Insmed Incorporated
INSMED Inc (Form: 10-K, Received: 02/23/2018 08:03:03)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
o
 
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
(State or other jurisdiction of incorporation or
organization)
 
54-1972729
(I.R.S. employer identification no.)
 
 
 
10 Finderne Avenue, Building 10
Bridgewater, New Jersey 08807
(Address of principal executive offices)
 
(908) 977-9900
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ü ]    No [  ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ]    No [ ü ]
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 [ ü ]    No [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [ ü ]    No [  ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]
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 [ ü ] Accelerated filer [  ] Non-accelerated filer (Do not check if a smaller reporting company) [  ] 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 [ ü ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2017, was $1,057 million (based on the closing price for shares of the registrant's common stock as reported on the Nasdaq Global Select Market on that date). In determining this figure, the registrant has assumed solely for this purpose that all of its directors, executive officers, persons beneficially owning 10% or more of the registrant's outstanding common stock and certain other stockholders of the registrant may be considered to be affiliates. This assumption shall not be deemed conclusive as to affiliate status for this or any other purpose.
On February 1, 2018 , there were 76,617,946 shares of the registrant's common stock, $0.01 par value, outstanding.
____________________________________________________________________________


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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission no later than May 1, 2018 and to be delivered to shareholders in connection with the 2018 Annual Meeting of Shareholders, are herein incorporated by reference in Part III of this Form 10-K.


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INSMED INCORPORATED
INDEX
 
 
 
PAGE
REPORT:
FORM 10-K
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Unless the context otherwise indicates, references in this Form 10-K 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, CONVERT and ARIKAYCE are trademarks of Insmed Incorporated. This Form 10-K also contains trademarks of third parties. Each trademark of another company appearing in this Form 10-K is the property of its owner.



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
               This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are statements that are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends," "potential," "continues," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements.
               Forward-looking statements are based on our current expectations and beliefs, and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance and achievements and the timing of certain events to differ materially from the results, performance, achievements or timing discussed, projected, anticipated or indicated in any forward-looking statements. Such risks, uncertainties and other factors include, among others, the following:

risks that the full six-month data from the CONVERT study (the CONVERT study or the 212 study) or subsequent data from the remainder of the study’s treatment and off-treatment phases will not be consistent with the top-line six-month results of the study;

uncertainties in the research and development of our existing product candidates, including due to delays in data readouts, such as the full data from the CONVERT study, patient enrollment and retention or failure of our preclinical studies or clinical trials to satisfy pre-established endpoints, including secondary endpoints in the CONVERT study and endpoints in the CONVERT extension study (the 312 study);
risks that subsequent data from the 312 study will not be consistent with the interim results;
failure to obtain, or delays in obtaining, regulatory approval from the US Food and Drug Administration (FDA), Japan’s Ministry of Health, Labour and Welfare (MHLW) and Pharmaceuticals and Medical Devices Agency (PMDA), the European Medicines Agency (EMA), and other regulatory authorities for our product candidates or their delivery devices, such as the eFlow Nebulizer System, including due to insufficient clinical data, selection of endpoints that are not satisfactory to regulators, complexity in the review process for combination products or inadequate or delayed data from a human factors study required for US regulatory approval;
failure to maintain regulatory approval for our product candidates, if received, due to a failure to satisfy post-approval regulatory requirements, such as the submission of sufficient data from confirmatory clinical studies;
safety and efficacy concerns related to our product candidates;
lack of experience in conducting and managing preclinical development activities and clinical trials necessary for regulatory approval, including the regulatory filing and review process;
failure to comply with extensive post-approval regulatory requirements or imposition of significant post‑approval restrictions on our product candidates by regulators;
uncertainties in the rate and degree of market acceptance of product candidates, if approved;
inability to create an effective direct sales and marketing infrastructure or to partner with third parties that offer such an infrastructure for distribution of our product candidates, if approved;
inaccuracies in our estimates of the size of the potential markets for our product candidates or limitations by regulators on the proposed treatment population for our product candidates;
failure of third parties on which we are dependent to conduct our clinical trials, to manufacture sufficient quantities of our product candidates for clinical or commercial needs, including our raw materials suppliers, or to comply with our agreements or laws and regulations that impact our business;
inaccurate estimates regarding our future capital requirements, including those necessary to fund our ongoing clinical development, regulatory and commercialization efforts as well as milestone payments or royalties owed to third parties;

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failure to develop, or to license for development, additional product candidates, including a failure to attract experienced third-party collaborators;
uncertainties in the timing, scope and rate of reimbursement for our product candidates;
changes in laws and regulations applicable to our business and failure to comply with such laws and regulations;
inability to repay our existing indebtedness or to obtain additional capital when needed on desirable terms or at all;
failure to obtain, protect and enforce our patents and other intellectual property and costs associated with litigation or other proceedings related to such matters;
restrictions imposed on us by license agreements that are critical for our product development, including our license agreements with PARI Pharma GmbH (PARI) and AstraZeneca AB (AstraZeneca), and failure to comply with our obligations under such agreements;
competitive developments affecting our product candidates and potential exclusivity related thereto;
the cost and potential reputational damage resulting from litigation to which we are or may be a party, including, without limitation, the class action lawsuit against us that recently was dismissed without prejudice;
loss of key personnel; and
lack of experience operating internationally.
               We may not actually achieve the results, plans, intentions or expectations indicated by our forward-looking statements because, by their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. You should carefully read the factors discussed in Risk Factors , Item 1A of Part I of this Annual Report on Form 10-K, as well as the discussion and analysis of our financial condition and financial statements contained in this Annual Report on Form 10-K for additional discussion of the risks and uncertainties that could cause our actual results to differ materially from those in our forward-looking statements. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission (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.
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PART I
ITEM 1.    BUSINESS
Business Overview
Insmed is a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. Our lead product candidate is amikacin liposome inhalation suspension (ALIS) (formerly known as liposomal amikacin for inhalation), which is in late-stage development for adult patients with treatment refractory nontuberculous mycobacteria (NTM) lung disease caused by Mycobacterium avium complex (MAC), a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Our earlier clinical-stage pipeline includes INS1007 and INS1009. INS1007 is a novel oral, reversible inhibitor of dipeptidyl peptidase 1 (DPP1), an enzyme responsible for activating neutrophil serine proteases, which are implicated in the pathology of chronic inflammatory lung diseases, such as non-cystic fibrosis (non-CF) bronchiectasis. INS1009 is an inhaled nanoparticle formulation of a treprostinil prodrug that may offer a differentiated product profile for rare pulmonary disorders, including pulmonary arterial hypertension (PAH).
The table below summarizes the current status and anticipated milestones for our principal product candidates: ALIS, INS1007, and INS1009.

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Product
Candidate/Target
Indications
Status
Next Expected Milestones
ALIS for NTM lung infections

• We announced top-line data for the CONVERT study on September 5, 2017. Based on top-line results, the CONVERT study met its primary endpoint of culture conversion, which we defined as three consecutive negative monthly sputum cultures by month six with statistical and clinical significance, with 29% of patients in the ALIS plus current guideline-based therapy (GBT) arm achieving culture conversion, compared to 9% of patients in the GBT-only arm (p<0.0001).
• We announced interim data from the CONVERT study and the 312 extension study on January 3, 2018. The recent data included interim long-term durability data for the CONVERT study and interim efficacy data for the 312 study.
 
• The CONVERT study is a randomized, open-label global phase 3 clinical study of ALIS in adult patients with treatment refractory NTM lung disease caused by MAC. The 312 study is a 12-month extension study of patients who completed six months of treatment in the CONVERT study, but did not demonstrate culture conversion by month six.

• The FDA has designated ALIS as an orphan drug, a breakthrough therapy, and a qualified infectious disease product (QIDP).

• The European Commission has granted an orphan designation for ALIS for the treatment of NTM lung disease.
• We plan to pursue accelerated approval of ALIS pursuant to Section 506(c) of the Federal Food Drug and Cosmetic Act and 21 C.F.R. Part 314 Subpart H (Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses) (Subpart H) based on the six-month data from the CONVERT study. We plan to file a new drug application (NDA) for approval of ALIS with the US Food and Drug Administration (FDA) before the end of March 2018.

• We intend to seek marketing approvals for ALIS in certain countries outside the US, such as Japan, when sufficient data are available. If approved, we expect ALIS would be the first inhaled antibiotic specifically indicated for the treatment of NTM lung disease caused by MAC in North America, Japan and Europe.
 
• If approved, we plan to commercialize ALIS in the US, Japan, certain countries in Europe, and certain other countries.
 
INS1007 (oral reversible inhibitor of DPP1) for non-CF bronchiectasis and other rare diseases
 • We are enrolling patients in the WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel-group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis.
 
• We are currently assessing regulatory strategies which could expedite the development and regulatory reviews of INS1007 in the US and the EU.
• We expect to advance enrollment in the WILLOW clinical study of INS1007 during 2018.

• We are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.

INS1009 (inhaled nanoparticle formulation of a treprostinil prodrug) for rare pulmonary disorders
  • The results of our phase 1 study of INS1009 were presented at the European Respiratory Society international congress in September 2016.

• The phase 1 study was a randomized, double-blind, placebo-controlled, single ascending dose study of INS1009 for inhalation to determine its safety, tolerability, and pharmacokinetics in healthy volunteers.

  • We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development including exploring its use as an inhaled dry powder formulation.
Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet medical need, including methicillin-resistant staph aureus (MRSA) and NTM. To complement our internal research and development, we actively evaluate in-licensing and acquisition opportunities for a broad range of rare diseases.


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Corporate History
We were incorporated in the Commonwealth of Virginia on November 29, 1999. On December 1, 2010, we completed a business combination with Transave, Inc. (Transave), a privately held New Jersey-based company focused on the development of differentiated and innovative inhaled pharmaceuticals for the site-specific treatment of serious lung diseases.
Our Strategy
 
Our strategy focuses on the needs of patients with rare diseases. We are currently primarily focused on the development and commercialization of ALIS. We are not aware of any approved inhaled therapies specifically indicated to treat NTM lung disease in North America, Japan or Europe. While we believe that ALIS has the potential to treat a number of different bacterial infections, we are prioritizing securing US regulatory approval of ALIS for adult patients with treatment refractory NTM lung disease caused by MAC. We are also advancing earlier-stage programs in other rare pulmonary disorders.
 
Our current priorities are as follows:
 
Completing the CONVERT study and the 312 study;

Preparing an NDA for submission under Subpart H to the FDA for ALIS based on the six-month data from the CONVERT study;
Ensuring our product supply chain will support the commercialization, if approved, and future life cycle management programs of ALIS;
Preparing for potential commercialization of ALIS in the US, Japan, certain countries in Europe, and certain other countries;
Developing the core value dossier to support the global reimbursement of ALIS;
Supporting further research and lifecycle management strategies for ALIS, including exploring the potential use of ALIS as part of a front-line, multi-drug regimen and as maintenance monotherapy to prevent recurrence (defined as true relapse or reinfection) of NTM lung disease;
Enrolling patients in the WILLOW phase 2 study of INS1007 in non-CF bronchiectasis;
Exploring INS1009 for use as an inhaled dry powder formulation and generating preclinical findings from our earlier-stage program(s); and
Expanding our rare disease pipeline through corporate development.

Product Pipeline
ALIS for Patients with NTM Lung Disease
 
Our lead product candidate is ALIS, a novel, once-daily liposomal formulation of amikacin that is in late-stage clinical development for adult patients with treatment refractory NTM lung disease caused by MAC, a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the need to administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Unlike amikacin solution for intravenous administration, our advanced liposome technology uses charge-neutral liposomes to deliver amikacin directly to the lung where it is taken up by the lung macrophages where the NTM infection resides. This technology prolongs the release of amikacin in the lungs, while minimizing systemic exposure thereby, offering the potential for decreased systemic toxicities. ALIS’s ability to deliver high levels of amikacin directly to the lung distinguishes it from intravenous amikacin. ALIS is administered once-daily, using a portable aerosol delivery system, via an optimized, investigational eFlow® Nebulizer System manufactured by PARI Pharma GmbH (PARI).
 
The FDA has designated ALIS as an orphan drug, a breakthrough therapy, and a QIDP for NTM lung disease. Orphan designated drugs are eligible for seven years of exclusivity for the orphan indication. QIDP designation features an additional five years of exclusivity for the designated indication. As a result, if ALIS is approved in the US, we expect FDA to grant a total of 12 years of exclusivity in the indication for which ALIS is approved. A QIDP-designated product is eligible for fast

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track status and is often granted priority review status. A priority review designation for a drug which is not a new molecular entity (NME) means the FDA’s goal is to take action on the NDA within six months following the receipt of the NDA.
 
The CONVERT Study and 312 Study
 
CONVERT Top-Line Efficacy Data
We announced top-line data for the CONVERT study on September 5, 2017. The CONVERT study enrolled 336 adult patients with NTM lung disease caused by MAC who were refractory to at least six months of treatment on current GBT of a multi-drug regimen. After a screening period of up to 10 weeks, eligible patients were randomized 2:1 to once-daily ALIS plus GBT or GBT only. The primary endpoint of the study was the proportion of patients achieving culture conversion, which we defined as three consecutive monthly negative sputum cultures, by month six. Based on top‑line results, the CONVERT study met its primary endpoint, with 29% of patients in the ALIS plus GBT arm achieving culture conversion, compared to 9% of patients in the GBT‑only arm (p<0.0001).
We also reported top-line data for certain secondary and exploratory endpoints for the first six months of the study. Top‑line data for the six‑minute walk test indicated no statistically significant difference between patients in the two arms of the study. However, an analysis of these data (per a pre-specified exploratory endpoint) showed that patients who achieved culture conversion in either arm demonstrated an improvement in six-minute walk distance when compared to patients who did not culture convert (p=0.0108). Top-line data for the secondary endpoint of time to conversion demonstrated that patients in the GBT-only arm took approximately 30% longer to convert when compared to patients on ALIS plus GBT (p<0.0001). We are continuing our analysis of the impact of conversion on a variety of other clinical measures.
The protocol for the CONVERT study incorporates feedback from the FDA and the EMA via its scientific advice working party process, as well as local health authorities in other countries, including Japan’s PMDA. Because the CONVERT study met the primary endpoint of culture conversion at month six based on the top-line results, we plan to submit an NDA for ALIS to the FDA by the end of March 2018 pursuant to Subpart H, which permits the FDA to approve a product candidate based on a surrogate or intermediate endpoint subject to the requirement that we conduct post-approval studies to verify and describe the clinical benefit of the product. We expect to receive a six-month priority review from the FDA. We believe that efficacy data from the CONVERT study at month six will be sufficient to support the accelerated approval of ALIS. We expect that full approval would be contingent on FDA review of, among other things, the final analyses of durability of culture conversion for converters.

CONVERT Top-Line Safety and Tolerability Data
Approximately 98% of patients in the ALIS plus GBT arm of the CONVERT study experienced at least one treatment-emergent adverse event (TEAE), compared to 91% of patients in the GBT-only arm, with most events being mild or moderate in severity. A greater percentage of patients in the ALIS plus GBT arm than in the GBT-only arm experienced TEAEs involving dysphonia, cough, haemoptysis, dyspnoea, oropharyngeal pain, diarrhea, nausea, and fatigue. Based on our review of the top-line study safety data, the incidence of dysphonia, cough and dyspnoea among patients in the ALIS plus GBT arm generally decreased after the second study month. Approximately 20% and 18% of patients in the ALIS plus GBT arm and GBT-only arm of the study, respectively, experienced at least one serious treatment emergent adverse event (STEAE). The table below provides additional information regarding certain STEAEs experienced by patients in the CONVERT study.
 
 
2:1 Randomization
Patients Reporting STEAEs >3% in Either Arm
 
ALIS + GBT (n=223)
GBT (n=112)
Patients Reporting At Least One STEAE
 
20.2% (45)
17.9% (20)
System Organ Class
 
Preferred Term
 
 
Respiratory, Thoracic, Mediastinal Disorders
 
11.7% (26)
9.8% (11)
 
Hemoptysis
2.7% (6)
4.5% (5)
 
COPD (exacerbation)
3.1% (7)
0.9% (1)
Infections and Infestations
 
9.0% (20)
5.4% (6)
 
Pneumonia
3.6% (8)
1.8% (2)
Cardiac Disorders
 
0.4% (1)
4.5% (5)
Patient Deaths
 
2.7% (6)
4.5% (5)


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There were no distinctions between treatment arms for adverse events of hearing loss or renal impairment, side effects commonly associated with the intravenous use of amikacin. As of September 2017, the overall dropout rate in the CONVERT study was 16.1%, with an 8.9% dropout rate in the GBT-only arm and a 19.6% dropout rate in the ALIS plus GBT arm. As of December 2017, the overall dropout rate in the CONVERT study was 18% (n=60/336).
    
CONVERT Long-Term Durability Data

We also recently announced interim data on the durability of culture conversion, as defined by patients that have completed treatment and continued in the CONVERT study off all therapy for three months, which we expect will be the endpoint necessary to support full regulatory approval in the US. The following data are interim results observed through December 2017, and have not been further analyzed. As of December 2017, of the 75 patients achieving culture conversion in the CONVERT study, 53 of these patients were evaluable for durability of culture conversion three months after the completion of treatment. Interim data for durability of culture conversion as of December 2017 on these 53 patients are detailed below:
 
Evaluable Number of Patients
as of December 2017 (At Least Three Months Post Treatment)*
Percent with Durable Culture
Conversion Three Months
After Completion
of All Treatment
Converters in the ALIS + GBT arm (n=65)
46
60.9% (28/46)
Converters in the GBT‑only arm (n=10)
7
0.0% (0/7)

* Evaluable number of patients includes all patients who reached three months post-treatment and all patients who discontinued prior to three months post-treatment.

312 Study
 
All non-converters in the CONVERT study, as determined at the month eight visit, may be eligible to enter the 312 study which is a separate 12-month, single-arm, open-label study. The purpose of the 312 study is to evaluate the safety and tolerability of longer-term treatment with ALIS added to GBT. The secondary endpoints of the 312 study include evaluating the proportion of patients achieving culture conversion (three consecutive monthly negative sputum cultures) by month six and the proportion of patients achieving culture conversion by month 12 (end of treatment).

312 Study Interim Efficacy Data
We recently announced interim data for the 312 study, which enrolled 163 adult patients with NTM lung disease caused by MAC who completed six months of treatment in the CONVERT study, but did not demonstrate culture conversion by Month 6. The following data are interim results observed through December 2017, and have not been further analyzed. Patients in the ALIS plus GBT arm of the CONVERT study and patients in the GBT-only arm of the CONVERT study who did not achieve culture conversion by Month 6 had the option to enroll in the 312 study at Month 8. Under the study protocol, patients from both arms of the CONVERT study will receive 12 months of ALIS plus GBT in the 312 study. We will also use the data from this trial to further assess the impact of the addition of ALIS to background GBT on sputum culture conversion, by Month 6.
As of December 2017, of the 163 patients enrolled in the 312 study, 124 patients were evaluable for culture conversion. Descriptive interim culture conversion data as of December 2017 for these 124 patients are detailed below. The interim culture conversion data has not been statistically analyzed.

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Number of Patients Completing Six Months of Treatment in the 312 study as of December 2017 **
Percent Achieving Sputum
Culture Conversion by
Month 6 in the 312 study
Patients who received GBT only in the 212 study and crossed over to receive six months of treatment with ALIS + GBT (n=90)
67
28.4% (19/67)
Patients who received ALIS + GBT in the 212 study and crossed over to continue treatment in the 312 study, to receive a combined total of 14 months of ALIS + GBT treatment in both studies (n=73)
57
12.3% (7/57)
** Includes all patients completing six months of treatment, all patients who discontinued prior to six months and for all ongoing patients prior to six months who completed two months of treatment.
312 Study Interim Safety and Tolerability Data
We have not yet performed a final analysis of any safety data for the 312 study. However, based on an interim review of data available from the 312 study, we believe that STEAEs were similar to the STEAEs we reported in September 2017 as part of our top-line data results for the 212 study. As of December 2017, the overall dropout rate in the 312 study was 24% (n=39/163).
Phase 2 Study (or 112 Study)
 
Our completed phase 2 study (or 112 study) was a randomized, double-blind, placebo-controlled study that evaluated the efficacy and safety of ALIS in adults with NTM lung disease due to MAC or M. abscessus that was refractory to guideline-based therapy. In October 2016, the results from the phase 2 study were published online in the American Journal of Respiratory and Critical Care Medicine (Olivier et al. 2016).
 
The study included an 84-day double-blind phase in which patients were randomized 1:1 either to ALIS once-daily plus a multi-drug regimen or to placebo (empty liposomes) once-daily plus a multi-drug regimen. After completing the 84-day double-blind phase, patients had the option of continuing in an 84-day open-label phase during which all patients received ALIS plus the same multi-drug regimen. The study also included 28-day and 12-month off-ALIS follow-up assessments. Eighty-nine (89) patients were randomized and dosed in the study. Of the 80 patients who completed the 84-day double-blind phase, 78 patients entered the open-label phase and received ALIS plus the same multi-drug regimen for 84 days. Seventy-six (76) percent (59/78) of patients who entered the open-label phase of the study completed the open-label study.
 
The primary efficacy endpoint of the study was the change from baseline (Day 1) to the end of the double-blind phase of the trial (Day 84) in a semi-quantitative measurement of mycobacterial density on a seven-point scale. ALIS did not meet the pre-specified level for statistical significance although there was a positive trend (p=0.072) in favor of ALIS. The p-value for the key secondary endpoint of culture conversion to negative at Day 84 was 0.003, in favor of ALIS. A shorter time to first negative sputum culture was also observed with ALIS relative to placebo during the double-blind phase (p=0.013).
 
The microbiologic outcomes from the 112 study were also explored post hoc using a more stringent definition of culture conversion, which was defined as at least three consecutive monthly sputum samples that test negative for NTM, consistent with the definition of culture conversion in the ATS/IDSA Guidelines and in clinical practice. Twenty-three (23) patients achieved at least three consecutive negative monthly sputum samples by the 28-day follow-up assessment, of which four started to convert at baseline prior to administration of study drug. For the other 19 patients who achieved culture conversion, 17 achieved culture conversion after receiving ALIS (10 during the double-blind phase and seven after entering the open-label phase, of which six received ALIS for the first time in the open-label phase). Two patients achieved culture conversion while receiving placebo during the double-blind phase. The majority of patients who achieved culture conversion (three consecutive negative monthly sputum samples) during the double-blind phase continued to have negative cultures through the open-label and follow-up phases.
 
At the end of the double-blind phase, the ALIS group improved from baseline in mean distance walked in the six-minute walk test. At the end of the open-label phase, patients in the ALIS group continued to improve in the mean distance

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walked in the six-minute walk test, while the patients who previously received placebo in the double-blind phase and subsequently received ALIS in the open-label phase demonstrated a reduced rate of decline from baseline.
 
Approximately 90% of patients in both treatment groups experienced at least one treatment-emergent adverse event, with most events either mild or moderate in severity. During the double-blind phase a greater percentage of patients treated with ALIS experienced, among others, dysphonia, bronchiectasis exacerbation, cough, oropharyngeal pain, fatigue, chest discomfort, wheezing, and infective pulmonary exacerbation of cystic fibrosis (CF). No clinically relevant changes were detected in laboratory values and vital signs.
 
Further Research and Lifecycle Management for ALIS
 
We are currently exploring and supporting research and lifecycle management programs for ALIS beyond refractory NTM lung infections caused by MAC. Specifically, we are evaluating future study designs focusing on the MAC disease treatment pathway, including front-line treatment and monotherapy maintenance to prevent recurrence (defined as true relapse or reinfection) of NTM lung disease. In addition, we are evaluating non-MAC NTM species, such as M. abscessus . If the data from the CONVERT study are sufficient to support our marketing authorization applications (MAAs) and regulatory bodies approve ALIS, such lifecycle management studies could enable us to reach more potential patients. These initiatives may include new clinical studies sponsored by us or investigator-initiated studies, which are clinical studies initiated and sponsored by physicians or research institutions with funding from us.
 
Market Opportunity for ALIS in NTM Lung Disease in 2018

NTM lung disease is associated with increased rates of morbidity and mortality, and MAC is the predominant pathogenic species in NTM lung disease in the US, Japan and Europe. The prevalence of NTM lung disease has increased over the past two decades, and we believe it is an emerging public health concern worldwide. Based on currently available information from external sources, including market research funded by us and third parties, and internal analyses and calculations, we estimate potential patient populations in the US, Japan and EU5 (comprised of France, Germany, Italy, Spain and the United Kingdom) for 2018 as follows:

Potential Market
 
Estimated Number of Patients with Diagnosed NTM Lung Disease
Estimated Number of Patients Treated for NTM Lung Disease Caused by MAC
Estimated Number of Patients Refractory to Treatment
United States
 
75,000-105,000
40,000-50,000
10,000-15,000
Japan
 
125,000-145,000
60,000-70,000
15,000-18,000
EU5
 
14,000
4,400
1,400

We are not aware of any approved inhaled therapies specifically indicated for NTM lung disease in North America, Japan or Europe. Current guideline-based approaches for NTM lung disease, including those from the American Thoracic Society and Infectious Diseases Society of America, involve multi-drug regimens not approved for the treatment of NTM lung disease and treatment that could last two years or more. Based on a burden of illness study that we conducted in the US with a major medical benefits provider, we previously concluded that patients with NTM lung disease are costly to healthcare plans, while a recent claims-based study in the US has shown that patients with NTM lung disease have higher resource utilization and costs than their age and gender-matched controls. Accordingly, we believe that a significant market opportunity for ALIS in NTM lung disease exists in the US and internationally. 
We are currently exploring the NTM market opportunity for ALIS in Japan. The CONVERT study included a comprehensive pharmacokinetic sub-study in Japanese subjects in lieu of a separate local pharmacokinetic study in Japan, as agreed with the PDMA. If the data from the CONVERT study are sufficient to support our MAAs, and the FDA approves ALIS, we expect our first regulatory filing after the US to be in Japan. We have established a Japanese legal entity and plan to hire local employees in 2018 to closely manage our regulatory and pre-commercial activities.
 
INS1007
 
INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we licensed from AstraZeneca in October 2016. DPP1 is an enzyme responsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction

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and inflammatory mediation. Neutrophils contain the neutrophil serine proteases, neutrophil elastase, proteinase 3, and cathepsin G, that have been implicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and release active neutrophil serine proteases in excess that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases. Non-CF bronchiectasis is a progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection. Currently, there is no cure, and we are not aware of any FDA-approved therapies specifically indicated for non-CF bronchiectasis.
 
The WILLOW Study
 
The WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. We commenced enrollment in the WILLOW study in December 2017. In addition, we are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.
 
Phase 1 Study Results
 
In a phase 1 study of healthy volunteers conducted by AstraZeneca, INS1007 (previously AZD7986) was well tolerated and demonstrated inhibition of the activity of the neutrophil serine protease neutrophil elastase in a dose and concentration dependent manner. In preclinical studies, it was shown to reversibly inhibit DPP1 and the activation of neutrophil serine proteases within maturing neutrophils.
 
