INSMED INC MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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

We are a global biopharmaceutical company on a mission to transform the lives of
patients with serious and rare diseases. Our first commercial product, ARIKAYCE,
was approved in the US in September 2018, in the EU in October 2020 and in Japan
in March 2021. Our clinical-stage pipeline includes brensocatib and TPIP.
Brensocatib is a small molecule, oral, reversible inhibitor of DPP1, which we
are developing for the treatment of patients with bronchiectasis, CF and other
neutrophil-mediated diseases. TPIP is an inhaled formulation of the treprostinil
prodrug treprostinil palmitil which may offer a differentiated product profile
for PAH and PH-ILD. We have legal entities in the US, France, Germany, Ireland,
Italy, the Netherlands, Switzerland, the UK and Japan.

Refer to Part I, Item 1. "Business" for a summary of our ongoing commercial and
clinical programs for ARIKAYCE and our ongoing clinical programs for brensocatib
and TPIP.

Prior to 2019, we had not generated significant revenue and through December 31,
2021, we had an accumulated deficit of $2.3 billion. 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 and marketable securities as of December 31, 2021 will
enable us to fund our operations for at least the next 12 months.

Our ability to reduce our operating loss and begin to generate positive cash
flow from operations depends on the continued success in commercializing
ARIKAYCE and achieving positive results from the ARIKAYCE frontline clinical
trial program in order to obtain full approval of ARIKAYCE in the US and
potentially reach more patients. Additionally, our continued success also
depends on bringing additional clinical stage products to market, such as
brensocatib and TPIP. We expect to continue to incur substantial expenses
related to our research and development activities as we continue the ARIKAYCE
frontline clinical program, conduct the Phase 3 ASPEN trial for brensocatib, and
continue the trials for TPIP and future product candidates. We also expect to
continue to incur significant costs related to the commercialization of
ARIKAYCE. Our financial results may fluctuate from quarter to quarter and will
depend on, among other factors, the net sales of ARIKAYCE; the scope and
progress of our research and development efforts; and the timing of certain
expenses. We cannot predict whether or when new products or new indications for
marketed products will receive regulatory approval or, if any such approval is
received, whether we will be able to successfully commercialize such products
and whether or when they may become profitable.

KEY ELEMENTS OF OUR OPERATING RESULTS

Product revenue, net

Product revenues, net, consist of net sales of ARIKAYCE. In October 2018, we
began shipping ARIKAYCE to our customers in the US, which include specialty
pharmacies and specialty distributors. In December 2020 and February 2021, we
began commercial sales of ARIKAYCE in Germany and the Netherlands, respectively.
In July 2021, we began recognizing product revenue from commercial sales of
ARIKAYCE in Japan. In September 2021, we began commercial sales of ARIKAYCE in
Wales. We recognize revenue for product received by our customers net of
allowances for customer credits, including prompt pay discounts, service fees,
estimated rebates, including government rebates, such as Medicaid rebates and
Medicare Part D coverage gap reimbursements in the US, and chargebacks.

Cost of product revenue (excluding amortization of intangible assets)

Cost of product revenues (excluding amortization of intangible assets) consist
primarily of direct and indirect costs related to the manufacturing of ARIKAYCE
sold, including third-party manufacturing costs, packaging services, freight,
and allocation of overhead costs, in addition to royalty expenses and
revenue-based milestones. We began capitalizing inventory upon FDA approval of
ARIKAYCE. All costs related to inventory for ARIKAYCE prior to FDA approval were
expensed as incurred and therefore not included in cost of product revenues.

Research and development (R&D) expenditure

R&D expenses consist primarily of salaries, benefits and other related costs,
including stock-based compensation, for personnel serving in our research and
development functions, including medical affairs and program management. R&D

                                       61

————————————————– ——————————

Contents

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

Selling, general and administrative (SG&A) expenses

SG&A expenses consist primarily of salaries, benefits and other related costs,
including stock-based compensation, for our non-employee directors and personnel
serving in our executive, finance and accounting, legal and compliance,
commercial and pre-commercial, corporate development, field sales, information
technology and human resource functions. SG&A expenses also include professional
fees for legal services, consulting services, including commercial activities,
insurance, board of director fees