INS1009
 
INS1009 is an investigational sustained-release inhaled treprostinil prodrug nanoparticle formulation that has the potential to address certain of the current limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development, including exploring its use as an inhaled dry powder formulation.
 
Phase 1 Study Results
 
In late 2014, we had a pre-IND meeting with the FDA for INS1009 and clarified that, subject to final review of the preclinical data, INS1009 could be eligible for an approval pathway under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (FDCA) (505(b)(2) approval). Like a traditional NDA that is submitted under Section 505(b)(1) of the FDCA, a 505(b)(2) NDA must establish that the drug is safe and effective, but unlike a traditional NDA, the applicant may rely at least in part on studies not conducted by or for the applicant and for which the applicant does not have a right of reference. The ability to rely on existing third-party data to support safety and/or effectiveness can reduce the time and cost associated with traditional NDAs.
 
We have completed a phase 1 study of INS1009. The phase 1 study was a randomized, double-blind, placebo-controlled single ascending dose study of INS1009 for inhalation to determine its safety, tolerability, and pharmacokinetics in healthy volunteers. Twenty-four (24) patients were enrolled and received INS1009 with cohorts of eight patients receiving doses of 85 micrograms (mcg), 170 mcg, 340 mcg or placebo. Participants in the first cohort (8 patients) received a single dose of open label treprostinil (Tyvaso®) at 54 mcg 24 hours prior to receiving INS1009 at 85 mcg. The 85 mcg dose of INS1009 provides an equivalent amount of treprostinil on a molar basis as the 54 mcg dose of Tyvaso. The peak treprostinil serum concentration was approximately 90% lower after INS1009 administration compared with Tyvaso, which could indicate a reduced future adverse event (AE) profile. The pharmacokinetic characteristics also supported once- or twice-daily dosing. The longer half-life of treprostinil for INS1009 was likely due to a sustained pulmonary release. The AE profile was consistent with other inhaled prostanoids. These data were presented at the European Respiratory Society international congress in September 2016.
Research and Development
Research and development expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, including medical affairs. Expenses also

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include other internal operating expenses, the cost of manufacturing our drug candidate(s) for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, our R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as for INS1007. Our expenses related to manufacturing our drug candidate(s) for clinical study are primarily related to activities at contract manufacturing organizations (CMOs) that manufacture our product candidates for our use, including purchases of active pharmaceutical ingredients. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf. We incurred approximately $109.7 million, $122.7 million, and $74.3 million for research and development expenses in the years ended December 31, 2017, 2016, and 2015, respectively.
Corporate Development
In October 2016, we exclusively licensed global rights to INS1007 from AstraZeneca and we plan to continue to develop, acquire, in license or co-promote complementary products that address rare diseases. We are focused broadly on rare disease therapeutics and prioritizing those areas that best align with our core competencies.
Manufacturing
We do not have any in-house manufacturing capability other than for small-scale pre-clinical development programs, and depend completely on a small number of third-party manufacturers and suppliers for the manufacture of our product candidates for use in clinical trials. We plan to rely on third-party manufacturers and suppliers for the commercial manufacture and supply of any product candidates that we may commercialize. ALIS is manufactured currently by Therapure Biopharma Inc. (Therapure) in Canada at a 200 kilogram (kg) scale and by Ajinimoto Althea, Inc. (Althea) in the US at a 50 kg scale. For additional information about our agreements with Therapure and Althea, see License and Other Agreements—ALIS-Related Agreements . In order to meet potential commercial demand, if ALIS is approved, we funded the manufacturing expansion at Therapure in Canada that operates at a larger scale than Althea. We have also identified certain second source suppliers for our supply chain and plan to enter into supply and quality agreements with certain of these second source suppliers in preparation for commercialization of ALIS. In addition, we have entered into a commercialization agreement with PARI, the manufacturer of our drug delivery nebulizer for ALIS, to address our commercial supply needs (Commercialization Agreement).
In October 2017, we entered into certain agreements with Patheon UK Limited (Patheon) related to increasing our long-term production capacity for ALIS commercial inventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. Under these agreements, we are required to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufacture ALIS. The investment in the long-term production capacity build-out, including these agreements, and related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be approximately $60.0 million and will be incurred over the next three to four years.
In May 2017, we entered into a commercial supply agreement with AstraZeneca related to certain short-term production needs for INS1007. We expect our future requirements for INS1007, beyond phase 2, will be manufactured by a CMO.
We currently produce INS1009 and plan to utilize third parties to manufacture INS1009 at a larger scale and to manufacture the nebulizer used to deliver the drug.
Intellectual Property
We own or license rights to more than 350 issued patents and pending patent applications in the US and in foreign countries, including more than 175 issued patents and pending patent applications related to ALIS. Our success depends in large part on our ability to maintain proprietary protection surrounding our product candidates, technology and know-how; to operate without infringing the proprietary rights of others; and to prevent others from infringing our proprietary rights. We actively seek patent protection by filing patent applications, including on inventions that are important to the development of our business in the US, Japan, Europe, Canada, and selected other foreign markets that we consider key for our product candidates. These international markets generally include Australia, China, India, Israel, and Mexico.
Our patent strategy includes obtaining patent protection, where possible, on compositions of matter, methods of manufacture, methods of use, methods of treatment, dosing and administration regimens and formulations. We also rely on trade secrets, know-how, continuing technological innovation, in-licensing and partnership opportunities to develop and maintain our proprietary position.
We monitor for activities that may infringe our proprietary rights, as well as the progression of third-party patent applications that may have the potential to create blocks to our products or otherwise interfere with the development of our business. We are aware, for example, of US patents, and corresponding international counterparts, owned by third parties that

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contain claims related to treating lung infections using inhaled antibiotics. If any of these patents were to be asserted against us, we do not believe that our proposed products would be found to infringe any valid claim of these patents.
Reflecting our commitment to safeguarding proprietary information, we require our employees, consultants, advisors, collaborators and other third-party partners to sign confidentiality agreements to protect the exchange of proprietary materials and information. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.
ALIS Patents and Trade Secrets
Of the patents and applications related to ALIS, there are eight issued US patents and one allowed US patent application that cover the ALIS composition and its use in treating NTM. Upon approval of ALIS for the treatment of NTM, these patents may be eligible for listing in the FDA Orange Book. These patents and their expiration dates are as follows:
US Patent No. 7,718,189 (expires June 6, 2025)
US Patent No. 8,226,975 (expires August 15, 2028)
US Patent No. 8,632,804 (expires December 5, 2026)
US Patent No. 8,802,137 (expires April 8, 2024)
US Patent No. 8,679,532 (expires December 5, 2026)
US Patent No. 8,642,075 (expires December 5, 2026)
US Patent No. 9,566,234 (expires January 18, 2034)
US Patent No. 9,827,317 (expires April 8, 2024)
US Patent No. 9,895,385 (expires May 15, 2035)
In addition, we own six pending US patent applications that cover the ALIS composition and/or its use in treating NTM. We also own a pending US application that covers methods for making ALIS. Upon approval of ALIS for the treatment of refractory NTM lung disease caused by MAC, these patent applications, if issued as patents, may be eligible for listing in the FDA Orange Book.
Four patents have been granted by the European Patent Office (EPO) (European Patent Nos. 1581236, 1909759, 1962805 and 2363114) that relate to ALIS and its use in treating NTM. In addition, we have five applications pending before the EPO that relate to ALIS and its use in treating NTM lung disease. We also have a pending European application that describes certain methods of making ALIS. More than 40 patents have also been issued in other major foreign markets, e.g., Japan, China, Korea, Australia, and India, that relate to ALIS and/or methods of using ALIS for treating various pulmonary disorders, including NTM lung disease. More than 60 foreign patent applications are pending that relate to the ALIS composition and/or its use in treating various pulmonary disorders, including NTM lung disease. We anticipate that in the US, we will have potential patent coverage for ALIS and its use in treating NTM lung disease, through May 15, 2035.
European Patent No. 2363114 was opposed by Generics (UK) Ltd, a wholly-owned subsidiary of Mylan NV, and was revoked in November 2017. We intend to appeal that decision, and the patent remains enforceable during the appeal. European Patent No. 1909759, owned by us, was previously opposed by Generics (UK) Ltd. An oral hearing was held on October 19, 2015, during which we submitted amended claims. The European Patent Office Opposition Division (EPOOD) maintained the patent as amended. This decision is currently under appeal by Generics (UK) Ltd.
Through our agreements with PARI, we have license rights to US and foreign patents and applications that cover the eFlow Nebulizer System medical device through January 18, 2034. We have rights to use the nebulizers in clinical trials, and we have entered into a commercial supply agreement with PARI.
The basic terms of utility patents issued in the US are the longer of 17 years from the issue date or 20 years from the earliest effective filing date, if the patent was in force on or was issued from a patent application that was filed prior to June 8, 1995; or 20 years from the earliest effective filing date, if the patent application was filed on or after June 8, 1995. All ALIS patent applications have earliest effective filing dates falling after June 8, 1995. The basic term of foreign utility patents may vary in accordance with provisions of applicable local law, but is typically 20 years from the earliest effective filing date.
INS1007 Patents
Through our agreement with AstraZeneca, we have licensed US Patent Nos. 9,522,894 and 9,815,805, which have claims directed to INS1007 and methods for using INS1007. Each expires January 21, 2035 (not taking into account any potential patent term extension). Counterpart patent applications are pending throughout the world and a continuation application is pending in the US.
INS1009 Patents
We own US Patent No. 9,255,064 (expires October 24, 2034), which is the first patent to issue with claims covering hexadecyl-treprostinil, the treprostinil component of INS1009. Other treprostinil prodrugs are also claimed and described in the

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patent. We also own US Patent No. 9,469,600, which has claims directed to INS1009 and other treprostinil prodrug nanoparticle formulations and expires October 24, 2034. Counterpart patent applications to US Patent Nos. 9,255,064 and 9,469,600 are pending in Europe, Japan and other foreign jurisdictions.
We own pending patent applications that relate to methods for using treprostinil prodrugs and nanoparticle formulations comprising the same, including INS1009 in treating patients with PAH and other diseases, as well as methods for manufacturing such treprostinil prodrugs and nanoparticle formulations.
Trademarks
In addition to our patents and trade secrets, we have filed applications to register certain trademarks in the US and/or abroad, including INSMED and ARIKAYCE. At present, we have received either a registration or a notice of allowance for the INSMED and ARIKAYCE marks from the US Patent and Trademark Office. We have also received foreign notices of allowance or registrations for the INSMED and ARIKAYCE marks, among others. The EMA has indicated it has no objection to our use of the name ARIKAYCE, and the FDA has conditionally approved our use of the name ARIKAYCE as the proposed trade name for ALIS. Our ability to obtain and maintain trademark registrations will in certain geographical locations depend on making use of the mark in commerce on or in connection with our products and approval of the trademarks for our products by regulatory authorities in each country.
License and Other Agreements
ALIS-related Agreements
We currently rely, and will continue to rely, on agreements with a number of third parties in connection with the development and manufacture of ALIS.
PARI Pharma GmbH
We have a licensing agreement with PARI for use of the optimized eFlow Nebulizer System for delivery of ALIS in treating patients with NTM lung infections, CF and bronchiectasis. Under the licensing agreement, we have rights under several US and foreign issued patents, and patent applications involving improvements to the optimized eFlow Nebulizer System, to exploit such system with ALIS for the treatment of such indications, but we cannot manufacture such nebulizers except as permitted under our Commercialization Agreement with PARI. We currently have rights to use the nebulizers in clinical trials. The eFlow Nebulizer System is labeled as investigational for use in our clinical trials in the US, Japan, Canada and Australia and must receive regulatory approval before we can market ALIS; the eFlow Nebulizer System has been approved for use in the EU.
We have certain obligations under this licensing agreement in relation to specified licensed indications. With respect to CF, we are obligated to use commercially reasonable efforts to develop, obtain regulatory and reimbursement approval, market and sell ALIS in two or more major European countries. With respect to NTM, CF and bronchiectasis, we have specific obligations to use commercially reasonable efforts to achieve certain developmental and regulatory milestones by set deadlines. Additionally, for NTM, we are obligated to use commercially reasonable efforts to achieve certain commercial milestones in the US, Europe and Canada. The consequences of our failing to use commercially reasonable efforts to achieve these milestones are context-specific, but include ending PARI's non-compete obligation, making the license non-exclusive and terminating the license, in each case with respect to the applicable indication. Termination of the licensing agreement or loss of exclusive rights may occur if we fail to meet our obligations, including payment of royalties to PARI, or if we do not meet certain milestones contained in the licensing agreement such as obtaining marketing approval or achieving the first commercial sale of ALIS.
Under the licensing agreement, we paid PARI an upfront license fee and PARI is entitled to receive milestone payments up to an aggregate of €4.3 million either in cash, qualified stock or a combination of both, at PARI's discretion, based on achievement of certain future milestone events including first acceptance of MAA submission (or equivalent) in the US of ALIS and the device, first receipt of marketing approval in the US for ALIS and the device, and first receipt of marketing approval in a major EU country for ALIS and the device. In addition, PARI is entitled to receive royalty payments in the mid-single digits on the annual global net sales of ALIS pursuant to the licensing agreement, subject to certain specified annual minimum royalties. In October 2017, we exercised an option to buy-down the future royalties that will be payable to PARI.
This license agreement will remain in effect on a country-by-country basis until the final royalty payments have been made with respect to the last country in which ALIS is sold, or until the agreement is otherwise terminated by either party. We have the right to terminate this license agreement upon written notice for PARI's uncured material breach, if PARI is the subject of specified bankruptcy or liquidation events, or if PARI fails to reach certain specified obligations. PARI has the right to terminate this license agreement upon written notice for our uncured material breach, if we are the subject of specified bankruptcy or liquidation events, if we assign or otherwise transfer the agreement to a third party that does not agree to assume all of our rights and obligations set forth in the agreement, or if we fail to reach certain specified milestones.

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In July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of eFlow nebulizer systems and related accessories (the Device) as optimized for use with ALIS. Under the Commercialization Agreement, PARI manufactures the Device except in the case of certain defined supply failures, when we will have the right to make the Device and have it made by third parties (but not certain third parties deemed under the Commercialization Agreement to compete with PARI). The Commercialization Agreement has an initial term of 15 years from the first commercial sale of ALIS pursuant to the licensing agreement (the Initial Term). The term of the Commercialization Agreement may be extended by us for an additional five years by providing written notice to PARI at least one year prior to the expiration of the Initial Term.
Althea
In September 2015, we entered into a Commercial Fill/Finish Services Agreement (the Fill/Finish Agreement) with Althea to produce, on a non-exclusive basis, ALIS in finished dosage form at a 50 kg scale. We are obligated to pay a minimum of $2.7 million for the batches of ALIS produced by Althea each calendar year during the term of the Fill/Finish Agreement. The Fill/Finish Agreement became effective as of January 1, 2015, and had an initial term that was to end on December 31, 2017. In 2016, we signed an extension of the Fill/Finish Agreement through December 31, 2019, and it may be extended for additional two-year periods upon mutual written agreement of us and Althea at least one year prior to the expiration of its then-current term. The Company has expensed at least the required minimum in each year of the contract.
Either we or Althea may terminate the Fill/Finish Agreement upon the occurrence of certain events, including (i) material breach of the Fill/Finish Agreement by either party, provided such breach is not cured within 30 days after receipt by the breaching party of written notice of the breach or (ii) insolvency or bankruptcy of the other party. In addition, we may terminate the Fill/Finish Agreement without cause with 12 months' prior written notice to Althea, and Althea may terminate the Agreement without cause with 24 months' prior written notice to us.
Therapure
In February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of ALIS at a 200 kg scale. Pursuant to the agreement, we collaborated with Therapure to construct a production area for the manufacture of ALIS in Therapure's existing manufacturing facility in Mississauga, Ontario, Canada. Therapure manufactures ALIS for us on a non-exclusive basis. The agreement has an initial term of five years from the first date on which Therapure delivers ALIS to us after we obtain permits related to the manufacture of ALIS, and will renew automatically for successive periods of two years each, unless terminated by either party by providing the required two years' prior written notice to the other party. Notwithstanding the foregoing, the parties have rights and obligations under the agreement prior to the commencement of the initial term. Under the agreement, we are obligated to pay certain minimum amounts for the batches of ALIS produced each calendar year. The agreement allows for termination by either party upon the occurrence of certain events, including (i) the material breach by the other party of any provision of the agreement or the quality agreement expected to be entered into between the parties, and (ii) the default or bankruptcy of the other party. In addition, we may terminate the agreement for any reason upon no fewer than 180 days' advance notice.
Patheon & related agreements
In October 2017, we entered into certain agreements with Patheon related to increasing our long-term production capacity for ALIS commercial inventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. Under these agreements, we are required to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufacture ALIS. Patheon's supply obligations will commence once certain technology transfer and construction services are completed. Our manufacturing and supply agreement with Patheon will remain in effect for a fixed initial term, after which it will continue for successive renewal terms unless either we or Patheon have given written notice of termination. The technology transfer agreement will expire when the parties agree that the technology transfer services have been completed. The agreements may also be terminated under certain other circumstances, including by either party due to a material uncured breach of the other party or the other party’s insolvency. These early termination clauses may reduce the amounts due to the relevant parties. The investment in our long-term production capacity build-out, including under the Patheon agreements and related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be approximately $60.0 million and will be incurred over the next three to four years.
SynteractHCR, Inc. (Synteract)
We entered into a services agreement with Synteract pursuant to which we retained Synteract to perform implementation and management services in connection with the 212 study. We may terminate the services agreement or any work order for any reason and without cause with 30 days' written notice. Either party may terminate the agreement in the event of a material breach or, bankruptcy petition by the other party or, if any approval from a regulatory authority is revoked, suspended or expires without renewal. We anticipate that aggregate costs relating to all work orders for the 212 study will be

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approximately $45 million over the period of the study. In April 2015, we entered into a work order with Synteract to perform implementation and management services for the 312 study. We anticipate that aggregate costs relating to all work orders for the 312 study will be approximately $25 million over the period of the study.
Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT)
In 2004 and 2009, we entered into research funding agreements with CFFT whereby we received $1.7 million and $2.2 million for each respective agreement in research funding for the development of ALIS. If ALIS becomes an approved product for CF in the US, we will owe a payment to CFFT of up to $13.4 million that is payable over a three-year period after approval as a commercialized drug in the US. Furthermore, if certain global sales milestones are met within five years of the drug commercialization, we would owe an additional payment of $3.9 million. Under the 2009 agreement, in the event we terminate development of ALIS for CF prior to first commercial sale of a product containing ALIS for a period of 360 continuous days, and such termination is not for reasons outside of our reasonable control, then at CFFT's election and within 180 days of such termination, CFFT (1) may elect to develop ALIS for CF and (2) will have the right to receive from us an exclusive (subject to certain exceptions), royalty-free, sub-licensable license to use, develop, sell and commercialize a product containing ALIS in the treatment of certain infections in CF patients or pulmonary disease associated with CF.
INS1007-related License Agreement
In October 2016, we entered into the AZ License Agreement, pursuant to which AstraZeneca granted us exclusive global rights for the purpose of developing and commercializing AZD7986 (renamed INS1007). In consideration of the licenses and other rights granted by AstraZeneca, we made an upfront payment of $30.0 million in late October 2016. We are obligated to make a series of contingent milestone payments to AstraZeneca totaling up to an additional $85.0 million upon the achievement of clinical development and regulatory filing milestones. If we elect to develop INS1007 for a second indication, we will be obligated to make an additional series of contingent milestone payments totaling up to $42.5 million. We are not obligated to make any additional milestone payments for additional indications. In addition, we have agreed to pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teen on net sales of any approved product based on INS1007 and one additional payment of $35.0 million upon the first achievement of $1 billion in annual net sales. The AZ License Agreement provides AstraZeneca with the option to negotiate a future agreement with us for commercialization of INS1007 in chronic obstructive pulmonary disease or asthma. If we fail to comply with our obligations under our agreements with AstraZeneca (including, among other things, if we fail to use commercially reasonable efforts to develop and commercialize a product based on INS1007, or we are subject to a bankruptcy or insolvency), AstraZeneca would have the right to terminate the license.
Competition
The biotechnology and pharmaceutical industries are highly competitive. We face potential competitors from many different areas including commercial pharmaceutical, biotechnology and device companies, academic institutions and scientists, other smaller or earlier stage companies and non-profit organizations developing anti-infective drugs and drugs for respiratory diseases. Many of these companies have greater human and financial resources and may have product candidates in more advanced stages of development and may reach the market before our product candidates. Competitors may develop products that are more effective, safer or less expensive or that have better tolerability or convenience. We also may face generic competitors where third-party payers will encourage use of the generic products. Although we believe that our formulation delivery technology, respiratory and anti-infective expertise, experience and knowledge in our specific areas of focus provide us with competitive advantages, these potential competitors could reduce our commercial opportunity. Additionally, there currently are, and in the future there may be, already-approved products for certain of the indications for which we are developing, or in the future may choose to develop, our product candidates. For instance, PAH is a competitive indication with established products, including other formulations of treprostinil.
NTM lung disease competitive overview
In the NTM lung disease market, our major competitors include pharmaceutical and biotechnology companies that have approved therapies or therapies in development for the treatment of chronic lung infections. While some companies have expressed interest in studying their products for NTM, we are not aware of any companies that are currently conducting clinical trials for the treatment of refractory NTM lung disease or of any approved inhaled therapies specifically indicated for refractory NTM lung infections in North America, Europe or Japan, but, as previously described, there is an ATS/IDSA-recommended treatment regimen that is utilized.
Government Regulation
Orphan Drug Designation
United States
Under the Orphan Drug Act (ODA), the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition (for the purposes of the ODA, "rare" is defined as a disease or condition for which the drug is intended

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affects fewer than 200,000 people in the US) if it meets certain criteria specified by the ODA and FDA. After the FDA grants orphan drug designation, the drug and the specific intended use(s) for which it has obtained designation are listed by the FDA in a publicly-accessible database. The FDA has designated ALIS as an orphan drug for treatment of (i) infections caused by NTM, (ii) bronchiectasis in patients with Pseudomonas aeruginosa or other susceptible microbial pathogens and (iii) bronchopulmonary Pseudomonas aeruginosa infections in CF patients.
Orphan drug designation qualifies the sponsor for various development incentives of the ODA, including tax credits for qualified clinical testing, and a waiver of the NDA user fee (unless the application seeks approval for an indication not included in the orphan drug designation). Orphan drug designation also affords the company a period of exclusivity for the orphan indication upon approval of the drug. Specifically, the first NDA applicant with an FDA orphan drug designation for a particular active moiety to receive FDA approval of the drug for an indication covered by the orphan designation is entitled to a seven-year exclusive marketing period, often referred to as orphan drug exclusivity, in the US for that drug in that indication. A product that has several separate orphan designations may have several separate exclusivities for separate orphan indications. During the orphan drug exclusivity period, the FDA may not approve any other applications to market the same drug for the same indication for use, except in limited circumstances, such as a showing of clinical superiority to the product that has orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition or the same drug for a different disease or condition, and it does not alter the timing or scope of the regulatory review and approval process; the sponsor must still submit evidence from clinical and non-clinical studies sufficient to demonstrate the safety and effectiveness of the drug.
Japan
The MHLW may, after hearing the opinion of the Pharmaceutical Affairs and Food Sanitation Council, grant orphan drug designation to a drug intended to treat a rare disease or condition if the drug meets the following conditions: (i) the number of target patients is less than 50,000 in Japan, (ii) the necessity of orphan drug designation is high from a medical point of view, (iii) there are sufficient theoretical grounds to use the drug for the target disease, and (iv) the plan for development of the drug is appropriate. Even if a drug is granted orphan drug designation, however, it does not always receive the manufacturing and marketing approval that is necessary for the drug to be sold or marketed in Japan.
Pharmaceutical manufacturers or distributors who have received orphan drug designation for a drug may be entitled to: (i) subsidies from the Japanese government through the National Institutes of Biomedical Innovation, Health and Nutrition (NIBIOHN); (ii) guidance and/or advice from the MHLW, PMDA and NIBIOHN for the study research of the drug; (iii) in principle, tax deductibility of 20% of the total research and research expenditures for the drug; (iv) priority review of their application; and (v) a re-examination interval period of 10 years (in general, drugs are subject to reexamination by the MHLW every eight years after receiving manufacturing/marketing approval).
European Union
The European Commission grants orphan drug designation to promote the development of drugs or biologics (1) for life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the EU, or (2) for life threatening, seriously debilitating or serious and chronic condition in the EU where, without incentives, sales of the drug in the European Economic Area (the European Union plus Iceland, Lichtenstein, and Norway) (EEA) are unlikely to be sufficient to justify its development. Orphan drug designation is available either if no other satisfactory method of diagnosing, preventing or treating the condition is approved in the EEA or if such a method does exist but the proposed orphan drug will be of significant benefit to patients. The European Commission has granted an orphan designation for ALIS for the treatment of NTM lung disease.
If a drug with an orphan drug designation subsequently receives a marketing authorization for a therapeutic indication which is covered by such designation, the drug is entitled to orphan exclusivity. Orphan exclusivity means that the EMA or a national medicines agency may not accept another application for authorization, or grant an authorization, for a same or similar drug for the same therapeutic indication. Competitors may receive such a marketing authorization despite orphan exclusivity, provided that they demonstrate that the existing orphan product is not supplied in sufficient quantities or that the 'second' drug or biologic is clinically superior to the existing orphan product. The 'second' drug may but need not have an orphan designation as well. The period of orphan exclusivity is ten years, which can be extended by two years where an agreed pediatric investigation plan has been implemented. The exclusivity period may also be reduced to six years if the designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Each orphan designation carries the potential for one market exclusivity for all the therapeutic indications that are covered by the designation. A product that has several separate orphan designations may have several separate market exclusivities.
Orphan drug designation also provides opportunities for free protocol assistance and fee reductions for access to the centralized regulatory procedure or fee exemptions for companies with a small and medium enterprises status. In addition,

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Member States may provide national benefits to orphan drugs, such as early access to the reimbursement procedure or exemption from any turnover tax imposed on pharmaceutical companies.
The orphan designation may be applied for at any time during the development of the drug but before the application for marketing authorization. At the time of marketing authorization, the criteria for orphan designation are examined again, and the Commission decides on the maintenance of the orphan designation. The non-maintenance of the orphan designation means that the drug loses its orphan status and thus no longer benefits from orphan exclusivity, fee reductions or exemptions, and national benefits.
Drug Approval
United States
In the US, pharmaceutical products are subject to extensive regulation by the FDA and other government bodies. The FDCA and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling and import and export of pharmaceutical products. Failure to comply with applicable US requirements at any time during product development, approval, or after approval may subject a company to a variety of administrative or judicial sanctions, such as imposition of clinical holds, FDA refusal to file or approve new drug applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement, civil penalties, and criminal prosecution. The description below summarizes the current approval process in the US for our product candidates.
Preclinical Studies
Preclinical studies include laboratory evaluation of product chemistry, formulation and toxicity, and pharmacology, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements including the FDA's good laboratory practices (GLP) regulations and the US Department of Agriculture's regulations implementing the Animal Welfare Act. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature, and a proposed clinical trial protocol, among other things, to the FDA as part of an IND application. Certain non-clinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
Clinical Trials
Clinical trials involve the administration of the investigational new drug to human subjects (healthy volunteers or patients) under the supervision of a qualified investigator. Clinical trials must be conducted (i) in compliance with all applicable federal regulations and guidance, including those pertaining to good clinical practice (GCP) standards that are meant to protect the rights, safety, and welfare of human subjects and to define the roles of clinical trial sponsors, investigators, and monitors as well as (ii) under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing of a new drug in the US (whether in patients or healthy volunteers) must be included as a submission to the IND, and the FDA must be notified of subsequent protocol amendments, including new protocols. In addition, the protocol must be reviewed and approved by an institutional review board (IRB), and all study subjects must provide informed consent. Typically, before any clinical trial, each institution participating in the trial will require review of the protocol before the trial commences at that institution. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and there are additional, more frequent reporting requirements for certain adverse events.
A study sponsor might choose to discontinue a clinical trial or a clinical development program for a variety of reasons. The FDA may impose a temporary or permanent clinical hold, or other sanctions, if it believes that the clinical trial either is not being conducted in accordance with the FDA requirements or presents an unacceptable risk to the clinical trial subjects. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB's requirements, or may impose other conditions.
Clinical trials to support NDAs for marketing approval are typically conducted in three sequential pre-approval phases, but the phases may overlap or be combined. In Phase 1, short term (typically less than a few months) testing is conducted in a small group of subjects (typically 20-100), who may be patients with the target disease or condition or healthy volunteers, to evaluate its safety, determine a safe dosage range, and identify side effects. In Phase 2, the drug is given to a larger group of subjects (typically up to several hundred) with the target condition to further evaluate its safety and gather preliminary evidence of efficacy. Phase 3 studies typically last between several months and two years. In Phase 3, the drug is

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given to a large group of subjects with the target disease or condition (typically several hundred to several thousand), often at multiple geographical sites, to confirm its effectiveness, monitor side effects, and collect data to support drug approval. Only a small percentage of investigational drugs complete all three phases of development and obtain marketing approval.
NDA
After completion of the required clinical testing, an NDA can be prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the US. The NDA is a large submission that must include, among other things, the results of all preclinical, clinical and other testing and a compilation of data relating to the product's pharmacology, chemistry, manufacture, and controls. The application also includes representative samples, copies of the proposed product labeling, patent information, and a financial certification or disclosure statement. The cost of preparing and submitting an NDA is substantial. Additionally, under federal law (as amended by the most recent reauthorization of the Prescription Drug User Fee Act (PDUFA VI) in the FDA Reauthorization Act of 2017 (FDARA)), most NDAs are subject to a substantial application fee and, upon approval, the applicant will be assessed an annual prescription drug program fee, both of which are adjusted annually. NDAs for orphan drugs are not subject to an application fee, unless the application includes an indication other than the orphan-designated indication. FDA also has the authority to grant waivers of certain user fees, pursuant to the FDCA.
The FDA has 60 days from its receipt of an NDA to determine whether the application is accepted for filing based on the FDA's threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins a substantive review. The FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes outside clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.
Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will typically inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with current good manufacturing practices (cGMP) is satisfactory and the NDA contains data that provide substantial evidence of effectiveness for the proposed indication, generally consisting of adequate and well-controlled clinical investigations, and that the drug is safe for use under the conditions of use in the proposed labeling. The FDA also reviews the proposed labeling submitted with the NDA and typically requires changes in the labeling text.
After the FDA evaluates the NDA and the manufacturing and testing facilities, it issues either an approval letter or a complete response letter. Complete response letters generally outline the deficiencies in the submission and delineate the additional testing or information needed in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA's satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. An approval letter, which may specify post approval requirements, authorizes commercial marketing of the drug for the approved indication or indications and the other conditions of use set out in the approved prescribing information. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing. Under priority review status, the FDA has 180 days from either the 60 day filing date (in the case of NME NDA submissions) or the date of receipt of the NDA (in the case of non-NME original NDA submissions) to issue either an approval letter or a complete response letter, unless the review period is adjusted by mutual agreement between the FDA and the applicant or as a result of the applicant submitting a major amendment. The FDA's current performance goals call for the FDA to complete review of 90 percent of standard (non-priority) NDAs within 10 months and priority NDAs within six months of filing.
As a condition of NDA approval, the FDA may require substantial post-approval testing, known as phase 4 studies, to be conducted in order to gather additional information on the drug's effect in various populations and any side effects associated with long-term use. Beyond routine post marketing safety surveillance, the FDA may require specific additional surveillance to monitor the drug's safety or efficacy and may impose other conditions, including labeling restrictions that can materially affect the potential market and profitability of the drug. As a condition of approval, or after approval, the FDA also may require submission of a risk evaluation and mitigation strategy (REMS) to mitigate any identified or suspected serious risks. The REMS may include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools. Further post-approval requirements are discussed below.
Expedited Review and Approval of Eligible Drugs
Under the FDA's accelerated approval program, the FDA may approve certain drugs for serious or life-threatening conditions on the basis of a surrogate or intermediate endpoint that is reasonably likely to predict clinical benefit, which can substantially reduce time to approval. A surrogate endpoint used for accelerated approval is a marker—a laboratory measurement, radiographic image, physical sign or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than

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irreversible morbidity and mortality (IMM) that is reasonably likely to predict an effect on IMM or other clinical benefit. The FDA bases its decision on whether to accept the proposed surrogate or intermediate clinical endpoint on the scientific support for that endpoint.
As a condition of accelerated approval, the FDA typically requires certain post-marketing clinical studies to verify and describe clinical benefit of the product, and may impose restrictions on distribution to assure safe use. Post marketing studies would usually be required to be studies already underway at the time of the accelerated approval. In addition, promotional materials for an accelerated approval drug to be used in the first 120 days post-approval must be submitted to the FDA prior to approval, and materials to be used after that 120-day period must be submitted 30 days prior to first use. If the required post-marketing studies fail to verify the clinical benefit of the drug, or if the applicant fails to perform the required post-marketing studies with due diligence, the FDA may withdraw approval of the drug under streamlined procedures in accordance with the agency's regulations. The agency may also withdraw approval of a drug if, among other things, the promotional materials for the product are false or misleading, or other evidence demonstrates that the drug product is not shown to be safe or effective under its conditions of use.
The FDA also has various programs—fast track designation, priority review, and breakthrough designation—that are intended to expedite or streamline the process for the development and FDA review of drugs that meet certain qualifications. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures. The programs each have different eligibility criteria and provide different benefits, and can be applied either alone or in combination depending on an applicant's circumstances. Fast track designation applies to a drug that is intended to treat a serious condition and for which nonclinical or clinical data demonstrate the potential to address unmet medical need. It should be requested at the time of IND submission or ideally no later than the pre-NDA meeting. The FDA must respond to requests for fast track designation within 60 days of receipt of the request. If granted, the applicant is eligible for actions to expedite development and review, such as frequent interaction with the review team, as well as for rolling review, meaning that the applicant may submit sections of the application as they are available. The timing of FDA's review of these sections depends on a number of factors, and the review clock does not start running until the agency has received a complete NDA submission. The FDA may withdraw fast track designation if the agency determines that the designation is no longer supported by data emerging in the clinical trial process.
Priority review applies to an application (both original and efficacy supplement) for a drug that treats a serious condition and that, if approved, would provide a significant improvement in safety or effectiveness. It also applies to any supplement that proposes a labeling change pursuant to a report on a pediatric study. A request for priority review is submitted at the time of NDA or supplemental NDA submission. The FDA must respond within 60 days of receipt of the request. If granted, the review time is shortened from the standard 10 months to 6 months, beginning either at the 60 day filing date (in the case of NME NDA submissions) or the date of receipt (in the case of non-NME original NDA submissions).
Breakthrough therapy designation applies to a drug that is intended to treat a serious condition and for which preliminary clinical evidence indicates that the drug may demonstrate substantial improvement on a clinically significant endpoint(s) over available therapies. It can be requested with the IND submission and ideally no later than the end-of-phase 2 meeting. The FDA must respond within 60 days of receipt of the request. If granted, the applicant receives intensive guidance on efficient drug development, intensive involvement of senior managers and experienced review and regulatory health project management staff in a proactive, collaborative, cross-disciplinary review, rolling review, and other actions to expedite review. Designation may be rescinded if the product no longer meets the criteria for breakthrough therapy designation. ALIS has been designated as a breakthrough therapy.
Drugs that are designated as QIDPs are eligible for priority review and fast track designation, and well as market exclusivity. A product is eligible if it is an antibacterial or anti-fungal drug for human use that is intended to treat serious or life-threatening infections, including: those caused by an anti-bacterial or anti-fungal resistant pathogen, including novel or emerging infectious pathogens; or caused by qualifying pathogens listed by the FDA. A drug sponsor may request that the FDA designate its product as a QIDP at any time prior to NDA submission. The FDA must make a QIDP determination within 60 days of receiving the designation request. ALIS has been designated as a QIDP for NTM lung disease.
Exclusivities
After NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension on a single patent. The allowable patent term extension is calculated as half of the drug's testing phase (the time between IND application and NDA submission) and all of the review phase (the time between NDA submission and approval) up to a maximum of five years. The time can be shortened if the FDA determines that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years. For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the United States Patent and Trademark Office must determine that approval of the drug covered by the patent

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for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been submitted.
A variety of non-patent exclusivity periods are available under the FDCA that can delay the submission or approval of certain applications for competing products.
A five-year period of non-patent exclusivity within the US is granted to the first applicant to gain approval of an NDA for a new chemical entity (NCE). An NCE is a drug that contains no active moiety (the molecule or ion responsible for the action of the drug substance) that has been approved by the FDA in any other application submitted under section 505(b) of the Act. During the exclusivity period for a NCE, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company that references (i.e., relies on FDA prior approval of) the NCE drug. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity or non-infringement with respect to a patent listed with the FDA for the reference NDA.
A three-year period of non-patent exclusivity is granted for a drug product that contains an active moiety that has been previously approved, when the application contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the sponsor that were essential to approval of the application, for example, for new indications, dosages, strengths or dosage forms of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations, which means that the FDA may approve applications for other versions of the original, unmodified drug product. Where this form of exclusivity applies, it prevents FDA approval of an ANDA or 505(b)(2) NDA subject to the exclusivity for the three-year period; however, the FDA may accept and review ANDAs or 505(b)(2) NDAs during the three-year period.
These exclusivities also do not preclude FDA approval of a 505(b)(1) application for a duplicate version of the drug during the period of exclusivity, provided that the applicant conducts or obtains a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Products with QIDP designation may receive a five-year extension of other non-patent exclusivities for which the drug is also eligible. The exclusivity does not prevent the FDA from approving a subsequent application for a change to the QIDP-designated drug that results in a new indication, route of administration, dosing, schedule, dosage form, delivery system, delivery device or strength. For example, a drug that has been designated as both an orphan drug and a QIDP for the same indication, like ALIS, could be eligible for a combined 12 years of exclusivity for that indication.
Medical Device Regulation
Medical devices, such as the eFlow Nebulizer System, may receive marketing authorization from the FDA as stand-alone devices, or in some cases, may receive marketing authorization as part of a combination product. In either case, the ultimate product will need to satisfy FDA requirements. The primary pathways for marketing authorization for devices in the US are 510(k) clearance or premarket approval (PMA).
Medical devices are also subject to certain post-clearance, post-approval requirements. Those requirements include continuing Quality System Regulation compliance, Medical Device Reporting, Correction and Removal, and requirements governing labeling and promotional advertising.
The FDCA permits medical devices intended for investigational use to be shipped to clinical sites if such devices comply with prescribed procedures and conditions. Devices intended for investigational use may be exempted from premarket notification and premarket approval requirements when shipped for use in clinical trials, but they must bear a label indicating that they are for investigational use. This labeling may not represent that the device is safe or effective for the purposes for which it is being investigated.
Combination Products
A combination product is a product comprising two or more regulated components (e.g., a drug and device) that are combined into a single product, co-packaged, or sold separately but intended for co-administration, as evidenced by the labeling for the products. A drug that is administered using a nebulizer, such as ALIS or INS1009, is an example of a combination drug/device product.
The FDA is divided into various Centers, which each have authority over a specific type of product. NDAs are reviewed by personnel within the Center for Drug Evaluation and Research, while device applications and premarket notifications are reviewed by the Center for Devices and Radiological Health. Combination products, such as drug/device combinations, generally will be reviewed by the Center that regulates the product's primary mode of action (PMOA), which is the single mode of a combination product that provides the most important therapeutic action of the combination product. If the PMOA is unclear or in dispute, a sponsor may file a Request for Designation with FDA’s Office of Combination Products (OCP), which will render a determination and assign a lead Center. OCP generally assigns jurisdiction based on PMOA. If there are two independent modes of action, neither of which is subordinate to the other, the FDA makes a determination as to

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which Center to assign the product based on consistency with other combination products raising similar types of safety and effectiveness questions or to the Center with the most expertise in evaluating the most significant safety and effectiveness questions raised by the combination product.
When evaluating an application for a combination product, a lead Center may consult other Centers and apply the standards that would be applicable but still retain reviewing authority, or it may assign review of a specific section of the application to another Center, delegating its review authority for that section. Depending on the type of combination product, approval or clearance could be obtained through submission of a single marketing application or through separate applications for the individual constituent parts (e.g., an NDA for the drug and a premarket notification for the device). The FDCA directs the FDA to conduct a review of a combination product under a single marketing application whenever appropriate. The agency has the discretion to require separate applications to more than one Center, and applicants may choose to submit separate applications for constituent parts of a combination (unless the FDA determines one application is necessary). One reason to submit multiple applications is if the applicant wishes to receive some benefit that accrues only from approval under a particular type of application, like new drug product exclusivity. If multiple applications are submitted, each application is generally reviewed by the Center with authority over each application type. For combination products that contain an approved constituent part (such as a drug-device combination product in which the device has previously received clearance), the FDA may require that the application(s) include only such information as is necessary to meet the standard for clearance or approval, taking into account any prior finding of safety or effectiveness for the approved constituent part.
Like their constituent products—e.g., drugs and devices—combination products are highly regulated and subject to a broad range of post marketing requirements including cGMPs, adverse event reporting, periodic reports, labeling and advertising and promotion requirements and restrictions.
Disclosure of Clinical Trial Information
Under US and certain foreign laws intended to improve clinical trial transparency, sponsors of clinical trials may be required to register and disclose certain information about their clinical trials. This can include information related to the investigational drug, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial. This information is then made publicly available. Under a recently revised regulation in the US, sponsors are obligated to disclose the results of these trials after completion (prior to the new rulemaking, disclosure of results was only required if the product or new indication was approved by the FDA). In the US, disclosure of the results of these trials can be delayed for up to two years if the sponsor is seeking approval of the product or a new indication. Competitors may use this publicly-available information to gain knowledge regarding the progress of development programs.
Other Post-approval Regulatory Requirements
Once an NDA is approved, a product will be subject to certain post-approval requirements, including those relating to advertising, promotion, adverse event reporting, recordkeeping, and cGMP, as well as registration, listing, and inspection. There also are continuing, annual user fee requirements, as well as new application fees for supplemental applications with clinical data.
The FDA regulates the content and format of prescription drug labeling, advertising, and promotion, including direct-to-consumer advertising and promotional Internet communications. FDA also establishes parameters for permissible non-promotional communications between industry and the medical community, including industry-supported scientific and educational activities. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion for uses not consistent with the approved labeling, and a company that is found to have improperly promoted off-label uses or otherwise not to have met applicable promotion rules may be subject to significant liability under both the FDCA and other statutes, including the False Claims Act.
Manufacturers are subject to requirements for adverse event reporting and submission of periodic reports following FDA approval of an NDA.
All aspects of pharmaceutical manufacture must conform to cGMPs after approval. Drug manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA during which the FDA inspects manufacturing facilities to assess compliance with cGMPs. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs.
Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, product formulation, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA

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supplement, in some cases before the change may be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.
As previously mentioned, the FDA also may require phase 4 studies and may require a REMS, which could restrict the distribution or use of the product.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act (PDMA), which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.

Japan

Under the Japanese regulatory system administered by the MHLW and the PMDA (which is responsible for product review and evaluations under the supervision of the MHLW), pre-marketing approval and clinical studies are required for all pharmaceutical products. The Law on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices (Act No. 145 of 1960) requires a license for marketing authorization when importing to Japan and selling pharmaceutical products manufactured in other countries. It also requires a foreign manufacturer to get each of its manufacturing sites certified as a manufacturing site of pharmaceutical products to be marketed in Japan. To receive a license for marketing authorization, the manufacturer or seller must, at the very least, employ certain manufacturing marketing, quality and safety personnel. A license for marketing authorization may not be granted if the quality management methods and post marketing safety management methods applied with respect to the pharmaceutical product fail to conform to the standards stipulated in the ordinances promulgated by the MHLW. To obtain manufacturing/marketing approval for a new product, a Company must submit an application for approval to the MHLW with results of nonclinical and clinical studies to show the quality, efficacy and safety of the product candidate. A data compliance review, on-site inspection for good clinical practice, audit and detailed data review for compliance with current good manufacturing practices are undertaken by the PMDA. The application is then discussed by the committees of the Pharmaceutical Affairs and Food Sanitation Council. Based on the results of these reviews, the final decision on approval is made by the MHLW. The time required for the approval process varies depending on the product, but it can take years. The product also needs approval for pricing to be applied for redemption of health insurance. The medical products which once are approved and marketed are also subject to regular post-marketing vigilance of safety and quality under the standards of Good Manufacturing Practice. In Japan, the National Health Insurance system maintains a Drug Price List specifying which pharmaceutical products are eligible for reimbursement, and the MHLW sets the prices of the products on this list. After receipt of marketing approval, negotiations regarding the reimbursement price with the MHLW would begin. Price would be determined within 60 to 90 days unless the applicant disagrees, which may result in extended pricing negotiations. The government generally introduces price cut rounds every other year and also mandates price decreases for specific products. New products judged innovative or useful, that are indicated for pediatric use, or that target orphan or small population diseases, however, may be eligible for a pricing premium. The government has also promoted the use of generics, where available.
European Union
Marketing Authorization Application
To obtain approval of a drug under the EU regulatory system, an application for a marketing authorization may be submitted under a centralized, a decentralized or a national procedure. The centralized procedure, which is compulsory for medicines produced by certain biotechnological processes or for orphan drugs, provides for the grant of a single marketing authorization that is valid for all EU member states, which grants the same rights and obligations in each member state as a national marketing authorization. As a general rule, only one marketing authorization may be granted for drugs approved through the centralized procedure and the marketing authorization is also relevant for the EEA countries.
Under the centralized procedure, the Committee for Medicinal Products for Human Use (CHMP) is required to adopt an opinion on a valid application within 210 days, excluding clock stops when additional information is to be provided by the applicant in response to questions. More specifically, on day 120 of the procedure, once the CHMP has received the preliminary assessment reports and opinions from the Rapporteur and Co-Rapporteur designated by the CHMP, it adopts a list of questions, which are sent to the applicant together with the CHMP's overall conclusions. Applicants then have three months to respond to the CHMP (and can request a three-month extension). The Rapporteur and Co-Rapporteur assess the applicant's replies, revise the assessment report as necessary and may prepare a list of outstanding issues. The revised assessment report and list of outstanding issues are sent to the applicant together with the CHMP's recommendation by day 180 of the procedure. Applicants then have one month to respond to the CHMP (and can request a one or two-month extension). The Rapporteur and Co-Rapporteur assess the applicant's replies, submit them for discussion to the CHMP and prepare a final assessment report.

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Once its scientific evaluation is completed, the CHMP gives a favorable or unfavorable opinion as to whether to grant the marketing authorization. After the adoption of the CHMP opinion, a decision must be adopted by the European Commission, after consulting the Standing Committee of the Member States. The European Commission prepares a draft decision and circulates it to the member states; if the draft decision differs from the CHMP opinion, the Commission must provide detailed explanations. The European Commission adopts a decision within 15 days of the end of the consultation procedure.
Accelerated Procedure, Conditional Approval and Approval Under Exceptional Circumstances
Various programs, including accelerated procedure, conditional approval and approval under exceptional circumstances, are intended to expedite or simplify the approval of drugs that meet certain qualifications. The purpose of these programs is to provide important new drugs to patients earlier than under standard approval procedures.
For drugs which are of major interest from the point of view of public health, in particular from the viewpoint of therapeutic innovation, applicants may submit a substantiated request for accelerated assessment. If the CHMP accepts the request, the review time is reduced from 210 to 150 days.
Furthermore, for certain categories of medicinal products, marketing authorizations may be granted on the basis of less complete data than is normally required in order to meet unmet medical needs of patients or in the interest of public health. In such cases, the company may request, or the CHMP may recommend, the granting of a marketing authorization, subject to certain specific obligations; such marketing authorization may be conditional or under exceptional circumstances. The timelines for the centralized procedure described above also apply with respect to applications for a conditional marketing authorization or marketing authorization under exceptional circumstances.
Conditional marketing authorizations may be granted for products designated as orphan medicinal products, if all of the following conditions are met: (1) the risk-benefit balance of the product is positive, (2) the applicant will likely be in a position to provide the required comprehensive clinical trial data, (3) the product fulfills unmet medical needs, and (4) the benefit to public health of the immediate availability on the market of the medicinal product concerned outweighs the risk inherent in the fact that additional data are still required.
Conditional marketing authorizations are valid for one year, on a renewable basis until the holder provides a comprehensive data package. The granting of conditional marketing authorization depends on the applicant's ability to fulfill the conditions imposed within the agreed upon deadline. They are subject to "conditions", i.e. the holder is required to complete ongoing studies or to conduct new studies with a view to confirming that the benefit-risk balance is positive or to fulfill specific obligations in relation to pharmacovigilance. Once the holder has provided a comprehensive data package, the conditional marketing authorization is replaced by a 'regular' marketing authorization.
Marketing authorizations under exceptional circumstances may be granted where the applicant demonstrates that, for objective and verifiable reasons, they are unable to provide comprehensive data on the efficacy and safety of the drug under normal conditions of use. Such marketing authorizations are subject to certain conditions, in particular relating to safety of the drug, notification of incidents relating to its use or actions to be taken. They are valid for an indefinite period of time, but the conditions upon which they are based are subject to an annual reassessment in order to ensure that the risk-benefit balance remains positive.
Exclusivities
If an approved drug contains a new active substance, it is protected by data exclusivity for eight years from the notification of the Commission decision granting the marketing authorization and then by marketing protection for an additional two or three years. Overall, the drug is protected for ten or eleven years against generic competition, and no additional exclusivity protection is granted for any new development of the active substance it contains.
During the eight-year period of data exclusivity, competitors may not refer to the marketing authorization dossier of the approved drug for regulatory purposes. During the period of marketing protection, competitors may not market their generic drugs. The period of marketing protection is normally two years but may become three years if, during the eight-year data exclusivity period, a new therapeutic indication is approved that is considered as bringing a significant clinical benefit over existing therapies.
Medical Devices Regulations
In the EU, the marketing of medical devices is not subject to a prior approval by a health authority, but, depending on the class of device, may require prior review by a Notified Body. Notified Bodies are technical review bodies that are accredited and supervised by national health authorities. They conduct conformity assessment procedures of, among others, medical devices.

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Medical devices are generally governed by Directive 93/42/EEC on Medical Devices that harmonizes the conditions for placing medical devices on the European market. This Directive however does not regulate certain important marketing aspects, such as advertising or pricing and reimbursement, which remain governed by national law.
Directive 93/42 requires medical devices to meet the essential requirements which are enumerated in the annexes to the Directive. Compliance with those requirements is demonstrated by the CE mark as the manufacturer may only affix the CE mark if it may declare conformity with the essential requirement for each medical device that is marketed. Directive 93/42 provides recourse to harmonized European standards in order to facilitate compliance with the essential requirements. Harmonized standards provide a presumption of conformity with the essential requirements.
Directive 93/42 institutes several conformity assessment procedures. The relevant conformity assessment procedure depends on the type of medical device and the risks involved. Devices are divided in four groups: Class I, Class IIa, Class IIb, and Class III. Class I devices present the lowest level of risk so that, for most of these devices the manufacturer can self-certify the product and need not rely on certification by a Notified Body. For the other classes, a Notified Body must review the manufacturer's procedures and/or the product. Every device is initially classified by the manufacturer. However, the Notified Body may dispute the classification and assert that the device should be included in a class requiring stricter conformity assessment procedures. Specific rules apply to custom-made medical devices, medical devices that are used in clinical trials, and medical devices that incorporate a medicinal ingredient.
For classes of devices other than Class I, a manufacturer must have a Notified Body test and certify conformity of its design and production procedures or its products with the essential requirements of Directive 93/42. Certification takes the form of a certificate of conformity issued by the Notified Body, which is valid throughout the European Union. Upon certification by the Notified Body, the manufacturer affixes the CE mark to the medical device, which allows the product to move freely within the EU and thus prevents EU Member States from restricting sales and marketing of the devices, unless such measure is justified on the basis of evidence of non-compliance. Ultimately, the manufacturer is responsible for the conformity of the device with the essential requirements and for the affixing of the CE mark. The eFlow Nebulizer System is CE marked by PARI in the EU.
Manufacturers of medical devices are subject to materiovigilance obligations that require reporting of incidents or near incidents related to the use of a medical device, which incidents may demonstrate the need for corrective action by the manufacturer. In addition, Notified Bodies regularly re-assess the conformity of a medical device to the essential requirements of Directive 93/42 and may from time to time audit the manufacturer and may, where needed, suspend or withdraw the manufacturer's certificate of conformity.
Pediatric Information
United States
Under the Pediatric Research Equity Act of 2003 (PREA), NDAs and NDA supplements must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may, on its own initiative or at the request of an applicant, grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted. Under the Best Pharmaceuticals for Children Act (BPCA), pediatric research is incentivized by the possibility of six additional months of pediatric exclusivity, which if granted, is added to existing exclusivity periods and patent terms listed for the applicable drug in the FDA's Orange Book at the time the sponsor satisfies the FDA's "written request" for pediatric research. Sponsors may seek to negotiate the terms of a written request during drug development. While the sponsor of an orphan designated drug may not be required to perform pediatric studies under PREA, they are eligible to participate in the incentives under the BPCA.
Japan
In Japan, there is no statutory rule which imposes any obligation on pharmaceutical manufacturers engaging in pediatric drug development. However, the guidelines of the MHLW (Handling of Pharmaceuticals during the Reexamination Interval Period (Issue No. 107, February 1, 1999 and No. 1324, December 27, 2000)) state as follows: (i) since information on pediatric patients obtained in clinical trials may be limited, the MHLW recommends that pharmaceutical manufacturers conduct adequate post-marketing surveillance during the reexamination interval period and collect as much information as possible for proper use of drugs for pediatric patients; and (ii) if a pharmaceutical manufacturer plans to conduct a clinical trial to set the dose of a pediatric drug to prepare application for manufacturing/marketing approval or after receiving the same approval, the reexamination interval period may be extended up to 10 years. In addition, since 2010 the MHLW has been promoting the development of children’s drugs that have been approved for use in Europe and the US but are not yet approved in Japan, so that they can be used as early as possible in Japan as well.
European Union

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In the EU, new drugs (i.e. drugs containing a new active substance) for adults, must also be tested in children. This mandatory pediatric testing is carried out through the implementation of a pediatric investigation plan, or PIP, which is proposed by the applicant and approved by the EMA. A PIP contains all the studies to be conducted and measures to be taken in order to support the approval of the new drug, including pediatric pharmaceutical forms, in all subsets of the pediatric population. Validation of the marketing authorization application for adults is subject to the implementation of the PIP, subject to one or more waivers or deferrals. On the one hand, the PIP may allow a deferral for one or more of the studies or measures included therein in order not to delay the approval of the drug in adults, and, on another hand, the EMA may grant either a product-specific waiver for the (adult) disease/condition or one or more pediatric subsets or a class waiver for the disease/condition. PIPs are subject to modifications from time to time, when they no longer are workable. Prior to obtaining the validation of a marketing authorization application for adults, the applicant has to demonstrate compliance with the PIP at the time of submission of the application. In the case of orphan medicinal products, completion of an approved PIP can result in an extension of the market exclusivity period from ten to twelve years.
Regulation Outside the US, Japan and Europe
In addition to regulations in the US, Japan and Europe, we will be subject to a variety of regulations in other jurisdictions governing clinical studies of our candidate products, including medical devices. Regardless of whether we obtain FDA approval for a product candidate, we must obtain approval of the product candidate (including a medical device) by the comparable regulatory authorities of countries outside the US before we can commence clinical studies or marketing of the product candidate in those countries. The requirements for approval and the approval process vary from country to country, and the time may be longer or shorter than that required for FDA approval. Under certain harmonized medical device approval/clearance regulations outside the US, reference to US clearance permits fast-tracking of market clearance. Other regions are harmonized with EU standards, and therefore recognize the CE mark as a declaration of conformity to applicable standards. Furthermore, we must obtain any required pricing approvals in addition to regulatory approval prior to launching a product candidate in the approving country.
Health Canada
Health Canada (HC) is the government agency that provides regulatory and marketing approval for drugs and therapeutic products in Canada. The ongoing Legislative and Regulatory Modernization (LRM) is the most significant drug regulatory system reform in Canada in more than 50 years and is expected to overhaul Canada's Food and Drugs Act and Regulations. The LRM supports a 'lifecycle' regulatory approach and is focused on strengthening evidence-based decision making, good regulatory planning, licensing, post-licensing, accountability, authority and enforcement. Through this framework, HC intends to improve the market authorization process and implement necessary regulatory frameworks. In October 2010, HC accelerated its modernization efforts. This included the proposed regulatory pathways for orphan drugs (harmonized with US/EU regulations).
Australia
The Therapeutic Goods Administration (TGA) is the regulatory body, under the Australian Department of Health, responsible for conducting assessment and monitoring activities of therapeutic goods in Australia. Products under the jurisdiction of the TGA include prescription medicines, medical devices (simple and complex), diagnostic products, vaccines, and biologics. Activities of the TGA include classifying the product based on risk to the person, implementing appropriate regulatory controls for the manufacturing processes, and monitoring approved products with a comprehensive adverse event reporting program. The TGA requires that a marketing authorization be submitted and reviewed for safety and efficacy, and approved before a medication can be marketed and provided to patients commercially. A separate regulatory pathway is utilized to conduct clinical trials in Australia. Australia has also an Orphan drug designation.
Early Access Programs in the European Union
Under EU law, member states are authorized to adopt national legal regimes for the supply or use of non-authorized drugs in case of therapeutic needs. The most common national legal regimes are compassionate use programs and named patient sales, but other national regimes for early access may be available, depending on the member state. For drugs that must be approved through the centralized procedure, such as orphan drugs, compassionate use programs are also regulated at the European level. ALIS is available in certain European countries under early access programs.
Special programs can be set up to make available to patients with an unmet medical need a promising drug which has not yet been authorized for their condition (compassionate use). As a general rule, compassionate use programs can only be put in place for drugs or biologics that are expected to help patients with life-threatening, long-lasting or seriously disabling illnesses who currently cannot be treated satisfactorily with authorized medicines, or who have a disease for which no medicine has yet been authorized. The compassionate use route may be a way for patients who cannot enroll in an ongoing clinical trial to obtain treatment with a potentially life-saving medicine. Compassionate use programs are coordinated and implemented by the EU member states, which decide independently how and when to open such programs according to national rules and

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legislation. Generally, doctors who wish to obtain a promising drug for their seriously ill patients will need to contact the relevant national authority in their respective country and follow the procedure that has been set up. Typically, the national authority keeps a register of the patients treated with the drug within the compassionate use program, and a system is in place to record any side effects reported by the patients or their doctors. Orphan drugs very often are subject to compassionate use programs due to their very nature (rare diseases are life-threatening, long-lasting or seriously disabling diseases) and the long time required for both their approval and effective marketing.
Doctors can also obtain certain drugs for their patients by requesting a supply of a drug from the manufacturer or a pharmacist located in another country, to be used for an individual patient under their direct responsibility. This is often called treatment on a 'named-patient basis' and is distinct from compassionate use programs. In this case, the doctor responsible for the treatment will either contact the manufacturer directly or issue a prescription to be fulfilled by a pharmacist. While manufacturers or pharmacists do record what they supply, there is no central register of the patients that are being treated in this way.
Reimbursement of Pharmaceutical Products
In the US, many independent third-party payers, as well as the Medicare and state Medicaid programs, reimburse buyers of pharmaceutical products. Medicare is the federal program that provides health care benefits to senior citizens and certain disabled and chronically ill persons. Medicaid is the need-based federal and state program administered by the states to provide health care benefits to certain persons.
As one of the conditions for obtaining Medicaid and Medicare Part B coverage for our marketed pharmaceutical products, we will need to agree to pay a rebate to state Medicaid agencies that provide reimbursement for those products. We will also have to agree to sell our commercial products under contracts with the Department of Veterans Affairs, Department of Defense, Public Health Service, and numerous other federal agencies as well as certain hospitals that are designated by federal statutes to receive drugs at prices that are significantly below the price we charge to commercial pharmaceutical distributors. These programs and contracts are highly regulated and will impose restrictions on our business. Failure to comply with these regulations and restrictions could result in a loss of our ability to continue receiving reimbursement for our drugs once approved.
Private healthcare payers also attempt to control costs and influence drug pricing through a variety of mechanisms, including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. The US President has indicated an interest in having the federal government negotiate drug prices with pharmaceutical manufacturers.
Different pricing and reimbursement schemes exist in other countries. In Japan, drugs can be sold on the market if they undergo the PMDA’s review of safety, effectiveness and quality and receive manufacturing/marketing approval. However, in order for drugs to be covered by the National Health Insurance, they must be included in a Drug Price List. The "Drug Pricing Organization," which is a division of the Central Social Insurance Medical Council (CSIMC), calculates the price of drugs, the general meeting of the CSIMC approves the calculated price, and the MHLW includes the drugs and the calculated price in the Drug Price List. After receiving manufacturing/marketing approval, drugs are included in the Drug Price List within 60 to 90 days unless the applicant disagrees, which may result in extended pricing negotiations. The MHLW updates the Drug Price List biennially after taking into account the survey result of the actual sales price of drugs and hearing the opinion of the CSIMC.
In the EU, governments influence the price of drugs through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to patients. Some jurisdictions operate positive and negative list systems under which drugs may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular drug candidate to currently available therapies. Other member states allow companies to fix their own prices for drugs, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new drugs. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country. There can be no assurance that any country that has price controls or reimbursement limitations for drugs will allow favorable reimbursement and pricing arrangements for any of our products.
Fraud and Abuse and Other Laws
Physicians and other healthcare providers and third-party payers (government or private) often play a primary role in the recommendation and prescription of health care products. In the US and most other jurisdictions, numerous detailed requirements apply to government and private health care programs, and a broad range of fraud and abuse laws, transparency

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laws, and other laws are relevant to pharmaceutical companies. US federal and state healthcare laws and regulations in these areas include the following:
The federal anti-kickback statute;
The federal civil False Claims Act;
The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH);
The federal criminal false statements statute;
The price reporting requirements under the Medicaid Drug Rebate Program and the Veterans Health Care Act of 1992;
The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program; and
Analogous and similar state laws and regulations.
Similar restrictions apply in Japan and the member states of the EU, which have been set out by laws or industry codes of conduct.
Employees
As of December 31, 2017 , we had a total of 214 employees, including 98 in research, clinical, regulatory, medical affairs and quality assurance; 20 in technical operations, manufacturing and quality control; 42 in general and administrative functions; and 54 in pre-commercial activities. We had 190 employees in the US and 24 employees in Europe. We anticipate increasing our headcount in 2018 .
None of our employees are represented by a labor union and we believe that our relations with our employees are generally good. Generally, our employees are at-will employees; however, we have entered into employment agreements with certain of our executive officers.
Available Information
We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act). We make available on our website at http://www.insmed.com, free of charge, copies of these reports as soon as reasonably practicable after filing, or furnishing them to, the SEC. The public can also obtain materials that we file with the SEC through the SEC's website at http://www.sec.gov or at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.
Also available through our website's "Investor Relations Corporate Governance" page are charters for the Audit, Compensation and Nominations and Governance committees of our board of directors, our Corporate Governance Guidelines, and our Code of Business Conduct and Ethics.
The references to our website and the SEC's website are intended to be inactive textual references only. Neither the information in or that can be accessed through our website, nor the contents of the SEC's website, are incorporated by reference in this Annual Report on Form 10-K.
Financial Information
The financial information required under this Item 1 is incorporated herein by reference to Item 8 of this Annual Report on Form 10-K.


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ITEM 1A.        RISK FACTORS
               Our business is subject to substantial risks and uncertainties. Any of the risks and uncertainties described below, 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-K (please read the Cautionary Note Regarding Forward-Looking Statements appearing at the beginning of this Form 10-K). The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations, prospects and the value of an investment in our common stock and could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements.

Risks Related to Development, Regulatory Approval and Commercialization of our Product Candidates
The currently reported results of the CONVERT study and the 312 study are based on top-line and interim data for the studies and may differ from complete study results once additional data are received and evaluated.
The reported results of our CONVERT study consist of only top-line data from the first six months of the study and interim data regarding durability of culture conversion in patients off of all therapy for three months. Top-line data are based on a preliminary analysis of currently available efficacy and safety data, and therefore these results are subject to change following a comprehensive review of the more extensive data we expect to receive when the full set of six-month data becomes available. Top-line data are based on important assumptions, estimations, calculations and information currently available to us, and we have not received or had an opportunity to evaluate all of the six‑month data from the CONVERT study. As a result, the top-line six-month results may differ from the full six-month data, or different conclusions or considerations may qualify such top-line results, once the complete six-month data have been received and fully evaluated. Similarly, the durability data we have reported from the CONVERT study consist only of interim data for evaluable study participants who have completed treatment and continued in the study off all therapy for three months. The CONVERT study is ongoing, and subsequent data from the treatment and off-treatment phases of the study may differ from the reported top-line and interim results.
The reported results of our 312 study, which are discussed herein, consist only of interim data for evaluable study participants who have completed six months of treatment under the 312 study as of December 2017. The currently reported results are subject to change following a comprehensive review of the more extensive data we expect to receive when this study is completed. The 312 study is a twelve-month study and remains ongoing, and subsequent data from the study may differ from the reported interim results.
If these top-line and interim data differ from the results of the full six-month data or subsequent data from patients during the remainder of the treatment phase or the off‑treatment phase of the CONVERT study, or the full twelve-month data from the 312 study, our ability to obtain or maintain approval for, and commercialize, ALIS may be harmed, which could materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Our prospects are highly dependent on the success of our most advanced product candidate, ALIS. If we are unable to successfully complete the development of, obtain or subsequently maintain regulatory approval for, and successfully commercialize ALIS, our business, financial condition, results of operations and prospects and the value of our common stock will be materially adversely affected.
We are investing significant efforts and financial resources in the development of ALIS, our most advanced product candidate. Our ability to generate product revenue from ALIS will depend heavily on the successful completion of development of, receipt of regulatory approval for, and commercialization of, ALIS.
Positive results from preclinical studies of a product candidate may not be predictive of similar results in human clinical trials, and promising results from earlier clinical trials of a product candidate may not be replicated in later clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late‑stage clinical trials even after achieving promising results in earlier stages of development. Accordingly, even if the full six‑month data for the primary endpoint of the CONVERT study, the interim durability data from the CONVERT study and the interim efficacy data from the 312 study are all positive, such data may not be predictive of the results from the remainder of either the CONVERT study or the 312 study, or future trials related to ALIS.

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In addition, even if we believe our clinical trials for ALIS demonstrate promising results, regulators may decline to grant regulatory approval. Regulators may disagree with our interpretation of data or the study design or execution from our clinical trials and may refuse to accept our application for review or decline to grant approval based on effectiveness and/or safety concerns. For instance, in the fourth quarter of 2014, we filed a MAA with the EMA for ALIS as a treatment for, among other things, NTM lung disease in adult patients. The filing was based in part on data from our phase 2 study in patients with NTM lung disease. We subsequently withdrew our MAA after the CHMP concluded that the data submitted did not provide enough evidence to support an approval. We currently expect to submit an NDA to the FDA pursuant to Subpart H for ALIS based on the efficacy data from the CONVERT study through Month 6. Although we view the top-line six-month results and the interim durability data from the CONVERT study as promising, the FDA may not agree that the six-month data are sufficient to support submission, or that the six-month data and the available interim durability data are sufficient to support approval, of our NDA under Subpart H.
Further, even if we obtain approval for ALIS from a regulator, including from the FDA pursuant to Subpart H, confirmatory clinical studies will be required and could fail to demonstrate sufficient safety and efficacy to support continued approval. For instance, if we obtain approval from the FDA based on the NDA filing described above, the FDA may nonetheless conclude that the data generated from the remainder of the CONVERT study or the 312 study is not sufficient to support continued approval for ALIS in its approved indication, and the approval may be withdrawn.
We do not expect ALIS to be commercially available in any market until we receive requisite approval from the FDA, MHLW, EMA or an equivalent regulatory agency. The failure to obtain or subsequently maintain such approvals will materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
We may not be able to obtain regulatory approvals for ALIS or any other products we develop in the US, Japan, Europe or other markets. If we fail to obtain such approvals, we will not be able to commercialize our products.
We are required to obtain various regulatory approvals prior to studying our products in humans and then again before we market and distribute our products, and the failure to do so will prevent us from commercializing our products, which would materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock. The regulatory review and approval processes in the US, Japan and Europe require evaluation of preclinical studies and clinical studies, as well as the evaluation of our manufacturing processes and quality systems. Securing regulatory approval to market our products requires the submission of much more extensive preclinical and clinical data, manufacturing and quality information regarding the process and facility, scientific data characterizing our product and other supporting data to the regulatory authorities in order to establish its safety and effectiveness. These processes are complex, lengthy, expensive, resource intensive and uncertain. We have limited experience in submitting and pursuing applications necessary to gain these regulatory approvals. In addition, the FDA will conduct a rigorous review of any trade name we intend to use for our product candidates. Even after the FDA approves a trade name, the FDA may request that we adopt an alternative name for the product if adverse event reports indicate a potential for confusion with other trade names and medication error. If we are required to adopt an alternative name, the commercialization of ALIS could be delayed or interrupted, which would limit our ability to commercialize ALIS and generate revenues.
As described above, data submitted to regulators are subject to varying interpretations that could delay, limit or prevent regulatory agency approval. For example, based on our communications with FDA to date, we need to demonstrate to FDA that our proposed in vitro release test (IVRT) is sufficient to ensure that amikacin is consistently released from batch to batch of ALIS and is discriminating of acceptable and unacceptable batches. Although we believe that our proposed testing methodology adequately characterizes the release of amikacin from the liposomal suspension, if FDA does not accept our proposed IVRT, the approval of ALIS could be prevented or delayed.
We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a product and the period required for review of any application for regulatory agency approval of a particular product. For example, the FDA has designated ALIS for fast track, breakthrough therapy and QIDP status, all programs intended to expedite or streamline the development and regulatory review of the drug. If we were to lose the current designation under one or more of those programs, we could face various consequences, including delays in the FDA review and approval process. In addition, the FDA review and approval process could be delayed in the event of a federal government shutdown. Resolving such delays could force us or third parties to incur significant costs, could limit our allowed activities or the allowed activities of third parties, could diminish any competitive advantages that we or our third parties may attain or could adversely affect our ability to receive royalties, any of which could materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock. Even with these designations, there is no guarantee we will receive approval for ALIS on a timely basis, or at all.

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Similarly, we are currently assessing regulatory strategies which could expedite the development and regulatory review of INS1007 in the US and the EU, but we may be unsuccessful in pursuing such strategies. The FDA recently denied our request for orphan drug designation for INS1007 in non-CF bronchiectasis. In addition, although we believe that INS1009 could be eligible for approval under Section 505(b)(2), and thus could rely at least in part on studies not conducted by or for us and for which we do not have a right of reference, we may not obtain approval from the FDA to use this pathway.
Approval by the FDA does not ensure approval by the regulatory authorities of other countries. To market our products outside of the US, we, and potentially our third-party providers, must comply with numerous and varying regulatory requirements of other countries. The approval procedures vary among countries and can involve additional product testing and administrative review periods. The time required to obtain approval in these other territories might differ from that required to obtain FDA approval. In addition, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions (including with respect to our target market) and criminal prosecution if we fail to comply with applicable US or foreign regulatory requirements.
We have not completed the research and development stage of ALIS or any other product candidates. If we are unable to successfully develop and commercialize ALIS or any other products, it will materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Our long-term viability and growth depend on the successful commercialization of ALIS and potentially other product candidates. Pharmaceutical product development is an expensive, high risk, lengthy, complicated, resource intensive process. In order to conduct the development programs for our products, we must, among other things, be able to successfully:
Identify potential product candidates;
Design and conduct appropriate laboratory, preclinical and other research;
Submit for and receive regulatory approval to perform clinical studies;
Design and conduct appropriate preclinical and clinical studies according to good laboratory practices and good clinical practices and disease-specific expectations of the FDA and other regulatory bodies;
Select and recruit clinical investigators and subjects for our studies;
Collect, analyze and correctly interpret the data from our studies;
Obtain data establishing adequate safety of our product candidates and demonstrating with statistical significance that our product candidates are effective for their proposed indications, as indicated by satisfaction of pre-established endpoints;
Submit for and receive regulatory approvals for marketing;
Submit for and receive reimbursement approvals for market access; and
Manufacture the product candidates and device components according to current good manufacturing practices (cGMP) and other applicable standards and regulations.
The development program with respect to any given product will take many years and thus delay our ability to generate profits associated with that product. In addition, potential products that appear promising at early stages of development may fail for a number of reasons, including the possibility that the products may require significant additional testing or turn out to be unsafe, ineffective, too difficult or expensive to develop or manufacture, too difficult to administer or unstable, or regulators may require additional testing to substantiate our claims. For instance, as described above, although we view the top-line six-month results from the CONVERT study and the interim data we have reported from the CONVERT study and 312 study as promising, our clinical studies of ALIS for refractory NTM lung disease caused by MAC are ongoing, and outcomes from those studies cannot be predicted. If we do not proceed with the development of our ALIS program in the NTM lung disease or CF indications, certain of our contract counterparties may elect to proceed with the development of these indications. Even if we are successful in obtaining regulatory approval for our product candidates, including ALIS, we may not obtain labeling that permits us to market them with commercially viable claims because the final wording of the approved indication may be restrictive, or the available clinical data may not provide adequate comparative data with other products.

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Failure to successfully commercialize our products will materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
If our clinical studies do not produce positive results or our clinical trials are delayed, or if serious side effects are identified during drug development, we may experience delays, incur additional costs and ultimately be unable to commercialize our product candidates in the US, Japan, Europe or other markets.
Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals, and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement and can take many years to complete. Special challenges can arise in conducting trials in diseases or conditions with small populations, such as difficulties enrolling adequate numbers of patients. Our product development costs have and may continue to increase if we experience further delays in testing or approvals. A failure of one or more of our preclinical studies or clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to obtain regulatory approval or commercialize our product candidates, including:
Our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect to be promising;
Regulators, ethics committees or institutional review boards (IRBs) may prevent us from commencing a clinical trial or conducting a clinical trial at a prospective trial site;
Enrollment in the clinical trials may take longer than expected or the clinical trials as designed may not allow for sufficient patient accrual to complete enrollment of the trial;
We may experience difficulties or delays due to the number of clinical sites involved in our clinical trials;
We may decide to limit or abandon our commercial development programs;
Conditions imposed on us by the FDA or any non-US regulatory authority regarding the scope or design of our clinical trials may require us to collect and submit information to regulatory authorities, ethics committees, IRBs or others for review and approval;
The number of patients required for our clinical trials may be larger than we anticipate or participants may drop out of our clinical trials at a higher rate than we anticipate;
Our third-party contractors, contract research organizations (CROs), clinical investigators, clinical laboratories, product suppliers or nebulizer supplier may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner;
We may have to suspend or terminate one or more of our clinical trials if we, regulators, ethics committees or the IRBs determine that the participants are being exposed to unacceptable health risks or for other reasons;
We may not be able to claim that a product candidate provides an advantage over current standard of care or future competitive therapies in development because our clinical studies may not have been designed to support such claims;
Regulators, ethics committees or IRBs may require that we hold, suspend or terminate clinical research for various reasons, including potential safety concerns or noncompliance with regulatory requirements;
The cost of our clinical trials may be greater than we anticipate;
The supply or quality of product used in clinical trials or other materials necessary to conduct our clinical trials may be insufficient or inadequate or we may not be able to reach agreements on acceptable terms with prospective contract manufacturers or CROs;

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The effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics; and
Our competitors may be able to bring products to market before we do.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
Experience increased product development costs, as we have in the past;
Be delayed in obtaining, or be unable to obtain, regulatory approval for one or more of our product candidates;
Obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval or labeling with black box or other warnings or contraindications;
Have the product removed from the market after obtaining regulatory approval; or
Face a shortened patent protection period during which we may have the exclusive right to commercialize our product candidates.
We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain regulatory approvals, including approval by the FDA, MHLW, PMDA, EMA and other regulatory agencies.
We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain regulatory approvals, including approval by the FDA, MHLW, PMDA and EMA, which might prevent us from successfully designing, implementing, or completing the clinical trials required to support regulatory approval of our product candidates. Since our merger with Transave, we have not completed a regulatory filing and review process for, obtained regulatory approval of or commercialized any of our product candidates. The application processes for the FDA, MHLW, PMDA, EMA and other regulatory agencies are complex and difficult and vary by regulatory agency, and we have limited experience in conducting and managing the application processes necessary to obtain regulatory approvals in these various jurisdictions and might not be able to demonstrate that our product candidates meet the appropriate standards for regulatory approval. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining regulatory approvals, we might not be able to commercialize ALIS or other product candidates, or might be significantly delayed in doing so, which may materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
There is little or no precedent for clinical development and regulatory expectations for agents to treat NTM lung disease; as a result, we may encounter challenges developing clinical endpoints that will ultimately be satisfactory to regulators, which could cause our product candidates not to be approved by regulators, delay commercialization of our product candidates or subject us to the risk of having any approval withdrawn.
Based on the top-line six-month data from the CONVERT study, we expect to submit an NDA under Subpart H to request accelerated approval for ALIS. The FDA may base accelerated approval for drugs intended to treat serious or life‑threatening illnesses on whether the drug has an effect on a surrogate endpoint or an intermediate clinical endpoint (other than survival or irreversible morbidity). We are using culture conversion as the surrogate endpoint in our CONVERT study. While we have discussed our protocol for potential accelerated approval under Subpart H with the FDA, the FDA has not indicated its agreement or disagreement with the protocol. In addition, the FDA has indicated that the results of the six-minute walk test, a secondary endpoint in the CONVERT study, will be important in assessing the clinical benefit of ALIS in this patient population. Developing clinical endpoints that are unsatisfactory to regulators could delay clinical trials and the FDA approval process, which could materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Additionally, if ALIS or any of our other product candidates is approved based on a surrogate endpoint or an intermediate clinical endpoint under the accelerated approval program, the approval will be subject to the requirement that we study the product candidate further to verify and describe its clinical benefit. Thus, even if we are successful in obtaining accelerated approval in the US or under comparable pathways in other jurisdictions, we may face requirements and limitations that will adversely affect our prospects. For example, we may be approved only for a very limited indication, we may not

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successfully complete required post-approval trials, or such trials may not confirm the clinical benefit of our drug, and approval of the drug may be withdrawn.
For ALIS to be successfully developed and commercialized in a given market, in addition to regulatory approvals required for ALIS, the eFlow Nebulizer System must satisfy certain regulatory requirements and its use as a delivery system for ALIS must be approved or cleared by regulators.
ALIS is administered using the eFlow Nebulizer System. As such, the eFlow Nebulizer System must receive regulatory approval or clearance on its own or in conjunction with ALIS as a combination product in order for us to develop and commercialize ALIS. Although the eFlow Nebulizer System is CE marked by PARI in the EU, outside the EU, it is labeled as investigational for use in our clinical trials, including in the US, Japan, Canada and Australia. The eFlow Nebulizer System is not approved for commercial use in the US, Japan, Canada or certain other markets in which we may seek to commercialize ALIS.
In the US, we plan to seek approval of the eFlow Nebulizer System in conjunction with ALIS as a combination product through a single NDA submission, and the increased complexity of the review process in this circumstance may delay approval. Additionally, while we continue to work closely with PARI to coordinate efforts regarding regulatory requirements, we will be responsible for this NDA submission, and we, in consultation and collaboration with PARI, may not be successful in meeting the regulatory requirements for the eFlow Nebulizer System, which would prevent or delay our ability to bring ALIS to market or to market it successfully. Failure of PARI to successfully supply, or to maintain regulatory approval or clearance, of the eFlow Nebulizer System could result in increased development costs, delays in or failure to obtain regulatory approval, and associated delays in ALIS reaching the market. Further, based on our discussions to date with the FDA, we conducted a human factors study for the eFlow Nebulizer System in preparation for submission of our NDA for ALIS. If the FDA does not find the results of that study to be acceptable, that might delay or prevent the approval of ALIS.
We may not be able to enroll enough patients to complete our clinical trials or retain a sufficient number of patients in our clinical trials to generate the data necessary for regulatory approval of our product candidates.
The completion rate of our clinical studies is dependent on, among other factors, the patient enrollment rate. Patient enrollment is a function of many factors, including:
Investigator identification and recruitment;
Regulatory approvals to initiate study sites;
Patient population size;
The nature of the protocol to be used in the trial;
Patient proximity to clinical sites;
Eligibility criteria for the study;
The patients’ willingness to participate in the study;
Discontinuation rates; and
Competition from other companies’ potential clinical studies for the same patient population.
Delays in patient enrollment for our clinical trials, including in the WILLOW study, our global phase 2 study of INS1007 in non-CF bronchiectasis that currently is enrolling patients, such as those we encountered in enrolling the CONVERT study, could increase costs and delay ultimate commercialization and sales, if any, of our products. Once enrolled, patients may elect to discontinue participation in a clinical trial at any time. If patients elect to discontinue participation in our clinical trials at a higher rate than expected, we may be unable to generate the data required by regulators for approval of our product candidates.

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Even if we obtain regulatory approval for ALIS or any of our other product candidates, we will continue to face extensive regulatory requirements and our products may face future development and regulatory difficulties.
Even if regulatory approval in the US is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing, including risk evaluation and mitigation strategies (REMS), or may impose ongoing requirements on us or our contract partners, including with respect to:
Labeling, such as a boxed warning or other warnings or contraindications;
Post-market surveillance, post-market studies or post-market clinical trials;
Packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other postmarket information;
Monitoring and reporting complaints, adverse events and instances of the failure of a product to meet specifications;
Compliance with cGMPs and certain quality systems requirements for device components;
Changes to the approved product, product labeling or manufacturing process;
Advertising and other promotional material; and
Disclosure of clinical trial results on publicly available databases.
In addition, the distribution, sale and marketing of our products are subject to a number of additional requirements, including:
State wholesale drug distribution laws and the distribution of our product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act of 1987;
Sales, marketing and promotion, scientific exchange, speaker programs, charitable donations and educational grant programs must comply with federal and state laws; and
Pricing and rebate arrangements must comply with reporting and payment obligations under the Medicaid drug rebate program, and additional laws and regulations apply to making products available to authorized users of the Federal Supply Schedule of the General Services Administration.
All of these activities also may be subject to federal and state consumer protection and unfair competition laws.
If we fail to comply with applicable regulatory requirements, a regulatory agency may:
Issue warning letters or untitled letters asserting that we are in violation of the law;
Seek an injunction or impose civil monetary penalties or pursue civil or criminal prosecutions and fines against our company or responsible officers;
Suspend or withdraw regulatory approval;
Suspend or terminate any ongoing clinical trials;
Refuse to approve pending applications or supplements to applications submitted by us;
Suspend or impose restrictions on operations, including costly new manufacturing requirements;
Seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; and/or
Refuse to allow us to enter into supply contracts, including government contracts.

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Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenues.
The commercial success of ALIS or any other product candidates that we may develop will depend upon many factors, including the degree of market acceptance by physicians, patients, third-party payers and others in the medical community.
Even if we are able to successfully complete development of, obtain regulatory approval for, and bring to market our product candidates, they may not gain market acceptance by physicians, patients, third‑party payers and others in the medical community. If ALIS, or any other product candidate we bring to market, does not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of ALIS and any other product candidates, if approved for commercial sale, will depend on a number of factors, including:
The prevalence and severity of any side effects, including any limitations or warnings contained in a product’s approved labeling;
The efficacy and potential advantages over alternative treatments;
The pricing of our products;
Relative convenience and ease of administration;
The willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
The strength of marketing and distribution support and timing of market introduction of competitive products;
Publicity concerning our products or competing products and treatments, including competing products becoming subject to generic pricing; and
Sufficient third-party insurance coverage and reimbursement.
Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will not be known until after it is launched. For example, if a clinical trial is not designed to demonstrate advantages over alternative treatments, we may be prohibited from promoting our product candidates on any such advantages. Our efforts to educate the medical community and third-party payers on the benefits of our product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required to commercialize more established technologies marketed by our competitors.
We currently are building our marketing and sales organization, and we have limited experience as a company in marketing drug products. If we are unable to successfully market and sell our products after they are approved, our ability to generate product revenues will be adversely affected.
We are building our commercial organization for the marketing, market access, sales and distribution of our products. In order to commercialize ALIS or any other product candidates, we must develop these capabilities on our own or make arrangements with third parties for the marketing, sales and distribution of our products. The establishment and development of our own sales force is and will continue to be expensive and time consuming and could delay any product launch, and we may be unable to successfully develop this capability. As a result, we may seek one or more partners to handle some or all of the sales and marketing of ALIS in certain markets. However, we may not be able to enter into arrangements with third parties to sell ALIS on favorable terms or at all. In the event we are unable to develop our own marketing, market access, and sales force or collaborate with a third-party marketing, market access, and sales organization, we may not be able to successfully commercialize ALIS or any other product candidates that we develop, which would adversely affect our ability to generate product revenues. Further, whether we commercialize products on our own or rely on a third party to do so, our ability to generate revenue will be dependent on the effectiveness of the sales force.

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If estimates of the size of the potential markets for our product candidates, including ALIS, are overstated or regulators limit the proposed treatment population for our product candidates, our ability to commercialize such product candidates successfully or achieve sufficient revenue to support our business could be materially adversely affected.
We have relied on currently available information from external sources, including market research funded by us and third parties, and internal analyses and calculations to estimate the potential market opportunities for NTM lung disease in 2018 in the US, Japan and the EU5. The externally sourced information used to develop these estimates has been obtained from sources we believe to be reliable, but we have not verified the data from such sources, and their accuracy and completeness cannot be assured. Similarly, our internal analyses and calculations are based upon management’s understanding and assessment of numerous inputs and market conditions, including, but not limited to, the projected increase in prevalence of NTM lung disease, Medicare patient population growth and ongoing population shifts to geographies with increased rates of NTM lung disease. These understandings and assessments necessarily require assumptions subject to significant judgment and may prove to be inaccurate. As a result, our estimates of the size of these potential markets for ALIS could prove to be overstated, perhaps materially. In addition, while we believe we have identified the physicians who treat the majority of the NTM lung disease patients in the US, we are relying on third party data to identify those physicians and to determine how to deploy our resources to market to those physicians. We cannot ensure that we are marketing our products to all appropriate physicians and we may therefore be limiting our market opportunity. We also cannot ensure that physicians will prescribe our products to the appropriate patients.
We may develop estimates with respect to market opportunities for other product candidates in the future, and such estimates would be subject to similar risks. In addition, a potential market opportunity could be reduced if a regulator limits the proposed treatment population for one of our product candidates. In either circumstance, even if we obtain regulatory approval for a product candidate, we may be unable to commercialize it on a scale sufficient to generate material revenues, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our common stock.
Risks Related to Our Reliance on Third Parties
We rely on third parties including collaborators, CROs, clinical and analytical laboratories, CMOs and other providers for many services that are critical to our business. If we are unable to form and sustain these relationships, or if any third-party arrangements that we may enter into are unsuccessful, including due to non-compliance by such third parties with our agreements or applicable law, our ability to develop and commercialize our products may be materially adversely affected.
We currently rely, and expect that we will in the future continue to rely, on third parties for significant research, analytical services, preclinical development, clinical development and manufacturing of our product candidates. For example, almost all of our clinical trial work is done by CROs, such as SynteractHCR, Inc., our CRO for both the CONVERT and 312 studies, and clinical laboratories. Reliance on these third parties poses a number of risks, including the following:
Significant competition in seeking appropriate partners;
The complex and time-consuming nature of negotiation, documentation and implementation of agreements with third parties in the pharmaceutical industry;
Our potential inability to establish and implement collaborations or other alternative arrangements that we might pursue on favorable terms;
Our potential inability to control whether third parties devote sufficient resources to our programs or products, including with respect to meeting contractual deadlines;
Our potential inability to control the regulatory and contractual compliance of third parties, including their quality systems, processes and procedures, systems utilized to collect and analyze data, and equipment used to test drug product and/or clinical supplies;
Disagreements with third parties, including CROs, that result in a dispute over and loss of intellectual property rights, delay or termination of research, development, or commercialization of product candidates or litigation or arbitration;
Contracts with our collaborators that fail to provide sufficient protection of our intellectual property; and

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Difficulty enforcing the contracts if one of these third parties fails to perform.
We also rely on third parties to select and enter into agreements with clinical investigators to conduct clinical trials to support approval of our product candidates, and the failure of these third parties to appropriately carry out such evaluation and selection can adversely affect the quality of the data from these studies and, potentially, the approval of our products. In particular, as part of future drug approval submissions to the FDA, we must disclose certain financial interests of investigators who participated in any of the clinical studies being submitted in support of approval, or must certify to the absence of such financial interests. The FDA evaluates the information contained in such disclosures to determine whether disclosed interests may have an impact on the reliability of a study. If the FDA determines that financial interests of any clinical investigator raise serious questions of data integrity, the FDA can institute a data audit, request that we submit further data analyses, conduct additional independent studies to confirm the results of the questioned study, or refuse to use the data from the questioned study as a basis for approval. A finding by the FDA that a financial relationship of an investigator raises serious questions of data integrity, could delay or otherwise adversely affect approval of our products.
Such risks could materially harm our business, financial condition, results of operations and prospects and the value of our common stock.
We may not have, or may be unable to obtain, sufficient quantities of our product candidates to meet our required supply for clinical studies or commercialization requirements, which would materially harm our business.
We do not have any in‑house manufacturing capability other than for small-scale pre-clinical development programs and depend completely on a small number of third-party manufacturers and suppliers for the manufacture of our product candidates on a clinical or commercial scale. For instance, we are and expect to remain dependent upon Therapure, Althea and eventually Patheon and other suppliers being able to provide an adequate supply of ALIS both for our clinical trials and for commercial sale in the event ALIS receives regulatory approvals. Althea currently manufactures ALIS at a relatively small scale. In order to meet potential commercial demand, if ALIS is approved, we funded a manufacturing expansion at Therapure in Canada that operates at a larger scale than Althea and have entered into certain agreements with Patheon related to increasing our long-term production capacity for ALIS commercial inventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. However, Patheon’s supply obligations will commence only after certain technology transfer and construction services are completed. Any delay in Patheon’s supply obligations commencing, whether due to delays in technology transfer and construction or from adding Patheon to our NDA as a contract manufacturer, would increase the risks associated with either Therapure or Althea being unable to provide us with an adequate supply of ALIS.
We are also dependent upon PARI being able to provide an adequate supply of nebulizers both for our clinical trials and for commercial sale in the event ALIS receives regulatory approval, as PARI is the sole manufacturer of the eFlow Nebulizer System. We have no alternative supplier for the nebulizer, and we do not intend to seek an alternative or secondary supplier. Significant effort and time were expended in the optimization of the nebulizer for use with ALIS. In the event PARI cannot provide us with sufficient quantities of the nebulizer, replication of the optimized device by another party may require considerable time and additional regulatory approval. In the case of certain defined supply failures, we will have the right under our Commercialization Agreement with PARI to make the nebulizer and have it made by certain third parties, but not those deemed under the Commercialization Agreement to compete with PARI.
We do not have long-term commercial agreements with all of our suppliers and if any of our suppliers are unable or unwilling to perform for any reason, we may not be able to locate suppliers or enter into favorable agreements with them. In such circumstances, an inadequate supply of ALIS or the nebulizer could delay, impair or prevent clinical trials, the development and commercialization of ALIS and adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Risks Related to Our Financial Condition and Future Capital Requirements
We have a history of operating losses, and we currently have no material source of revenue. We expect to incur operating losses for the foreseeable future and may never achieve or maintain profitability.
We have incurred losses each previous year of our operation, except in 2009, when we sold our manufacturing facility and certain other assets to Merck, and we did not generate material revenue during the years ended December 31, 2017, 2016, 2015 or 2014. We expect to continue incurring operating losses for the foreseeable future. The process of developing and commercializing our products requires significant pre-clinical and clinical testing as well as regulatory approvals for commercialization and marketing before we are allowed to begin product sales. In addition, we are significantly expanding our sales and marketing organization and establishing contractual relationships to enable product manufacturing and other related

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activities to support commercialization of ALIS and our other product candidates, if approved. We expect that our activities, together with our general and administrative expenses, will continue to result in substantial operating losses for the foreseeable future. As of December 31, 2017 , our accumulated deficit was $957.9 million . For the years ended December 31, 2017 and 2016 , our consolidated net loss was $192.6 million and $176.3 million , respectively. To achieve and maintain profitability, we need to generate significant revenues from future product sales. The process of developing and commercializing our products will require significant expenditures for pre-clinical and clinical testing, regulatory approvals for commercialization and marketing, development of an internal or external sales and marketing organization and other related activities. Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to predict the extent of any future losses, and we may never generate significant future revenues or achieve and sustain profitability.
We may need additional funds in the future to continue our operations, but we face uncertainties with respect to our ability to access capital.
Our operations have consumed substantial amounts of cash since our inception. We expect to continue to incur substantial research and development expenses, and we expect to expend substantial financial resources to complete development of, seek regulatory approval for, and prepare for commercialization of ALIS. In addition, if we obtain regulatory approval for ALIS or any of our other product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We may need additional capital to fund these expenses and our other research and development activities, including due to changes in our product development plans or misjudgment of expected costs, fund corporate development, maintain our intellectual property portfolio or resolve litigation. As of December 31, 2017 , we had $381.2 million of cash and cash equivalents on hand. In January 2018, we completed a public offering of $450.0 million of convertible debt which resulted in net proceeds of approximately $435.8 million after underwriting fees and expenses. We expect our operating expenses, capital expenditures and long-term investments will be significantly higher in 2018 than in 2017, reflecting our investment in the build-out of our commercial organization to support global expansion activities for ALIS, including the potential launch of ALIS in the US in late 2018; the build-up of third-party manufacturing capacity and preparation of commercial inventory, which includes capital and long term investments; and continued investment in research and development (primarily associated with our ongoing and future clinical trials and clinical studies for ALIS and ongoing phase 2 program for INS 1007, along with advancement of other pipeline programs, including INS 1009) as well as general and administrative expenses. We do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable. If adequate funds are not available to us when needed, we will be forced to delay, restrict or eliminate all or a portion of our development programs or commercialization efforts.
Our loan agreement with Hercules contains covenants and other provisions that impose restrictions on our operations, which may adversely affect our ability to optimally operate our business or to maximize shareholder value.
Our loan agreement with Hercules, under which we had outstanding indebtedness of $55.6 million as of December 31, 2017, contains various restrictive covenants, including restrictions on our ability to incur additional debt, transfer or place a lien or security interest on our assets, including our intellectual property, merge with or acquire other companies, redeem or repurchase any shares of our capital stock or pay cash dividends to our shareholders. The loan agreement also contains certain other covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends). Upon the occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and Hercules may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the loan agreement. The interest-only period under the loan agreement extends through May 1, 2019. The maturity date of the loan facility is October 1, 2020. In February 2018, we notified Hercules that we will repay the A&R Loan Agreement in full on February 28, 2018. The total aggregate cash payable to Hercules for the early prepayment of debt, inclusive of accrued interest, the backend fee and an early payment penalty will be approximately $58.0 million.
Our borrowings under the loan agreement are secured by a lien on our assets, excluding our intellectual property, and in the event of a default on the loan, Hercules may have the right to seize the assets securing our obligations under the loan agreement. The terms and restrictions provided in the loan agreement may inhibit our ability to conduct our business and to maximize shareholder value. Future debt securities or other financing arrangements could contain negative covenants similar to, or even more restrictive than, the Hercules loan agreement.
We have indebtedness in the form of convertible senior notes which could adversely affect our financial position, prevent us from implementing our strategy, and dilute the ownership interest of our existing shareholders.
    
In January 2018, we completed an underwritten public offering of 1.75% convertible senior notes due 2025 (the Convertible Notes). The Convertible Notes may be convertible into common stock at an initial conversion rate of 25.5384 shares of common stock per $1,000 principal amount of Convertible Notes. We sold $450.0 million aggregate principal amount

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of the Convertible Notes, including the exercise in full of the underwriters’ option to purchase additional Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million were approximately $435.8 million. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2024 only under certain circumstances. On or after October 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time. Upon conversion of the Convertible Notes, we will deliver cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The degree to which we are leveraged could have negative consequences such as the following:

we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing economic conditions;
our ability to obtain financing in the future may be limited;
a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of our existing indebtedness when it becomes due;
we may elect to make cash payments upon conversion, which would reduce our available cash.

Our ability to pay principal or interest on or to refinance our indebtedness, including the indebtedness incurred as a result of the issuance of the Convertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy any obligations under the Convertible Notes to make cash payments to noteholders or our obligations under any future indebtedness we may incur. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Convertible Notes or future indebtedness will depend on the capital markets. If we do not meet our debt obligations, it could materially adversely affect our results of operations, financial condition and the value of our common stock.

The conversion of some or all of the Convertible Notes will dilute the ownership interests of existing shareholders to the extent we deliver shares upon conversion of any of the Convertible Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the price of our common stock.

The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, may have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of shareholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we may be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We may report lower net income (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period's amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock and the trading price of the Convertible Notes.

    Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2024 only under certain circumstances. For example, holders may convert their Convertible Notes at their option during any quarter commencing after the quarter ending March 31, 2018 (and only during such quarter) if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of the conversion price on each applicable trading day. If the Convertible Notes become convertible prior to October 15, 2024, we would be required to reclassify our Convertible Notes and the related debt issuance costs as current liabilities and certain portions of our equity outside of equity to mezzanine equity, which would have an adverse impact on our reported financial results for such quarter, and could have an adverse impact on the market price of our common stock and the trading price of the Convertible Notes.

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     In addition, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method if we have the ability and intent to settle in cash, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that we will be able to continue to demonstrate the ability or intent to settle in cash or that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.

In-process research and development (IPRD) comprised approximately 13% of our total assets as of December 31, 2017 . A reduction in the value of our IPRD could have a material adverse effect on our results of operations, financial condition and the value of our common stock.
As a result of the merger with Transave, Inc. in 2010, we recorded an intangible IPRD asset of $77.9 million and goodwill of $6.3 million on our balance sheet. As a result of the clinical hold on ALIS announced in late 2011, we recorded a charge of $26.0 million in the fourth quarter of 2011 that reduced the value of IPRD to $58.2 million and reduced goodwill to zero. Potential future activities or results could result in additional writedowns of IPRD, which could materially adversely affect our results of operations, financial condition and the value of our common stock.
We may be unable to use certain of our net operating losses and other tax assets.
We have substantial tax loss carry forwards for US federal income tax and state income tax purposes, and beginning in 2015, we had tax loss carry forwards in Ireland as well. In general, our net operating losses and tax credits have been fully offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. In particular, our ability to fully use certain US tax loss carry forwards and general business tax credit carry forwards recorded prior to December 2010 to offset future income or tax liability is limited under section 382 of the Internal Revenue Code of 1986, as amended (the Code). Changes in the ownership of our stock, including those resulting from the issuance of shares of our common stock offerings or upon exercise of outstanding options, may limit or eliminate our ability to use certain net operating losses and tax credit carry forwards in the future.
Comprehensive tax reform legislation could adversely affect our business and financial condition.
On December 22, 2017, the US government signed into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act introduced significant changes to the US tax laws.
The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income in respect of losses arising in taxable years beginning after 2017 and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Our federal net operating loss carryovers for taxable years beginning after 2017 will be carried forward indefinitely pursuant to the Tax Act.
The Tax Act did not have a material impact on our financial statements because our deferred temporary differences are fully offset by a valuation allowance and we do not have any significant offshore earnings from which to record the mandatory transition tax. However, given the significant complexity of the Tax Act, anticipated guidance from the US Treasury about implementing the Tax Act, and the potential for additional guidance from the SEC or the FASB related to the Tax Act, these estimates may be adjusted during the measurement period. We continue to examine the impact the Tax Act may have on our business. Notwithstanding the reduction in the federal corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected.


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Any acquisitions we make, or collaborative relationships we enter into, may require a significant amount of our available cash and may not be clinically or commercially successful.
As part of our business strategy, we may effect acquisitions to obtain additional businesses, products, technologies, capabilities and personnel, but we cannot assure you that we will identify suitable products or enter into such acquisitions on acceptable terms.
Acquisitions involve a number of operational risks, including:
Failure to achieve expected synergies;
Difficulty and expense of assimilating the operations, technology and personnel of the acquired business;
Our inability to retain the management, key personnel and other employees of the acquired business;
Our inability to maintain the acquired company’s relationship with key third parties, such as alliance partners;
Exposure to legal claims for activities of the acquired business prior to the acquisition;
The diversion of our management’s attention from our core business; and
The potential impairment of goodwill and write-off of IPRD costs, adversely affecting our reported results of operations and financial condition.
We also may enter into collaborative relationships that would involve our collaborators conducting proprietary development programs. Any conflict with our collaborators could limit our ability to obtain future collaboration agreements and negatively influence our relationship with existing collaborators. Disagreements with collaborators may also develop over the rights to our intellectual property.
If we make one or more significant acquisitions or enter into a significant collaboration in which the consideration includes cash, we may be required to use a substantial portion of our available cash and/or need to raise additional capital. For instance, in September and October of 2016 we borrowed $30.0 million under our loan agreement with Hercules to fund the payment due under the license agreement with AstraZeneca and this investment, as with any acquisition or collaboration, may not be successful.
Risks Related to Regulatory Matters
The manufacturing facilities of our third-party manufacturers are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we and our manufacturing partners fail to comply with the regulations or maintain the approvals.
Manufacturers of our product candidates are subject to cGMP and similar standards, and while we have policies and procedures in place to select manufacturers that adhere, and monitor their adherence to, such standards, they may nonetheless fail to do so. If one of them fails to obtain or maintain compliance or experiences problems in the scale-up of commercial production, the production of our product candidates could be interrupted, resulting in delays, additional costs or restrictions on the marketing or sale of our products. These manufacturers and their facilities will be subject to pre-approval cGMP inspection by the FDA and other regulatory authorities, and the findings of the cGMP inspection could result in a failure to obtain, or a delay in obtaining, regulatory approval. In addition, these manufacturers and their facilities will be subject to continual review and periodic inspections by the FDA and other regulatory authorities following regulatory approval, if any, of our product candidates. For instance, to monitor compliance with applicable regulations, the FDA routinely conducts inspections of facilities and may identify potential deficiencies. The FDA issues what are referred to as “FDA Form 483s” that set forth observations and concerns that are identified during its inspections. Failure to satisfactorily address the concerns or potential deficiencies identified in a Form 483 could result in the issuance of a warning letter, which is a notice of the issues that the FDA believes to be significant regulatory violations requiring prompt corrective actions. Failure to respond adequately to a warning letter, or to otherwise fail to comply with applicable regulatory requirements could result in enforcement, remedial and/or punitive actions by the FDA or other regulatory authorities.

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Even if we obtain regulatory approval for ALIS or any of our other product candidates, adverse effects discovered after approval could limit the commercial profile of any approved product.
If we obtain regulatory approval for ALIS or any other product candidate that we develop, such products will be used by a larger number of patients and for longer periods of time than they were used in clinical trials. For these or other reasons, we or others may later discover that our products have adverse event profiles that limit their usefulness or require their withdrawal. This discovery could have a number of potentially significant negative consequences, including:
Regulatory authorities may withdraw their approval or clearance of the product and may require recall of product in distribution;
Regulatory authorities may require the addition of labeling statements, such as black box or other warnings or contraindications, or the issuance of “Dear Doctor Letters” or similar communications to healthcare professionals;
Regulatory authorities may impose additional restrictions on marketing and distribution of the products, or other risk management measures, such as a REMS;
We may be required to change the way the product is administered, conduct additional clinical studies or restrict the distribution of the product;
We could be sued and held liable for harm caused to subjects; and
We could be subject to negative publicity, including communications issued by regulatory authorities.
Any of these events could prevent us from maintaining market acceptance of the affected product, cause substantial reduction in sales or substantially increase the costs of commercializing our product candidates, cause significant financial losses or result in significant reputational damage.
If we are unable to obtain adequate reimbursement from governments or third-party payers for ALIS or any other products that we may develop or if we are unable to obtain acceptable prices for those products, our prospects for generating revenue and achieving profitability may be materially adversely affected.
Our prospects for generating revenue and achieving profitability depend heavily upon the availability of adequate reimbursement for the use of our approved products from governmental and other third-party payers, both in the US and in other markets. We expect a substantial majority of potential future ALIS revenues would come from Medicare reimbursement. Reimbursement by a third-party payer may depend upon a number of factors, including the third-party payer’s determination that use of a product is:
A covered benefit under its health plan;
Safe, effective and medically necessary;
Appropriate for the specific patient;
Cost-effective; and
Neither experimental nor investigational.
Obtaining a determination of coverage and reimbursement for a product from each government or other third-party payer is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payer. We may not be able to provide data sufficient to gain a positive coverage and reimbursement determination or we might need to conduct post‑marketing studies in order to demonstrate the cost-effectiveness of any future products to such payers’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources. Even when a payer determines that a product is eligible for reimbursement, the payer may impose coverage limitations that preclude payment for some uses that are approved by the FDA or non-US regulatory authorities. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, also may not be sufficient to cover our costs and may not be made permanent. Subsequent approvals of competitive products could result in a detrimental change to the reimbursement of our products.

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There is a significant focus in the US healthcare industry and elsewhere on cost containment and value. We expect changes in the Medicare program and state Medicaid programs, as well as managed care organizations and other third-party payers, to continue to put pressure on pharmaceutical product pricing. For instance, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) expanded Medicare outpatient prescription drug coverage for the elderly through Part D prescription drug plans sponsored by private entities and authorized such plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class. The plans generally negotiate significant price concessions as a condition of formulary placement. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs, which is generally believed to have resulted in lower Medicare reimbursement for physician-administered drugs. These cost reduction initiatives and other provisions of this legislation provide additional pressure to contain and reduce drug prices and could decrease the coverage and price that we receive for any approved products and could seriously harm our business. Although the MMA applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations when setting their own reimbursement rates, and any reimbursement reduction resulting from the MMA may result in a similar reduction in payments from private payers. Additionally, the Patient Protection and Affordable Care Act (ACA) revised the definition of “average manufacturer price” for reporting purposes and increased the minimum percentage for Medicaid drug rebates to states, and has imposed a significant annual fee on companies that manufacture or import branded prescription drug products. We believe it is likely that the ACA, or any legislation enacted to amend or replace it, will continue the pressure on pharmaceutical pricing, especially under the Medicare program, and also may increase our regulatory burdens and operating costs. If one or more of our product candidates reaches commercialization, such changes may have a significant impact on our ability to set a price we believe is fair for our products and may adversely affect our ability to generate revenue and achieve or maintain profitability. We expect further federal and state proposals and health care reforms to continue to be proposed by legislators and/or the US President, which could limit the prices that can be charged for the products we develop and may limit our commercial opportunity. In addition, any reduction of assistance from independent charitable organizations that provide co-pay assistance to Medicare patients could limit the ability of the primarily elderly NTM lung disease patient population to afford ALIS.
Moreover, in markets outside the US, including Japan, Canada and the countries in the EU, pricing of pharmaceutical products is subject to governmental control. Evaluation criteria used by many EU government agencies for the purposes of pricing and reimbursement typically focus on a product’s degree of innovation and its ability to meet a clinical need unfulfilled by currently available therapies. The ACA created a similar entity, the Patient-Centered Outcomes Research Institute (PCORI) designed to review the effectiveness of treatments and medications in federally-funded health care programs. The PCORI began its first research initiatives recently, and an adverse result may result in a treatment or product being removed from Medicare or Medicare coverage. The decisions of such governmental agencies could affect our ability to sell our products profitably.
Government health care reform could increase our costs, and could materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Our industry is highly regulated and changes in or revisions to laws and regulations that make gaining regulatory approval, reimbursement and pricing more difficult or subject to different criteria and standards may adversely impact our business, operations or financial results. For example, under the ACA, drug manufacturers are required to report information on payments or transfers of value to US physicians and teaching hospitals as well as investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties. The reported data are posted in searchable form on a public website.
The Administration and the majority party in both Houses of Congress have indicated their ongoing desire to repeal the ACA. It is unclear whether, when and how that repeal may be effectuated and what the effect on the healthcare sector will be. The US President has indicated an interest in having the federal government negotiate drug prices with pharmaceutical manufacturers. Changes to the ACA, to the Medicare or Medicaid programs, or to the ability of the federal government to negotiate drug prices, or other federal legislation regarding healthcare access, financing or legislation in individual states, could affect our business, financial condition, results of operations and prospects and the value of our common stock.
If we are found in violation of federal or state “fraud and abuse” laws, we may be required to pay a penalty or may be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
In the US, we are subject to various federal and state health care “fraud and abuse” laws, including anti‑kickback laws, false claims laws and other laws intended to reduce fraud and abuse in federal and state health care programs. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under these laws. Violations of fraud and abuse laws may be punishable by criminal and/

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or civil sanctions, including fines or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment from contracting with the US government, and our business, financial condition, results of operations and prospects and the value of our common stock may be adversely affected. Our reputation could also suffer. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.
Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. Some states, as well as other countries, including France, require the disclosure of certain payments to health care professionals. Health record privacy laws may limit access to information identifying those individuals who may be prospective users. There are ambiguities as to what is required to comply with these state requirements, and we could be subject to penalties if a state determines that we have failed to comply with an applicable state law requirement.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property rights adequately, the value of our product candidates could be diminished.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal, technical, scientific and factual questions, and our success depends in large part on our ability to protect our proprietary technology and to obtain patent protection for our products, prevent third parties from infringing on our patents, both domestically and internationally. We have sought to protect our proprietary position by filing patent applications in the US and abroad related to our novel technologies and products that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technologies or from developing competing products and technologies.
Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Any conclusions we may reach regarding non-infringement, inapplicability or invalidity of a third party’s intellectual property vis-à-vis our proprietary rights, or those of a licensor, are based in significant part on a review of publicly available databases and other information. There may be information not available to us or otherwise not reviewed by us that could render these conclusions inaccurate. Our competitors may also be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.
Additionally, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented through litigation, which could limit our ability to stop competitors from marketing similar products or reduce the term of patent protection we may have for our products. US patents and patent applications may also be subject to interference or derivation proceedings, and US patents may be subject to re‑examination proceedings, reissue, post-grant review and/or inter partes review in the PTO. Foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office, which could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. See Intellectual Property - ALIS Patents and Trade Secrets in Item 1 of Part I of this Annual Report on Form 10‑K for the year ended December 31, 2017 (2017 Annual Report) for more information on our European patent that was previously opposed, the decision of which is now under appeal by Generics (UK) Ltd. Another of our European patents has been opposed by Generics (UK) Ltd., and was revoked in November 2017. We intend to appeal that decision, and the patent remains enforceable during the appeal. These European patents have statutory expiration dates in 2026 and 2023, respectively, not including additional term that might be added via a Supplementary Protection Certificate.
Changes in either patent laws or in interpretations of patent laws in the US and other countries may also diminish the value of our intellectual property or narrow the scope of our patent protection, including making it easier for competitors to challenge our patents. For example, the America Invents Act included a number of changes to established practices, including the transition to a first-inventor-to-file system and new procedures for challenging patents and implementation of different methods for invalidating patents.

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If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our product candidates could be significantly diminished.
We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, advisors, collaborators, and other third parties and partners to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information or may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, third parties may independently develop or discover our trade secrets and proprietary information. Regulators also may disclose information we consider to be proprietary to third parties under certain circumstances, including in response to third-party requests for such disclosure under the Freedom of Information Act or comparable laws. Additionally, the FDA, as part of its Transparency Initiative, continues to consider whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time whether and how the FDA’s disclosure policies may change in the future.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the US Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our patents or in-licensed patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner may be required to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the US and foreign countries may affect our ability to obtain adequate protection for our technology and to enforce intellectual property rights.
The drug research and development industry has a history of intellectual property litigation, and we may be involved in costly intellectual property disputes which may prevent or delay our product development efforts, prevent us from commercializing our products or increase the costs of commercializing our products.
Third parties may claim that we have infringed upon or misappropriated their proprietary rights. Any existing third-party patents, or patents that may later issue to third parties, could negatively affect our commercialization of ALIS, INS1007, INS1009 or any other product. For instance, PAH is a competitive indication with established products, including other formulations of treprostinil. Our supply of the active pharmaceutical ingredient for INS1009 is dependent upon a single supplier. The supplier owns patents on its manufacturing process, and we have filed patent applications for INS1009; however, a competitor in the PAH indication may claim that we or our supplier have infringed upon or misappropriated its proprietary rights. Moreover, in the event that we pursue approval of INS1009, or any other product candidate, via the 505(b)(2) regulatory pathway, we will be required to file a certification against any unexpired patents listed in the Orange Book for the third party drug we rely upon as part of our regulatory submission. This certification process may lead to litigation and could delay also launch of a product candidate.
In the event of a successful claim against us for infringement or misappropriation of a third party’s proprietary rights, we may be required to take actions including but not limited to the following:
Pay damages, including up to treble damages, royalties, and the other party’s attorneys’ fees, which may be substantial;
Cease the development, manufacture, marketing and sale of products or use of processes that infringe the proprietary rights of others;
Expend significant resources to redesign our products or our processes so that they do not infringe the proprietary rights of others, which may not be possible;

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Redesign our products or processes to avoid third-party proprietary rights, which means we may suffer significant regulatory delays associated with conducting additional clinical trials or other steps to obtain regulatory approval; and/or
Obtain one or more licenses arising out of a settlement of litigation or otherwise from third parties which license(s) may not be available to us on acceptable terms or at all.
We may also have to undertake costly litigation or engage in other proceedings, such as interference or inter partes review, to enforce any patents issued or licensed to us, to confirm the scope and validity of our or a licensor’s proprietary rights or to defend against allegations that we have infringed a third party’s intellectual property rights. Such proceedings are likely to be time consuming and may divert management attention from operation of our business, and could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our common stock.
Certain of our existing license agreements include, and our future license agreements also may include, restrictions on our ability to freely develop or commercialize the product candidates that are subject to those agreements. If we fail to comply with our obligations under these agreements, or if these license agreements are terminated for other reasons, we could lose license rights that are important to our business.
We are a party to licensing agreements with PARI and AstraZeneca, which we view as material to our business. For additional information regarding the terms of these agreements, see Business - License and Other Agreements in Item 1 of Part I of this 2017 Annual Report. Under our license agreement with AstraZeneca, AstraZeneca retains a right of first negotiation pursuant to which it may exclusively negotiate with us before we can negotiate with a third party regarding any transaction to develop or commercialize INS1007, subject to certain exceptions. While this right of first negotiation is not triggered by a change of control, it may impede or delay our ability to consummate certain other transactions involving INS1007.
Additionally, if we fail to comply with our obligations under the agreements with PARI and AstraZeneca, our counterparty may have the right to take action against us, up to and including termination of the relevant license. For instance, under our licensing agreement with PARI, with respect to NTM, CF and bronchiectasis, we have specific obligations to use commercially reasonable efforts to achieve certain developmental and regulatory milestones by set deadlines. Additionally, for NTM, we are obligated to use commercially reasonable efforts to achieve certain commercial milestones in the US and Europe. The consequences of our failing to use commercially reasonable efforts to achieve certain commercial milestones are context-specific, but include ending PARI’s non-compete obligation, making the license non-exclusive and terminating the license, in each case with respect to the applicable indication. Similarly, under our license agreement with AstraZeneca, AstraZeneca may terminate our license to INS1007 if we fail to use commercially reasonable efforts to develop and commercialize a product based on INS1007, or we are subject to a bankruptcy or insolvency. Reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms and may materially harm our business.
Risks Related to Our Industry
We operate in a highly competitive and changing environment, and if we are unable to adapt to our environment, we may be unable to compete successfully.
Biotechnology and related pharmaceutical technology have undergone and are likely to continue to experience rapid and significant change. We expect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies and to obtain and maintain protection for our intellectual property. Any compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with their development. In each of our potential product areas, we face substantial competition from pharmaceutical, biotechnology and other companies, universities and research institutions. Relative to us, most of these entities have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical studies and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or obtain patent protection earlier than us. Furthermore, we believe that our competitors have used, and may continue to use, litigation to gain a competitive advantage. Our competitors may also use different technologies or approaches to the development of products similar to the products we are seeking to develop.
We expect that competing successfully will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. Specifically, we expect crucial factors will include the relative speed with which we can develop products, complete the clinical testing and regulatory approval processes and supply

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commercial quantities of the product to the market. We expect competition to increase as technological advances are made and commercial applications broaden. There are potential competitive products, both approved and in development, which include oral, systemic, or inhaled antibiotic products to treat chronic respiratory infections. For instance, certain entities have expressed interest in studying their products for NTM lung disease and are seeking to advance studies in NTM lung disease caused by mycobacterial species other than MAC; however, we are not aware that any such entities are currently conducting clinical trials for the treatment of refractory NTM lung disease caused by MAC or of any approved inhaled therapies specifically indicated for NTM lung disease in North America, Japan or Europe. If any of our competitors develops a product that is more effective, safe, tolerable or, convenient or less expensive than ALIS or our other product candidates, it would likely materially adversely affect our ability to generate revenues. We also may face lower priced generic competitors if third-party payers encourage use of generic or lower-priced versions of our product or if competing products are imported into the US or other countries where we may sell ALIS.
In addition, there are other amikacin products that have been approved by the FDA, MHLW and other regulatory agencies for use in other indications, and physicians may elect to prescribe those products rather than ALIS to treat the indications for which ALIS may receive approval, which is commonly referred to as off-label use. Although regulations prohibit a drug company from promoting off-label use of its product, the FDA and other regulatory agencies do not regulate the practice of medicine and cannot direct physicians as to what product to prescribe to their patients. As a result, we would have limited ability to prevent any off-label use of a competitor’s product to treat diseases for which we have received FDA or other regulatory agency approval, even if such use violates our patents or any statutory exclusivities that FDA may grant for the use of amikacin to treat such diseases. If we are unable to compete successfully, it will materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
If another party obtains orphan drug exclusivity for a product that is essentially the same as a product we are developing for a particular indication, we may be precluded or delayed from commercializing the product in that indication.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition. The company that obtains the first regulatory approval from the FDA for a designated orphan drug for a rare disease generally receives marketing exclusivity for use of that drug for the designated condition for a period of seven years. Similar laws exist in the EU with a term of ten years. See Business - Government Regulation - Orphan Drugs in Item 1 of Part I of this 2017 Annual Report for additional information. If a competitor obtains approval of the same drug for the same indication or disease before us, and the FDA grants such orphan drug exclusivity, we would be prohibited from obtaining approval for our product for seven or more years, unless our product can be shown to be clinically superior. In addition, even if we obtain orphan exclusivity, the FDA may approve another product during our orphan exclusivity period for the same indication under certain circumstances.
Our research, development and manufacturing activities used in the production of ALIS involve the use of hazardous materials, which could expose us to damages, fines, penalties and sanctions and materially adversely affect our results of operations and financial condition.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our research and development program and manufacturing activities for ALIS and our other product candidates involve the controlled use of hazardous materials and chemicals. We generally contract with third parties for the disposal of these materials and wastes. Although we strive to comply with all pertinent regulations, we cannot eliminate the risk of environmental contamination, damage to facilities or injury to personnel from the accidental or improper use or control of these materials. In addition to any liability we could have for any misuse by us of hazardous materials and chemicals, we could also potentially be liable for activities of our CMOs or other third parties. Any such liability, or even allegations of such liability, could materially adversely affect our results of operations and financial condition. We also could incur significant costs associated with civil or criminal fines and penalties.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
We may be subject to product liability claims, and we have only limited product liability insurance.
The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims, which can lead to significant adverse publicity and obligations to pay damages. We currently have only limited product liability insurance for our products. We do not know if we will be able to maintain existing, or obtain additional, product liability

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insurance on acceptable terms or with adequate coverage against potential liabilities. This type of insurance is expensive and may not be available on acceptable terms. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products. A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts and may materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Risks Related to Employee Matters and Managing Growth
We are dependent upon retaining and attracting key personnel, the loss of whose services could materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
We depend heavily on our management team and our principal clinical and commercial personnel, the loss of whose services might significantly delay or prevent the achievement of our research, development or business objectives. Our success depends, in large part, on our ability to attract and retain qualified management, clinical and commercial personnel, and on our ability to develop and maintain important relationships with commercial partners, leading research institutions and key distributors. We plan to hire additional personnel in anticipation of seeking regulatory approval for and commercial launch of ALIS.
Competition for skilled personnel in our industry and market is very intense because of the numerous pharmaceutical and biotechnology companies that seek similar personnel. These companies may have greater financial and other resources, offer a greater opportunity for career advancement and have a longer history in the industry than we do. We also experience competition for the hiring of our clinical and commercial personnel from universities, research institutions, and other third parties. We cannot assure that we will attract and retain such persons or maintain such relationships. Our inability to retain and attract qualified employees would materially harm our business, financial condition, results of operations and prospects and the value of our common stock.
We expect to expand our development, manufacturing, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, manufacturing, sales, marketing and distribution will place additional requirements on our management, operational and financial resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees.
The anticipated commercialization of ALIS and the development of additional product candidates will require significant expenditures by us and place a strain on our resources. If our management is unable to effectively manage our activities in anticipation of commercialization, as well as our development efforts, we may incur higher than expected expenditures or other expenses and our business may otherwise be adversely affected.
Risks Related to Our Common Stock and Listing on the Nasdaq Global Select Market
The market price of our stock has been and may continue to be highly volatile.
Our common stock is listed on the Nasdaq Global Select Market under the ticker symbol “INSM”. The market price of our stock has been and may continue to be highly volatile, and could be subject to wide fluctuations in price in response to various factors, including those discussed herein, many of which are beyond our control. In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging biotechnology and pharmaceutical companies like us, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock. Historically, when the market price of a stock has been volatile, shareholders are more likely to institute securities and derivative class action litigation against the issuer of such stock. As described below, a securities class action lawsuit was initiated against us during 2016 following a decline in our stock price.

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We, certain of our executive officers and directors and the underwriters from a prior securities offering were subject to a recently dismissed securities class action lawsuit, which, if a second amended complaint is filed, may require significant management and board time and attention and significant expense to us and result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our common stock.  
We, certain of our executive officers and directors and the underwriters from a prior securities offering were named as defendants in a securities class action lawsuit initially filed on July 15, 2016. The amended complaint, filed December 15, 2016, alleged that we and certain of our executive officers and directors violated Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and that we, certain of our executive officers and the underwriters violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder of the Exchange Act, by making materially false and misleading statements and omissions relating to the development of ALIS and/or related requests for regulatory approval. It also alleged that the defendant officers and directors violated Section 15 of the Securities Act and that the defendant officers violated Section 20(a) of the Exchange Act. On February 15, 2018, the Court issued a decision granting our motion and dismissing the amended complaint without prejudice. The lead plaintiff has until March 19, 2018 to file a second amended complaint.  For additional information, see Note 11, Commitments and Contingencies, in Item 1 of Part I of this 2017 Annual Report. While we believe that we have substantial legal and factual defenses to the claims that were asserted in the class action and intend to continue vigorously defend the case if a second amended complaint is filed, this lawsuit could divert our management’s and board’s attention from other business matters, the outcome of the litigation is difficult to predict and quantify, and the defense against the underlying claims will likely be costly. The ultimate resolution of this matter could result in payments of monetary damages or other costs, materially and adversely affect our business, financial condition and results of operations, and adversely affect our reputation and prospects, and consequently, could negatively impact the value of our common stock.
 
We have insurance policies related to some of the risks associated with our business, including directors’ and officers’ liability insurance policies. However, there is no assurance that our insurance coverage will be sufficient or that our insurance carriers will cover all claims in that litigation. If we are not successful in our defense of the claims asserted in the putative action and those claims are not covered by insurance or exceed our insurance coverage, we may have to pay damage awards, indemnify our executive officers and directors from damage awards that may be entered against them and pay the costs and expenses incurred in defense of, or in any settlement of, such claims. In addition, we are indemnifying the underwriters that are party to this action against the claims asserted against them, and these costs and expenses might not be covered by insurance.
 
In addition, there is the potential for additional shareholder litigation against us, and we could be materially and adversely affected by such matters.

Certain provisions of Virginia law, our articles of incorporation and amended and restated bylaws and arrangements between us and our employees could hamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of us.
Certain provisions of Virginia law, our articles of incorporation and amended and restated bylaws and arrangements with our employees could hamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of, us or limit the price that investors might be willing to pay for shares of our common stock. These provisions or arrangements include:
The ability to issue preferred stock with rights senior to those of our common stock without any further vote or action by the holders of our common stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock. In certain circumstances, such issuance could have the effect of decreasing the market price of our common stock.
The existence of a staggered board of directors in which there are three classes of directors serving staggered three-year terms, thus expanding the time required to change the composition of a majority of directors.
The requirement that shareholders provide advance notice when nominating director candidates to serve on our Board of Directors.
The inability of shareholders to convene a shareholders’ meeting without the chairman of the board, the president or a majority of the board of directors first calling the meeting.

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The prohibition against entering into a business combination with the beneficial owner of 10% or more of our outstanding voting stock for a period of three years after the 10% or greater owner first reached that level of stock ownership, unless certain criteria are met.
In addition to severance agreements with our officers and provisions in our incentive plans that permit acceleration of equity awards upon a change in control, a severance plan for eligible full-time employees that provides such employees with severance equal to six months of their then-current base salaries in connection with a termination of employment without cause upon, or within 18 months following, a change in control.
We previously had a shareholder rights plan, or “poison pill”, which expired in May 2011. Under Virginia law, our Board of Directors may implement a new shareholders’ rights plan without shareholder approval. Our Board of Directors intends to regularly consider this matter, even in the absence of specific circumstances or takeover proposals, to facilitate its future ability to quickly and effectively protect shareholder value.
Other Risks Related to Our Business
We have limited experience operating internationally, are subject to a number of risks associated with our international activities and operations and may not be successful in our efforts to expand internationally.
We currently have limited operations outside of the US. As of December 31, 2017, we had 24 employees located in Europe, and we have suppliers located around the world. In order to meet our long‑term goals, we will need to grow our international operations over the next several years, including in Japan, and continue to source material used in the manufacture of our product candidates from abroad. Consequently, we are and will continue to be subject to additional risks related to operating in foreign countries, including:
Our limited experience operating our business internationally;
An inability to achieve the optimal pricing and reimbursement for ALIS or subsequent changes in reimbursement, pricing and other regulatory requirements;
Any implementation of, or changes to, tariffs, trade barriers and other import-export regulations in the US or other countries in which we, or our third-party partners, operate;
Unexpected adverse events related to ALIS or our other product candidates occurring in foreign markets that we have not experienced in the US;
Economic and political conditions, including geopolitical events, such as war and terrorism, foreign currency fluctuations and inflation, which could result in increased or unpredictable operating expenses and reduced revenues and other obligations incident to doing business in, or with a company located in, another country;
Changes resulting from (i) the uncertainty and instability in economic and market conditions caused by the UK’s vote to exit the European Union; and (ii) the uncertainty regarding how the UK’s access to the EU Single Market and the wider trading, legal, regulatory and labor environments will be impacted by the UK’s vote to exit the European Union, including the resulting impact on our business; and
Compliance with foreign or US laws, rules and regulations, including data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import, export and trade restrictions, anti-bribery/anti-corruption laws, regulations or rules, which could lead to actions by us or our licensees, distributors, manufacturers, other third parties who act on our behalf or with whom we do business in foreign countries or our employees who are working abroad that could subject us to investigation or prosecution under such foreign or US laws.
These and other risks associated with our international operations may materially adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our business operations, including our drug development programs.
Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism,

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war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material adverse effect on our business operations, including a material disruption of our drug development programs. Unauthorized disclosure of sensitive or confidential client or employee data, whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, could damage our reputation. Similarly, unauthorized access to or through our information systems and networks, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation. For example, the loss of clinical trial data from completed or ongoing clinical trials for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.
Although we have general liability insurance coverage, including coverage for errors and omissions, our insurance may not cover all claims, continue to be available on reasonable terms or be sufficient in amount to cover one or more large claims; additionally, the insurer may disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our common stock.
We are subject to the US Foreign Corrupt Practices Act, the UK Bribery Act and other anti-corruption laws and trade control laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to negative publicity, civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, financial condition, results of operations and prospects and the value of our common stock.
Our operations are subject to anti-corruption laws, including the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other anti-corruption laws that apply in countries where we do business. The FCPA, UK Bribery Act and these other laws generally prohibit us, our employees and our intermediaries from making prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. The CONVERT study includes more than 125 sites in 18 countries, and we are conducting the 312 study and plan to conduct the WILLOW study, our global phase 2 study of INS1007 in non-CF bronchiectasis, at a broad range of trial sites around the world. Certain of these jurisdictions pose a risk of potential FCPA violations, and we have relationships with third parties whose actions could potentially subject us to liability under the FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the US Department of Commerce’s Bureau of Industry and Security, the US Department of Treasury’s Office of Foreign Assets Control, and various non-US government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations (collectively, Trade Control laws).
We may not be effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the FCPA and other anti‑corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and prospects and the value of our common stock. Likewise, even an investigation by US or foreign authorities of potential violations of the FCPA other anti-corruption laws or Trade Control laws could have an adverse impact on our reputation, business, financial condition, results of operations and prospects and the value of our common stock.


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ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.    PROPERTIES
We currently lease 56,617 square feet of laboratory and office space in Bridgewater, New Jersey. The initial term of the lease will expire in November 2019, and we have the option to extend the lease for two additional five year periods beyond the initial term. We also lease 14,311 square feet of additional laboratory space located in Bridgewater, NJ for which the initial lease term expires in September 2021. In addition, we lease office space in Ireland, the Netherlands and Japan.
ITEM 3.    LEGAL PROCEEDINGS
On July 15, 2016, a lawsuit captioned Hoey v. Insmed Incorporated, et al, No. 3:16-cv-04323-FLW-TJB (D.N.J. July 15, 2016) was filed in the US District Court for the District of New Jersey on behalf of a putative class of investors who purchased our common stock from March 18, 2013 through June 8, 2016. The complaint alleged that we and certain of our executives violated Sections 10(b) and 20(a) of the Exchange Act by misrepresenting and/or omitting the likelihood of the EMA approving our European MAA for use of ALIS in the treatment of NTM lung disease and the likelihood of commercialization of ALIS in Europe.
 
On October 25, 2016, the Court issued an order appointing Bucks County Employees Retirement Fund as lead plaintiff for the putative class. On December 15, 2016, the lead plaintiff filed an amended complaint that shortens the putative class period for the Exchange Act claims to March 26, 2014 through June 8, 2016 and adds claims under Sections 11, 12, and 15 of the Securities Act on behalf of a putative class of investors who purchased common stock in or traceable to our March 31, 2015 public offering. The amended complaint names as defendants in the Securities Act claims the Company, certain directors and officers, and the investment banks who served as underwriters in connection with the secondary offering. The amended complaint alleges defendants violated the Securities Act by using a purportedly misleading definition of “culture conversion” and supposedly failing to disclose in the offering materials purported flaws in its Phase 2 study that made the secondary offering risky or speculative. The amended complaint seeks damages in an unspecified amount. We moved to dismiss the amended complaint on March 1, 2017. The lead plaintiff opposed the motion on May 17, 2017 and we provided our reply brief on July 11, 2017. On July 20, 2017, the plaintiff asked for leave to file a sur-reply in further opposition to our motion to dismiss the amended complaint, which we had opposed.

On February 15, 2018, the Court issued a decision granting our motion and dismissing the amended complaint without prejudice. The lead plaintiff has until March 19, 2018 to file a second amended complaint.  If a second amended complaint is filed, we intend to continue to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of the lawsuit.
 
From time to time, we are a party to various other 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 our consolidated financial position, results of operations or cash flows.

ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our trading symbol is "INSM." Our common stock currently trades on the Nasdaq Global Select Market. Until February 3, 2014, our common stock traded on the Nasdaq Capital Market. The following table lists the high and low sale prices per share for our common stock on a quarterly basis for both 2017 and 2016 .
Fiscal Year 2017
 
High
 
Low
Fourth Quarter
 
$
32.94

 
$
25.81

Third Quarter
 
$
31.39

 
$
11.49

Second Quarter
 
$
19.35

 
$
14.61

First Quarter
 
$
17.51

 
$
12.74


Fiscal Year 2016
 
High
 
Low
Fourth Quarter
 
$
15.49

 
$
10.21

Third Quarter
 
$
15.35

 
$
9.75

Second Quarter
 
$
14.53

 
$
9.02

First Quarter
 
$
18.60

 
$
10.53

On February 1, 2018 , the last reported sale price for our common stock on the Nasdaq Global Select Market was $26.37 per share. As of February 1, 2018 , there were 138 holders of record of our common stock.
We have never declared or paid cash dividends on our common stock. We anticipate that we will retain all earnings, if any, to support operations and to finance the growth and development of our business for the foreseeable future. Under the terms of our loan agreement with Hercules, we are prohibited from declaring or paying any cash dividend or making a cash distribution on any class of our stock or on other equity interest, except that our subsidiaries (defined in the loan agreement as a corporate entity in which we control more than 50% of the voting securities) may pay dividends or make distributions to their equity owners. Any future determination as to the payment of dividends will be dependent upon these and any contractual or other restrictions to which we may be subject and, to the extent permissible thereunder, will be at the sole discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors our board of directors deems relevant at that time.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Insmed Incorporated, the NASDAQ Composite Index,
the S&P 500 Index, the NASDAQ Pharmaceutical Index and the NASDAQ Biotechnology Index
CHART-ABB3CA75DEC5CE9E50A.JPG
_________________________________

*    $100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.
ITEM 6.    SELECTED FINANCIAL DATA
The following selected financial data reflects our consolidated statements of operations and consolidated balance sheets as of and for the years ended December 31, 2017 , 2016 , 2015 , 2014 and 2013 . The data below should be read in conjunction with, and is qualified by reference to, Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K.

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Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands, except per share data)
 
Historical Statement of Operations Data:
 

 
 

 
 

 
 

 
 

 
Revenues
$

 
$

 
$

 
$

 
$
11,500

 
Operating expenses:


 
 

 


 
 

 
 

 
Research and development
109,749

 
122,721

 
74,277

 
56,292

 
44,279

 
General and administrative
79,171

 
50,679

 
43,216

 
31,073

 
22,236

 
Total operating expenses
188,920

 
173,400

 
117,493

 
87,365

 
66,515

 
Operating loss
(188,920
)
 
(173,400
)
 
(117,493
)
 
(87,365
)
 
(55,015
)
 
Investment income
1,624

 
604

 
261

 
58

 
166

 
Interest expense
(5,925
)
 
(3,498
)
 
(2,889
)
 
(2,415
)
 
(2,412
)
 
Other income (expense), net
300

 
119

 
(33
)
 
141

 
(33
)
 
Loss before income taxes
(192,921
)
 
(176,175
)
 
(120,154
)
 
(89,581
)
 
(57,294
)
 
Income tax (benefit) provision
(272
)
 
98

 
(1,971
)
 
(10,422
)
 
(1,221
)
 
Net loss
$
(192,649
)
 
$
(176,273
)
 
$
(118,183
)
 
$
(79,159
)
 
$
(56,073
)
 
Basic and diluted net loss per share
$
(2.89
)
 
$
(2.85
)
 
$
(2.02
)
 
$
(1.84
)
 
$
(1.60
)
 
Weighted average basic and diluted common shares outstanding
66,576

 
61,892

 
58,633

 
43,095

 
34,980

 
Historical Balance Sheet Data:


 
 

 
 
 
 

 
 

 
Cash, cash equivalents and short-term investments
$
381,165

 
$
162,591

 
$
282,876

 
$
159,226

 
$
113,894

 
Total assets
$
462,047

 
$
237,956

 
$
356,556

 
$
230,864

 
$
176,498

 
Current portion of long-term debt
$

 
$

 
$
3,113

 
$

 
$
3,283

 
Debt, long-term
$
55,567

 
$
54,791

 
$
22,027

 
$
24,856

 
$
16,338

 
Total shareholders' equity
$
361,059

 
$
154,483

 
$
311,698

 
$
186,237

 
$
143,324

 


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ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
               The following discussion also should be read in conjunction with our consolidated financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled Risk Factors, Cautionary Note Regarding Forward-Looking Statements and elsewhere herein, our actual results may differ materially from those anticipated in these forward-looking statements.
EXECUTIVE OVERVIEW
Insmed is a global biopharmaceutical company focused on the unmet needs of patients with rare diseases. Our operations are based on the technology and products historically developed by Transave. We have legal entities in the US, Ireland, Germany, France, the United Kingdom (UK), the Netherlands and Japan.
We have not generated material revenue to date, except for in 2013, and through December 31, 2017 , we had an accumulated deficit of $957.9 million . We have financed our operations primarily through the public offerings of our equity securities and debt financings. Although it is difficult to predict our future funding requirements, based upon our current operating plan, we anticipate that our cash and cash equivalents as of December 31, 2017 will enable us to fund our operations for at least the next 12 months.
We expect that over the next few years we will continue to incur losses from operations as we increase our expenditures in research and development in connection with our ongoing and future clinical trials, and for expenses related to the preparation for the commercial launch of ALIS globally, if approved.
PIPELINE PROGRESS
ALIS for Patients with NTM Lung Disease
 
Our lead product candidate is ALIS, a novel, once-daily liposomal formulation of amikacin that is in late-stage clinical development for adult patients with treatment refractory NTM lung disease caused by MAC, a rare and often chronic infection that can cause irreversible lung damage and can be fatal. Amikacin solution for parenteral administration is an established drug that has activity against a variety of NTM; however, its use is limited by the need to administer it intravenously and by toxicity to hearing, balance, and kidney function (Peloquin et al., 2004). Unlike amikacin solution for intravenous administration, our advanced liposome technology uses charge-neutral liposomes to deliver amikacin directly to the lung where it is taken up by the lung macrophages where the NTM infection resides. This technology prolongs the release of amikacin in the lungs, while minimizing systemic exposure thereby, offering the potential for decreased systemic toxicities. ALIS’s ability to deliver high levels of amikacin directly to the lung distinguishes it from intravenous amikacin. ALIS is administered once-daily, using a portable aerosol delivery system, via an optimized, investigational eFlow® Nebulizer System manufactured by PARI.
 
The FDA has designated ALIS as an orphan drug, a breakthrough therapy, and a QIDP for NTM lung disease. Orphan designation features seven years of post-approval marketing exclusivity in the approved indication, and QIDP features an additional five years of post-approval exclusivity in the approved indication. As a result, ALIS could have 12 years of post-approval marketing exclusivity in the US, if approved. A QIDP-designated product is eligible for fast track status and is often granted priority review status. A priority review designation for a drug which is not a NME means the FDA’s goal is to take action on the NDA within six months following the receipt of the NDA.
 
The CONVERT Study and 312 Study
 
CONVERT Top-Line Efficacy Data
We announced top-line data for the CONVERT study on September 5, 2017. The CONVERT study enrolled 336 adult patients with NTM lung disease caused by MAC who were refractory to at least six months of treatment on current GBT of a multi-drug regimen. After a screening period of up to 10 weeks, eligible patients were randomized 2:1 to once-daily ALIS plus GBT or GBT only. The primary endpoint of the study was the proportion of patients achieving culture conversion, which we defined as three consecutive monthly negative sputum cultures, by month six. Based on top-line results, the CONVERT study met its primary endpoint, with 29% of patients in the ALIS plus GBT arm achieving culture conversion, compared to 9% of patients in the GBT-only arm (p<0.0001).

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We also reported top-line data for certain secondary and exploratory endpoints for the first six months of the study. Top-line data for the six-minute walk test indicated no statistically significant difference between patients in the two arms of the study. However, an analysis of these data (per a pre-specified exploratory endpoint) showed that patients who achieved culture conversion in either arm demonstrated an improvement in six-minute walk distance when compared to patients who did not culture convert (p=0.0108). Top-line data for the secondary endpoint of time to conversion demonstrated that patients in the GBT-only arm took approximately 30% longer to convert when compared to patients on ALIS plus GBT (p<0.0001). We are continuing our analysis of the impact of conversion on a variety of other clinical measures.
The protocol for the CONVERT study incorporates feedback from the FDA and the EMA via its scientific advice working party process, as well as local health authorities in other countries, including Japan’s PMDA. Because the CONVERT study met the primary endpoint of culture conversion at month six based on the top-line results, we plan to submit an NDA for ALIS to the FDA by the end of March 2018 pursuant to Subpart H, which permits the FDA to approve a product candidate based on a surrogate or intermediate endpoint subject to the requirement that we conduct post-approval studies to verify and describe the clinical benefit of the product. We expect to receive a six-month priority review from the FDA. We believe that efficacy data from the CONVERT study at month six will be sufficient to support the accelerated approval of ALIS. We expect that full approval would be contingent on FDA review of, among other things, the final analyses of durability of culture conversion for converters.

CONVERT Top-Line Safety and Tolerability Data

Approximately 98% of patients in the ALIS plus GBT arm of the CONVERT study experienced at least one treatment-emergent adverse event (TEAE), compared to 91% of patients in the GBT-only arm, with most events being mild or moderate in severity. A greater percentage of patients in the ALIS plus GBT arm than in the GBT-only arm experienced TEAEs involving dysphonia, cough, haemoptysis, dyspnoea, oropharyngeal pain, diarrhea, nausea, and fatigue. Based on our review of the top‑line study safety data, the incidence of dysphonia, cough and dyspnoea among patients in the ALIS plus GBT arm generally decreased after the second study month. Approximately 20% and 18% of patients in the ALIS plus GBT arm and GBT-only arm of the study, respectively, experienced at least one serious treatment emergent adverse event (STEAE). The table below provides additional information regarding certain STEAEs experienced by patients in the CONVERT study.
 
 
2:1 Randomization
Patients Reporting STEAEs >3% in Either Arm
 
ALIS + GBT (n=223)
GBT (n=112)
Patients Reporting At Least One STEAE
 
20.2% (45)
17.9% (20)
System Organ Class
 
Preferred Term
 
 
Respiratory, Thoracic, Mediastinal Disorders
 
11.7% (26)
9.8% (11)
 
Hemoptysis
2.7% (6)
4.5% (5)
 
COPD (exacerbation)
3.1% (7)
0.9% (1)
Infections and Infestations
 
9.0% (20)
5.4% (6)
 
Pneumonia
3.6% (8)
1.8% (2)
Cardiac Disorders
 
0.4% (1)
4.5% (5)
Patient Deaths
 
2.7% (6)
4.5% (5)

There were no distinctions between treatment arms for adverse events of hearing loss or renal impairment, side effects commonly associated with the intravenous use of amikacin. As of September 2017, the overall dropout rate in the CONVERT study was 16.1%, with an 8.9% dropout rate in the GBT-only arm and a 19.6% dropout rate in the ALIS plus GBT arm. As of December 2017, the overall dropout rate in the CONVERT study was 18% (n=60/336).
    
CONVERT Long-Term Durability Data

We also recently announced interim data on the durability of culture conversion, as defined by patients that have completed treatment and continued in the CONVERT study off all therapy for three months, which we expect will be the endpoint necessary to support full regulatory approval in the US. The following data are interim results observed through December 2017, and have not been further analyzed. As of December 2017, of the 75 patients achieving culture conversion in the CONVERT study, 53 of these patients were evaluable for durability of culture conversion three months after the completion of treatment. Interim data for durability of culture conversion as of December 2017 on these 53 patients are detailed below:

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Evaluable Number of Patients
as of December 2017 (At Least Three Months Post Treatment) *
Percent with Durable Culture
Conversion Three Months
After Completion
of All Treatment
Converters in the ALIS + GBT arm (n=65)
46
60.9% (28/46)
Converters in the GBT‑only arm (n=10)
7
0.0% (0/7)

* Evaluable number of patients includes all patients who reached three months post-treatment and all patients who discontinued prior to three months post-treatment.

312 Study
 
All non-converters in the CONVERT study, as determined at the month eight visit, may be eligible to enter the 312 study, which is a separate 12-month, single-arm, open-label study. The purpose of the 312 study is to evaluate the safety and tolerability of longer-term treatment with ALIS added to GBT. The secondary endpoints of the 312 study include evaluating the proportion of patients achieving culture conversion (three consecutive monthly negative sputum cultures) by month six and the proportion of patients achieving culture conversion by month 12 (end of treatment).

312 Study Interim Efficacy Data
We recently announced interim data for the 312 study, which enrolled 163 adult patients with NTM lung disease caused by MAC who completed six months of treatment in the CONVERT study, but did not demonstrate culture conversion by Month 6. The following data are interim results observed through December 2017, and have not been further analyzed. Patients in the ALIS plus GBT arm of the CONVERT study and patients in the GBT-only arm of the CONVERT study who did not achieve culture conversion by Month 6 had the option to enroll in the 312 study at Month 8. Under the study protocol, patients from both arms of the CONVERT study will receive 12 months of ALIS plus GBT in the 312 study. We will also use the data from this trial to further assess the impact of the addition of ALIS to background GBT on sputum culture conversion, by Month 6.
As of December 2017, of the 163 patients enrolled in the 312 study, 124 patients were evaluable for culture conversion. Descriptive interim culture conversion data as of December 2017 for these 124 patients are detailed below. The interim culture conversion data has not been statistically analyzed.
 
Number of Patients Completing Six Months of Treatment in the 312 study as of December 2017 **
Percent Achieving Sputum
Culture Conversion by
Month 6 in the 312 study
Patients who received GBT only in the 212 study and crossed over to receive six months of treatment with ALIS + GBT (n=90)
67
28.4% (19/67)
Patients who received ALIS + GBT in the 212 study and crossed over to continue treatment in the 312 study, to receive a combined total of 14 months of ALIS + GBT treatment in both studies (n=73)
57
12.3% (7/57)
** Includes all patients completing six months of treatment, all patients who discontinued prior to six months and for all ongoing patients prior to six months who completed two months of treatment.
312 Study Interim Safety and Tolerability Data
We have not yet performed a final analysis of any safety data for the 312 study. However, based on an interim review of data available from the 312 study, we believe that STEAEs were similar to the STEAEs we reported in September 2017 as part of our top-line data results for the 212 study. As of December 2017, the overall dropout rate in the 312 study was 24% (n=39/163).

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Table of Contents

Further Research and Lifecycle Management for ALIS
 
We are currently exploring and supporting research and lifecycle management programs for ALIS beyond refractory NTM lung infections caused by MAC. Specifically, we are evaluating future study designs focusing on the MAC disease treatment pathway, including front-line treatment and monotherapy maintenance to prevent recurrence (defined as true relapse or reinfection) of NTM lung disease. In addition, we are evaluating non-MAC NTM species, such as M. abscessus . If the data from the CONVERT study are sufficient to support our MAAs and regulatory bodies approve ALIS, such lifecycle management studies could enable us to reach more potential patients. These initiatives may include new clinical studies sponsored by us or investigator-initiated studies, which are clinical studies initiated and sponsored by physicians or research institutions with funding from us.
 
INS1007

INS1007 is a small molecule, oral, reversible inhibitor of DPP1, which we in-licensed from AstraZeneca in October 2016. DPP1 is an enzyme responsible for activating neutrophil serine proteases in neutrophils when they are formed in the bone marrow. Neutrophils are the most common type of white blood cell and play an essential role in pathogen destruction and inflammatory mediation. Neutrophils contain the neutrophil serine proteases, neutrophil elastase, proteinase 3, and cathepsin G, that have been implicated in a variety of inflammatory diseases. In chronic inflammatory lung diseases, neutrophils accumulate in the airways and release active neutrophil serine proteases in excess that cause lung destruction and inflammation. INS1007 may decrease the damaging effects of inflammatory diseases, such as non-CF bronchiectasis, by inhibiting DPP1 and its activation of neutrophil serine proteases. Non-CF bronchiectasis is a progressive pulmonary disorder in which the bronchi become permanently dilated due to chronic inflammation and infection. Currently, there is no cure, and we are not aware of any FDA-approved therapies specifically indicated for non-CF bronchiectasis.
 
The WILLOW Study
 
The WILLOW study, a global phase 2, randomized, double-blind, placebo-controlled, parallel group, multi-center clinical study to assess the efficacy, safety and tolerability, and pharmacokinetics of INS1007 administered once daily for 24 weeks in subjects with non-CF bronchiectasis. We commenced enrollment in the WILLOW study in December 2017. In addition, we are exploring the potential of INS1007 in various neutrophil-driven inflammatory conditions.
 
INS1009
INS1009 is an investigational sustained-release inhaled treprostinil prodrug nanoparticle formulation that has the potential to address certain of the current limitations of existing prostanoid therapies. We believe that INS1009 prolongs duration of effect and may provide PAH patients with greater consistency in pulmonary arterial pressure reduction over time. Current inhaled prostanoid therapies must be dosed four to nine times per day for the treatment of PAH. Reducing dose frequency has the potential to ease patient burden and improve compliance. Additionally, we believe that INS1009 may be associated with fewer side effects, including elevated heart rate, low blood pressure, and severity and/or frequency of cough, associated with high initial drug levels and local upper airway exposure when using current inhaled prostanoid therapies. We believe INS1009 may offer a differentiated product profile for rare pulmonary disorders, including PAH, and we are currently evaluating our options to advance its development, including exploring its use as an inhaled dry powder formulation.

Other Development Activities
Our earlier-stage pipeline includes preclinical compounds that we are evaluating in multiple rare diseases of unmet medical need, including methicillin-resistant staph aureus (MRSA) and NTM. To complement our internal research and development, we actively evaluate in-licensing and acquisition opportunities for a broad range of rare diseases.
KEY COMPONENTS OF OUR RESULTS OF OPERATIONS
Research and Development (R&D) Expenses
R&D expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions, including medical affairs. Expenses also include other internal operating expenses, the cost of manufacturing our drug candidate(s) for clinical study, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, our R&D expenses include payments to third parties for the license rights to products in development (prior to marketing approval), such as for INS1007. Our expenses related to

63


manufacturing our drug candidate(s) for clinical study are primarily related to activities at CMOs that manufacture our product candidates for our use, including purchases of active pharmaceutical ingredients. Our expenses related to clinical trials are primarily related to activities at contract research organizations that conduct and manage clinical trials on our behalf.
Since 2011, we have focused our development activities principally on our proprietary, advanced liposomal technology designed specifically for inhalation lung delivery. In 2015, we commenced the CONVERT study for ALIS for adult patients with treatment refractory NTM lung disease. In 2015, we also completed an open-label extension study in which CF patients that completed our phase 3 trial received ALIS for a period of two years. The majority of our research and development expenses have been for our ALIS development programs. Our development efforts in 2017 and 2016 principally related to the development of ALIS in the NTM lung disease indication described above.
General and Administrative Expenses
General and administrative 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, pre-commercial, corporate development, information technology, program management and human resource functions. General and administrative expenses also include professional fees for legal services, including fees incurred in connection with the securities litigation filed against us and patent-related expenses, consulting services including for pre-commercial planning activities such as non-branded disease awareness, insurance, board of director fees, tax and accounting services.
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 interest costs and amortization of debt issuance costs related to our debt obligations. 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 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.

RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2017 and 2016
Net Loss
Net loss for the year ended December 31, 2017 was $192.6 million , or $2.89 per common share—basic and diluted, compared with a net loss of $176.3 million , or $2.85 per common share—basic and diluted, for the year ended December 31, 2016 . The $16.4 million increase in our net loss for the year ended December 31, 2017 as compared to the same period in 2016 was due to:
Decreased R&D expenses of $13.0 million primarily resulting from the $30.0 million upfront payment for the license agreement entered into with AstraZeneca for exclusive global rights to INS1007 in October 2016, offset in part by, an increase in expenses related to the WILLOW study and higher compensation and related expenses due to an increase in headcount; and
Increased general and administrative expenses of $28.5 million resulting from an increase in pre-commercial planning activities, including external consulting expenses, and higher compensation and related expenses due to an increase in headcount.

In addition, there was a $2.4 million increase in interest expense resulting from the increase in our debt in the second half of 2016.
R&D Expenses
R&D expenses for the years ended December 31, 2017 and 2016 were comprised of the following (in thousands):

64


 
 
Years Ended December 31,
 
Increase (decrease)
 
2017
 
2016
 
$
 
%
External Expenses
 
 

 
 

 
 

 
 
Clinical development and research
 
$
40,511

 
$
35,890

 
$
4,621

 
12.9%
INS1007 license payment
 

 
30,000

 
(30,000
)
 
(100.0)%
Manufacturing
 
19,808

 
17,313

 
2,495

 
14.4%
Regulatory, quality assurance, and medical affairs


 
7,308

 
4,064

 
3,244

 
79.8%
Subtotal—external expenses
 
$
67,627

 
$
87,267

 
$
(19,640
)
 
(22.5)%
Internal Expenses
 
 
 
 
 
 
 
 
Compensation and related expenses
 
$
34,180

 
$
28,513

 
$
5,667

 
19.9%
Other internal operating expenses
 
7,942

 
6,941

 
1,001

 
14.4%
Subtotal—internal expenses
 
$
42,122

 
$
35,454

 
$
6,668

 
18.8%
Total
 
$
109,749

 
$
122,721

 
$
(12,972
)
 
(10.6)%
R&D expenses decreased to $109.7 million during the year ended December 31, 2017 from $122.7 million in the same period in 2016 . The $13.0 million decrease was due to a $30.0 million upfront payment under the AZ License Agreement related to INS1007 in October 2016 and a $3.7 million decrease in expenses relating to INS1009. These decreases were partially offset by a $10.2 million increase in raw materials purchases and expenses related to the WILLOW trial for INS1007 and a $5.7 million increase in compensation and related expenses, including stock-based compensation, due to an increase in headcount. There was also an increase of $3.2 million due to increased regulatory, quality assurance and medical affairs consulting expenses and medical grants.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2017 and 2016 were comprised of the following (in thousands):
 
 
Years Ended December 31,
 
Increase (decrease)
 
2017
 
2016
 
$
 
%
General & administrative
 
$
46,249

 
$
35,291

 
$
10,958

 
31.1
%
Pre-commercial expenses
 
32,922

 
15,388

 
17,534

 
113.9
%
Total general & administrative expenses
 
$
79,171

 
$
50,679

 
$
28,492

 
56.2
%
General and administrative expenses increased to $79.2 million during the year ended December 31, 2017 from $50.7 million in the same period in 2016 . The $28.5 million increase was primarily due to an increase of $12.8 million in consulting fees relating to pre-commercial planning activities, an increase of $7.7 million due to higher compensation costs related to an increase in headcount, and a one-time payment in October 2017 related to the buy-down of future royalties payable to PARI on the global net sales of ALIS, if approved.
Interest Expense
Interest expense was $5.9 million during the year ended December 31, 2017 as compared to $3.5 million in the same period in 2016 . The $2.4 million increase in interest expense in 2017 relates primarily to an increase in our borrowings from Hercules in September and October of 2016. We entered into an Amended and Restated Loan Agreement (A&R Loan Agreement) with Hercules which increased our borrowing capacity by an additional $30.0 million to an aggregate total of $55.0 million. The increase in borrowings under the A&R Loan Agreement was used to fund the upfront payment owed under the AZ License Agreement for the exclusive global rights to INS1007.
Income tax (benefit) provision
The income tax (benefit) provision was $(0.3) million and $0.1 million for the years ended December 31, 2017 and 2016 , respectively. The income tax (benefit) for the year ended December 31, 2017 reflects the reversal of the valuation allowance related to alternative minimum tax (AMT) that we paid in 2009. As a result of the Tax Act, we recorded a noncurrent receivable to reflect the tax amount due to us in future periods relating to a refund due for the prior AMT paid. In addition, the income tax (benefit) provision for the years ended December 31, 2017 and 2016 reflects current income tax expense recorded as a result of taxable income in certain of our subsidiaries in Europe.

65


On December 22, 2017 the Tax Act was signed into law. The Tax Act introduced significant changes to the Code. The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income in respect of losses arising in taxable years beginning after 2017 and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Our federal net operating loss carryovers for taxable years beginning after 2017 will be carried forward indefinitely pursuant to the Tax Act. Notwithstanding the reduction in the federal corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. The Tax Act did not have a material impact on our financial statements because our deferred temporary differences are fully offset by a valuation allowance and we do not have any significant offshore earnings from which to record the mandatory transition tax. However, given the significant complexity of the Tax Act, anticipated guidance from the US Treasury about implementing the Tax Act, and the potential for additional guidance from the SEC or the FASB related to the Tax Act, these estimates may be adjusted during the measurement period. We continue to examine the impact the Tax Act may have on our business.
Comparison of the Years Ended December 31, 2016 and 2015
Net Loss
Net loss for the year ended December 31, 2016 was $176.3 million, or $2.85 per common share—basic and diluted, compared with a net loss of $118.2 million, or $2.02 per common share—basic and diluted, for the year ended December 31, 2015. The $58.1 million increase in our net loss for the year ended December 31, 2016 as compared to the same period in 2015 was due to:
Increased R&D expenses of $48.4 million primarily resulting from a $30.0 million upfront payment for the license agreement entered into with AstraZeneca for exclusive global rights to INS1007 in October 2016 (AZ License Agreement), an increase in clinical trial expenses related to the CONVERT study and higher compensation and related expenses due to an increase in headcount; and
Increased general and administrative expenses of $7.5 million resulting from an increase in pre-commercial planning activities, legal and consulting expenses and higher compensation and related expenses, including an increase in noncash stock-based compensation, related to an increase in headcount.
In addition, there was a $2.1 million decrease in the income tax benefit resulting from the sale of a portion of our New Jersey State net operating losses (NOLs) under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the Program) for cash of $2.0 million in 2015.
R&D Expenses
R&D expenses for the years ended December 31, 2016 and 2015 were comprised of the following:
 
 
Years Ended December 31,
 
Increase (decrease)
 
 
2016
 
2015
 
$
 
%
 
External Expenses
 
 

 
 

 
 

 
 

 
Clinical development and research
 
$
35,890

 
$
24,972

 
$
10,918

 
43.7
 %
 
INS1007 license payment
 
30,000

 

 
30,000

 
nm

 
Manufacturing
 
17,313

 
22,121

 
(4,808
)
 
(21.7
)%
 
Regulatory, quality assurance, and medical affairs

 
4,064

 
4,173

 
(109
)
 
(2.6
)%
 
Subtotal—external expenses
 
$
87,267

 
$
51,266

 
$
36,001

 
70.2
 %
 
Internal Expenses
 
 

 
 

 
 
 
 
 
Compensation and related expenses
 
$
28,513

 
$
18,666

 
$
9,847

 
52.8
 %
 
Other internal operating expenses
 
6,941

 
4,345

 
2,596

 
59.7
 %
 
Subtotal—internal expenses
 
$
35,454

 
$
23,011

 
$
12,443

 
54.1
 %
 
Total
 
$
122,721

 
$
74,277

 
$
48,444

 
65.2
 %
 

66


R&D expenses increased to $122.7 million during the year ended December 31, 2016 from $74.3 million in the same period in 2015. The $48.4 million increase was due to a $30.0 million upfront payment under the AZ License Agreement related to INS1007 in October 2016, a $10.9 million increase in external clinical development expenses primarily related to the CONVERT study and a $9.8 million increase in compensation and related expenses, including stock-based compensation, due to an increase in headcount. These increases were partially offset by a $4.8 million decrease in manufacturing expenses primarily due to the completion of the build-out of our production area at Therapure's facility in 2015.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2016 and 2015 were comprised of the following (in thousands):
 
 
Years Ended December 31,
 
Increase (decrease)
 
 
2016
 
2015
 
$
 
%
 
General & administrative
 
$
35,291

 
$
30,614

 
$
4,677

 
15.3
%
 
Pre-commercial expenses
 
15,388

 
12,602

 
2,786

 
22.1
%
 
Total general & administrative expenses
 
$
50,679

 
$
43,216

 
$
7,463

 
17.3
%
 
General and administrative expenses increased to $50.7 million during the year ended December 31, 2016 from $43.2 million in the same period in 2015. The $7.5 million increase was primarily due to an increase of $3.7 million in consulting fees relating to pre-commercial planning activities, legal and consulting expenses and an increase of $3.7 million due to higher compensation costs, including stock-based compensation, related to an increase in headcount.
Interest Expense
Interest expense was $3.5 million during the year ended December 31, 2016 as compared to $2.9 million in the same period in 2015. The $0.6 million increase in interest expense in 2016 relates primarily to an increase in our borrowings from Hercules in September and October of 2016. We entered into an Amended and Restated Loan Agreement (A&R Loan Agreement) with Hercules which increased our borrowing capacity by an additional $30.0 million to an aggregate total of $55.0 million. The increase in borrowings under the A&R Loan Agreement was used to fund the upfront payment owed under the AZ License Agreement for the exclusive global rights to INS1007.
Income tax (benefit) provision
The income tax (benefit) provision was $0.1 million and $(2.0) million for the years ended December 31, 2016 and 2015, respectively. The income tax provision for the year ended December 31, 2016 reflects current income tax expense recorded as a result of taxable income in certain our subsidiaries in Europe. The income tax benefit recorded for the year ended December 31, 2015 primarily reflects the reversal of a valuation allowance previously recorded against our New Jersey State NOLs that resulted from the sale of a portion of our New Jersey State NOLs under the Program for cash of $2.0 million, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash. In 2015, we reached the lifetime maximum cap of NOLs that can be sold to the State of New Jersey. Therefore, we received no cash proceeds from the Program in 2016 and will not receive cash proceeds from the Program in the future.

LIQUIDITY AND CAPITAL RESOURCES
Overview
There is considerable time and cost associated with developing a potential drug or pharmaceutical product to the point of regulatory approval and commercialization. In recent years, we have funded our operations through public offerings of equity securities and debt financings. We expect to continue to incur losses both in our US and certain international entities, as we plan to fund research and development activities and commercial launch activities.
We may need to raise additional capital to fund our operations, to develop and commercialize ALIS if approved, to develop INS1007 and INS1009, and to develop, acquire, in-license or co-promote other products 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 may 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 develop our potential product candidates, to pursue the

67


license or purchase of other technologies, to commercialize our product candidates or to purchase other products. During 2018, we plan to continue to fund further clinical development of ALIS and INS1007, support efforts to obtain regulatory approvals, and prepare for commercialization of ALIS. Our cash requirements in 2018 will be impacted by a number of factors, the most significant of which are expenses related to the CONVERT and 312 studies and pre-commercialization efforts for ALIS, and to a lesser extent, expenses related to INS1007 and future ALIS clinical trials. We expect our operating expenses in 2018 to increase significantly as compared to 2017.
In January 2018, we completed an underwritten public offering of 1.75% convertible senior notes due 2025. We sold $450.0 million aggregate principal amount of the Convertible Notes, including the exercise in full of the underwriter's option to purchase additional Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million , were $435.8 million .
    
In September 2017, we completed an underwritten public offering of  14,123,150  shares of our common stock, which included the underwriter’s exercise in full of its over-allotment option of  1,842,150 shares, at a price to the public of  $28.50  per share.  Our net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses of  $24.8 million , were $377.7 million .
In April 2015, we completed an underwritten public offering of 11,500,000 shares of our common stock, which included the underwriter's exercise in full of its over-allotment option of 1,500,000 shares, at a price to the public of $20.65 per share. Our net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses of $14.5 million , were $222.9 million .
Cash Flows
As of December 31, 2017 , we had total cash and cash equivalents of $381.2 million , as compared with $162.6 million as of December 31, 2016 . The $218.6 million increase was due to the cash provided by financing activities in excess of our operating activities. Our working capital was $344.8 million as of December 31, 2017 as compared with $140.4 million as of December 31, 2016 .
Net cash used in operating activities was $159.6 million and $146.7 million for the years ended December 31, 2017 and 2016 , respectively. The net cash used in operating activities during 2017 and 2016 was primarily for the clinical, regulatory, manufacturing and pre-commercial activities related to ALIS, including in 2017 the exercise of an option to buy-down the future royalties payable to PARI. In 2017, there were increases in raw materials purchases and expenses related to the WILLOW study for INS1007. In addition, in the fourth quarter of 2016, we made a payment of $30.0 million to AstraZeneca under the AZ License Agreement for INS1007.
Net cash used in investing activities was $3.0 million and $4.2 million for the years ended December 31, 2017 and 2016 , respectively. The net cash used in investing activities during 2017 was primarily related to the investment in our long-term production capacity build-out at Patheon and for the build out of our lab facility in Bridgewater, New Jersey. Net cash used in investing activities during 2016 was primarily related to payments for the build out of our headquarters and lab facility in Bridgewater, New Jersey.
Net cash provided by financing activities was $381.1 million and $30.7 million for the years ended December 31, 2017 and 2016 , respectively. Net cash provided by financing activities during 2017 included net cash proceeds of $377.7 million from our issuance of 14.1 million shares of common stock in September 2017 and cash proceeds received from stock option exercises. Net cash provided by financing activities for the year ended December 31, 2016 was primarily net cash proceeds from the issuance of debt.
Contractual Obligations
On June 29, 2012, we and our domestic subsidiaries, as co-borrowers, entered into a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (as subsequently amended, the Prior Loan Agreement) under which we borrowed an aggregate of $25.0 million at an interest rate of 9.25%. We paid an "end of term" charge of $390,000 in January 2016, which was charged to interest expense (and accreted to the debt) using the effective interest method over the life of the Prior Loan Agreement.
On September 30, 2016, we and our domestic subsidiaries, as co-borrowers, entered into the A&R Loan Agreement with Hercules. The A&R Loan Agreement included a total commitment from Hercules of up to $55.0 million, of which $25.0 million was previously outstanding. The amount of borrowings was initially increased by $10.0 million to an aggregate total of $35.0 million on September 30, 2016. An additional $20.0 million was available at our option through June 30, 2017 subject to certain conditions, including the payment of a facility fee of 0.375%. We exercised this option in early October 2016 and borrowed an additional $20.0 million in connection with the upfront payment obligation under the AZ License Agreement.

68


The interest rate for the term is floating and is defined as the greater of (i) 9.25% or (ii) 9.25% plus the sum of the US prime rate minus 4.50%, along with a backend fee of 4.15% of the aggregate principal amount outstanding and an aggregate facility fee of $337,500. The interest-only period extends through November 1, 2018, but can be extended up to six months under certain conditions. The maturity date of the loan facility was also extended to October 1, 2020. In connection with the Company generating and announcing top-line data from the CONVERT study on September 5, 2017 that supports the filing of an NDA, along with the completion of the equity financing, the interest-only period was automatically extended through May 1, 2019 and the requirement to have a consolidated minimum cash liquidity in an amount no less than $25.0 million was eliminated.
In connection with the A&R Loan Agreement, we granted Hercules a first position lien on all of our assets, excluding intellectual property. Prepayment of the loans made pursuant to the A&R Loan Agreement is subject to penalty. The backend fee of 4.15% on the aggregate outstanding principal balance will be charged to interest expense (and accreted to the debt) using the effective interest method over the original life of the A&R Loan Agreement. Debt issuance fees paid to the lender were recorded as a discount on the debt and are being amortized to interest expense using the effective interest method over the life of the A&R Loan Agreement. In February 2018, we notified Hercules that we will repay the A&R Loan Agreement in full on February 28, 2018. The total aggregate cash payable to Hercules for the early prepayment of debt, inclusive of accrued interest, the backend fee and an early payment penalty will be approximately $58.0 million.
We have an operating lease for office and laboratory space located in Bridgewater, NJ, our corporate headquarters, for which the initial lease term expires in November 2019. Future minimum rental payments under this lease total approximately $2.0 million. In July 2016, we signed an operating lease for additional laboratory space located in Bridgewater, NJ for which the initial lease term expires in September 2021. Future minimum rental payments under this lease are $1.9 million.
In September 2015, we entered into a Commercial Fill/Finish Services Agreement (the Fill/Finish Agreement) with Althea, for Althea to produce, on a non-exclusive basis, ALIS in finished dosage form at a 50 kg scale. Under the Fill/Finish Agreement, we are obligated to pay a minimum of $2.7 million for the batches of ALIS produced each calendar year during the term of the Fill/Finish Agreement. The Fill/Finish Agreement was effective as of January 1, 2015, and had an initial term that was to end on December 31, 2017. In 2016, we signed an extension of the agreement through December 31, 2019 and it may be extended for additional two-year periods upon mutual written agreement of the Company and Althea at least one year prior to the expiration of its then-current term.
As of December 31, 2017 , future payments under our long-term debt agreements, minimum future payments under non-cancellable operating leases and minimum future payment obligations are as follows:
 
 
 
 
As of December 31, 2017
Payments Due By Period
 
 
Total
 
Less than
1 year
 
1 - 3 Years
 
3 - 5 Years
 
More than 5 Years
 
 
(in thousands)
Debt obligations
 
 

 
 

 
 

 
 

 
 

Debt maturities
 
$
55,000

 
$

 
$
55,000

 
$

 
$

Contractual interest
 
14,871

 
5,158

 
9,713

 

 

Operating leases
 
3,917

 
1,521

 
1,898

 
498

 

Purchase obligations
 
5,400

 
2,700

 
2,700

 

 

Total contractual obligations
 
$
79,188

 
$
9,379

 
$
69,311

 
$
498

 
$

This table does not include: (a) any milestone payments which may become payable to third parties under our license and collaboration agreements as the timing and likelihood of such payments are not known; (b) any royalty payments to third parties as the amounts of such payments, timing and/or the likelihood of such payments are not known; (c) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above; (d) the January 2018 underwritten public offering of 1.75% convertible senior notes due 2025 in the aggregate principal amount of $450.0 million ; or (e) any payments related to the agreements mentioned below.
We currently have a licensing agreement with PARI for the use of the optimized eFlow Nebulizer System for delivery of ALIS in treating patients with NTM lung infections, CF and bronchiectasis. Under the licensing agreement, we have rights under several US and foreign issued patents, and patent applications involving improvements to the optimized eFlow Nebulizer System, to exploit such system with ALIS for the treatment of such indications, but we cannot manufacture such

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nebulizers except as permitted under our Commercialization Agreement with PARI. Under the licensing agreement, we paid PARI an upfront license fee and PARI is entitled to receive milestone payments up to an aggregate of €4.3 million either in cash, qualified stock or a combination of both, at PARI's discretion, based on achievement of certain future milestone events including, first acceptance of MAA submission (or equivalent) in the US of ALIS and the device, first receipt of marketing approval in the US for ALIS and the device, and first receipt of marketing approval in a major EU country for ALIS and the device. In addition, PARI is entitled to receive royalty payments in the mid-single digits on the annual global net sales of ALIS pursuant to the licensing agreement, subject to certain specified annual minimum royalties. In October 2017, we exercised an option to buy-down the future royalties that will be payable to PARI. The payment to PARI was included as a component of general and administrative expenses in the fourth quarter of 2017.
In July 2014, we entered into a Commercialization Agreement with PARI for the manufacture and supply of eFlow nebulizer systems and related accessories (the Device) as optimized for use with ALIS. Under the Commercialization Agreement, PARI manufactures the Device except in the case of certain defined supply failures, when the Company will have the right to make the Device and have it made by third parties (but not certain third parties deemed under the Commercialization Agreement to compete with PARI). The Commercialization Agreement has an initial term of 15 years from the first commercial sale of ALIS pursuant to the licensing agreement (the Initial Term). The term of the Commercialization Agreement may be extended by us for an additional five years by providing written notice to PARI at least one year prior to the expiration of the Initial Term.
In October 2017, we entered into certain agreements with Patheon related to increasing our long-term production capacity for ALIS commercial inventory. The agreements provide for Patheon to manufacture and supply ALIS for our anticipated commercial needs. Under these agreements, we are required to deliver to Patheon the required raw materials, including active pharmaceutical ingredients, and certain fixed assets needed to manufacture ALIS. Patheon's supply obligations will commence once certain technology transfer and construction services are completed. Our manufacturing and supply agreement with Patheon will remain in effect for a fixed initial term, after which it will continue for successive renewal terms unless either we or Patheon have given written notice of termination. The technology transfer agreement will expire when the parties agree that the technology transfer services have been completed. The agreements may also be terminated under certain other circumstances, including by either party due to a material uncured breach of the other party or the other party’s insolvency. These early termination clauses may reduce the amounts due to the relevant parties. The investment in our long-term production capacity build-out, including under the Patheon agreements and related agreements or purchase orders with third parties for raw materials and fixed assets, is estimated to be approximately $60.0 million and will be incurred over the next three to four years.
In October 2016, we entered into the AZ License Agreement, pursuant to which AstraZeneca granted us exclusive global rights for the purpose of developing and commercializing AZD7986 (which we renamed INS1007). In consideration of the licenses and other rights granted by AstraZeneca, we made an upfront payment of $30.0 million, which was included as research and development expense in the fourth quarter of 2016. We are obligated to make a series of contingent milestone payments to AstraZeneca totaling up to an additional $85.0 million upon the achievement of clinical development and regulatory filing milestones. If we elect to develop INS1007 for a second indication, we will be obligated to make an additional series of contingent milestone payments totaling up to $42.5 million. We are not obligated to make any additional milestone payments for any additional indications. In addition, we have agreed to pay AstraZeneca tiered royalties ranging from a high single-digit to mid-teen on net sales of any approved product based on INS1007 and one additional payment of $35.0 million upon the first achievement of $1 billion in annual net sales. The AZ License Agreement provides AstraZeneca with the option to negotiate a future agreement with us for commercialization of INS1007 in chronic obstructive pulmonary disease or asthma.
In December 2014, we entered into a services agreement with SynteractHCR, Inc. (Synteract) pursuant to which we retained Synteract to perform implementation and management services in connection with the 212 study. We anticipate that aggregate costs relating to all work orders for the 212 study will be approximately $45 million over the period of the study. In April 2015, we entered into a work order with Synteract to perform implementation and management services for the 312 study. We anticipate that aggregate costs relating to all work orders for the 312 study will be approximately $25 million over the period of the study.
In February 2014, we entered into a contract manufacturing agreement with Therapure for the manufacture of ALIS at a 200 kg scale. Pursuant to the agreement, we collaborated with Therapure to construct a production area for the manufacture of ALIS in Therapure's existing manufacturing facility in Canada. Therapure manufactures ALIS for us on a non-exclusive basis. The agreement has an initial term of five years from the first date on which Therapure delivers ALIS to us after we obtain permits related to the manufacture of ALIS, and will renew automatically for successive periods of two years each, unless terminated by either party by providing the required two years' prior written notice to the other party. Under the agreement, we are obligated to pay certain minimum amounts for the batches of ALIS produced each calendar year.

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In 2004 and 2009, we entered into research funding agreements with Cystic Fibrosis Foundation Therapeutics, Inc. (CFFT) whereby we received $1.7 million and $2.2 million for each respective agreement in research funding for the development of ALIS. If ALIS becomes an approved product for patients with CF in the US, we will owe a payment to CFFT of up to $13.4 million that is payable over a three-year period after approval as a commercialized drug in the US. Furthermore, if certain global sales milestones are met within five years of the drug's commercialization, we would owe an additional payment of $3.9 million. Since there is significant development and regulatory risk associated with ALIS, including with respect to the CF indication, we have not accrued these obligations.
Future Funding Requirements
To date, we have not generated material revenue from ALIS, and we do not know when, or if, we will generate such revenue. We do not expect to generate such revenue unless or until we obtain marketing approval of, secure reimbursement for, and commercialize, ALIS. We may need to raise additional capital to fund our operations, to develop and commercialize ALIS, to develop INS1007 and INS1009, and to develop, acquire, in-license or co-promote other products that address orphan or rare diseases. Our future capital requirements may be substantial and will depend on many factors, including:
the timing and cost of our anticipated clinical trials of ALIS for the treatment of patients with NTM lung infections;
the decisions of the FDA, MHLW, PMDA and EMA with respect to our applications for marketing approval of ALIS in the US, Japan and Europe; the costs of activities related to the regulatory approval process; and the timing of approvals, if received;
the cost of putting in place the sales and marketing capabilities necessary to be prepared for a potential commercial launch of ALIS, if approved;
the cost of filing, prosecuting, defending, and enforcing patent claims;
the timing and cost of our anticipated clinical trials, including INS1007 and the related milestone payments due to AstraZeneca;
the costs of our manufacturing-related activities;
the costs associated with commercializing ALIS, if we receive marketing approval; and
subject to receipt of marketing approval, the levels, timing and collection of revenue received from sales of approved products, if any, in the future.
In April 2015, we generated net proceeds of $222.9 million from the issuance of 11.5 million shares of common stock. In September 2017, we completed an underwritten public offering of  14,123,150  shares of our common stock, which included the underwriter’s exercise in full of its over-allotment option of  1,842,150 shares, at a price to the public of  $28.50  per share.  Our net proceeds from the sale of the shares, after deducting the underwriter’s discount and offering expenses of  $24.8 million , were $377.7 million . In January 2018, we completed an underwritten public offering of 1.75% convertible senior notes due 2025. We sold $450.0 million aggregate principal amount of the Convertible Notes, including the exercise in full of the underwriters' option to purchase additional Convertible Notes. Our net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses of $14.2 million , were approximately $435.8 million . The Convertible Notes bear interest payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. We believe that we have sufficient capital resources to support scheduled interest payments on this debt. On September 30, 2016, the total committed amount under the A&R Loan Agreement with Hercules was increased to $55.0 million, $25.0 million of which was previously outstanding. During the fourth quarter of 2016, we drew down the remaining commitment. In February 2018, we notified Hercules that we will repay the A&R Loan Agreement in full on February 28, 2018. We believe we currently have sufficient funds to meet our financial needs for at least the next 12 months. However, our business strategy may require us to raise additional capital at any time through equity or debt financing(s), strategic transactions or otherwise.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than operating leases, 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
Preparation of financial statements in accordance with generally accepted accounting principles in the US requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and assumptions. The amounts of assets and liabilities reported in our consolidated balance sheets and the amounts of revenue reported in our consolidated statements of

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comprehensive loss are affected by estimates and assumptions, which are used for, but not limited to, the accounting for research and development, stock-based compensation, identifiable intangible assets, and accrued expenses. The accounting policies discussed below are considered critical to an understanding of our consolidated financial statements because their application places the most significant demands on our judgment. Actual results could differ from our estimates. For additional accounting policies, see Note 2 to our Consolidated Financial Statements— Summary of Significant Accounting Policies.
Research and Development
Research and development expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving our research and development functions, and other internal operating expenses, the cost of manufacturing our drug candidate for clinical study, including the medical devices for drug delivery, the cost of conducting clinical studies, and the cost of conducting preclinical and research activities. In addition, research and development expenses include payments to third parties for the license rights to products in development (prior to marketing approval). Our expenses related to manufacturing our drug candidate and medical devices for clinical study are primarily related to activities at CMOs that manufacture ALIS, and to a lesser extent, our other clinical product requirements. Our expenses related to clinical trials are primarily related to activities at CROs that conduct and manage clinical trials on our behalf. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts 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. Nonrefundable advance payments 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, or when the goods or services are no longer expected to be provided.
Stock-Based Compensation
We recognize stock-based compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value of those awards. The grant-date fair value of the award is recognized as compensation expense ratably over the requisite service period, which generally equals the vesting period of the award, and if applicable, is adjusted for expected forfeitures. We also grant performance-based stock options to employees. The grant-date fair value of the performance-based stock options is recognized as compensation expense over the implicit service period using the accelerated attribution method once it is probable that the performance condition will be achieved. Stock-based compensation expense is included in both research and development expenses and general and administrative expenses in the Consolidated Statements of Comprehensive Loss.
The following table summarizes the assumptions used in determining the fair value of stock options granted during the years ended December 31, 2017 , 2016 and 2015 :
 
 
2017
 
2016
 
2015
Volatility
 
71% - 79%
 
74% - 77%
 
78% - 82%
Risk-free interest rate
 
1.73% - 2.13%
 
1.00% - 1.90%
 
1.31% - 1.75%
Dividend yield
 
0.0%
 
0.0%
 
0.0%
Expected option term (in years)
 
6.25
 
6.25
 
6.25
For the years ended December 31, 2017 , 2016 and 2015 , the volatility factor was based on our historical volatility during the expected term or since the closing of our merger with Transave, Inc. in December 2010. The risk-free interest rate is based on the US Treasury yield in effect at the date of grant. Estimated forfeitures were based on the actual percentage of option forfeitures since the closing of the Company’s merger with Transave, Inc. in December 2010 for the years ended December 31, 2016 and 2015 . Beginning with the year ended December 31, 2017 , estimated forfeitures were based on the actual percentage of option forfeitures over the expected option term.
Identifiable Intangible Assets
Identifiable intangible assets are measured at their respective fair values and are not amortized until commercialization. Once commercialization occurs, these intangible assets will be amortized over their estimated useful lives. The fair values assigned to our intangible assets are based on reasonable estimates and assumptions given available facts and circumstances. Unanticipated events or circumstances may occur that may require us to review the assets for impairment. Events or circumstances that may require an impairment assessment include negative clinical trial results, the non-approval of a new drug application by a regulatory agency, material delays in our development program or a sustained decline in market capitalization.

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Indefinite-lived intangible assets are not subject to periodic amortization. Rather, indefinite-lived intangibles are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if events or circumstances indicate impairment may have occurred. Events or circumstances that may require an interim impairment assessment are consistent with those described above. We perform our annual impairment test as of October 1 of each year.
We use the income approach to derive the fair value of in-process research and development assets. This approach calculates fair value by estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. A market based valuation approach was not considered given a lack of revenues and profits by us. This approach requires significant management judgment with respect to unobservable inputs such as future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates and other assumptions and estimates. The estimates and assumptions used are consistent with our business plans.
Accrued Expenses
We are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating the level of service performed on our behalf and the associated cost incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examples of areas in which subjective judgments may be required include costs associated with services provided by contract organizations for preclinical development, clinical trials and manufacturing of clinical materials. We accrue for expenses associated with these external services by determining the total cost of a given study based on the terms of the related contract. We accrue for costs incurred as the services are being provided by monitoring the status of the trials and the invoices received from our external service providers. In the case of clinical trials, the estimated cost normally relates to the projected costs of having subjects enrolled in our trials, which we recognize over the estimated term of the trial according to the number of subjects enrolled in the trial on an ongoing basis, beginning with subject enrollment. As actual costs become known to us, we adjust our accruals. To date, the number of clinical trials and related research service agreements has been relatively limited and our estimates have not differed significantly from the actual costs incurred.
New Accounting Pronouncements—Adopted
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, provide certain footnote disclosures. This ASU was effective for the annual period ended December 31, 2016, and interim reporting periods thereafter. The adoption of this standard did not have an impact on our consolidated financial statements and related footnote disclosures.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes , which updated and simplified the presentation of deferred income taxes. Current generally accepted accounting principles require an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Earlier application was permitted and we adopted the update effective with our annual reporting period ended December 31, 2015. The adoption of this update did not have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (ASC) Topic 718, Compensation—Stock Compensation. ASU 2016-9 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-9 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-9 in the first quarter of 2017. The impact of the adoption was not material to the consolidated financial statements.

Recent Accounting Pronouncements—Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning

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after December 15, 2017. We will adopt ASU 2014-09 in the first quarter of 2018 and the impact of adoption will not be material to our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. We expect to adopt ASU 2016-02 in the first quarter of 2019 and are in the process of evaluating the impact of adoption on our consolidated financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2017 , our cash and cash equivalents were in cash accounts or were invested in money funds. Such accounts or investments are not insured by the federal government.
As of December 31, 2017 , we had $55.0 million of fixed rate borrowings bearing interest at 9.25% outstanding under the A&R Loan Agreement with Hercules. If a 10% change in interest rates was to have occurred on December 31, 2017 , this change 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. Fluctuations in foreign currency exchange rates do not materially affect our results of operations. During 2017 , 2016 and 2015 , our results of operations were not materially affected by fluctuations in foreign currency exchange rates.
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included in our Financial Statements and Supplementary Data listed in Item 15 of Part IV of this 2017 Annual Report.
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017 . The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d- 15(e) under the Exchange Act, means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the periodic 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 December 31, 2017 , our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act , as a process designed by, or under the supervision of, our principal executive and principal financial and accounting officers and effected by our board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

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Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and board of directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 , based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. Based on management's assessment, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017 .
Ernst & Young LLP, our independent registered public accounting firm, issued an attestation report on our internal control over financial reporting. The report of Ernst & Young LLP is contained in Item 15 of Part IV of this Annual Report on Form 10-K.
ITEM 9B.    OTHER INFORMATION
None

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PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captions Election of Directors, Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement for our 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.
ITEM 11.    EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captions Compensation Discussion and Analysis , Compensation Committee Report , Compensation Committee Interlocks and Insider Participation and Director Compensation in our definitive proxy statement for our 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captions Compensation Discussion and Analysis , Security Ownership of Certain Beneficial Owners, Directors and Management in our definitive proxy statement for our 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the discussion responsive thereto under the captions Election of Class II Directors and Certain Relationships and Related Transactions in our definitive proxy statement for our 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.
ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the discussion responsive thereto under the caption Corporate Governance and Ratification of Independent Registered Public Accounting Firm in our definitive proxy statement for our 2018 annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of the fiscal year covered by this Annual Report.

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PART IV
ITEM 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report.
1.     FINANCIAL STATEMENTS . The following consolidated financial statements of the Company are set forth herein, beginning on page 84 :
(i) Reports of Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets as of December 31, 2017 and 2016
(iii) Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2017 , 2016 and 2015
(iv) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2017 , 2016 and 2015
(v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 , 2016 and 2015
(vi) Notes to Consolidated Financial Statements
2.    FINANCIAL STATEMENT SCHEDULES.
None required.
3.    EXHIBITS.
The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.

EXHIBIT INDEX
 
Agreement and Plan of Merger, dated December 1, 2010, among Insmed Incorporated, River Acquisition Co., Transave, LLC Transave, Inc. and TVM V Life Science Ventures GmbH & Co. KG (incorporated by reference from Exhibit 2.1 to Insmed Incorporated's Current Report on Form 8-K filed on December 2, 2010 (SEC file no. 000-30739)).
 
 
 
 
Articles of Incorporation of Insmed Incorporated, as amended through June 14, 2012 (incorporated by reference from Exhibit 3.1 to Insmed Incorporated's Annual Report on Form 10-K filed on March 18, 2013).
 
 
 
 
Amended and Restated Bylaws of Insmed Incorporated (incorporated by reference from Exhibit 3.1 to Insmed Incorporated's Quarterly Report on Form 10-Q filed on August 6, 2015).
 
 
 
 
Specimen stock certificate representing common stock, $0.01 par value per share, of the Registrant (incorporated by reference from Exhibit 4.2 to Insmed Incorporated's Registration Statement on Form S-4/A (Registration No. 333-30098) filed on March 24, 2000).
 
 
 
 
Indenture, dated as of January 26, 2018, by and between the Company and Wells Fargo Bank, National Association (incorporated by reference from Exhibit 4.1 to Insmed Incorporated’s Current Report on Form 8-K filed on January 26, 2018).
 
 
 
 
First Supplemental Indenture, dated as of January 26, 2018, 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 January 26, 2018).
 
 
 
 
Form of 1.75% Convertible Senior Note due 2025 (included in Exhibit 4.3).
 
 
 
 
Insmed Incorporated Amended and Restated 2000 Stock Incentive Plan (incorporated by reference from Exhibit 10.3 to Insmed Incorporated's Form 10-Q filed on May 7, 2013).
 
 
 
 
Insmed Incorporated 2013 Incentive Plan (incorporated by reference from Exhibit 99.1 to Insmed Incorporated's Registration Statement on Form S-8 filed on May 24, 2013).
 
 
 
 
Insmed Incorporated 2015 Incentive Plan (incorporated by reference from Exhibit 99.1 to Insmed Incorporated's Registration Statement on Form S-8 filed on May 28, 2015).
 
 
 

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Insmed Incorporated 2017 Incentive Plan (incorporated by reference from Exhibit 10.3 to Insmed Incorporated’s Form 10-Q filed August 3, 2017).
 
 
 
 
Form of Award Agreement for Restricted Stock Units issued to employees pursuant to the Insmed Incorporated 2013 Incentive Plan (incorporated by reference from Exhibit 10.3 to Insmed Incorporated's Form 10-K filed on March 6, 2014).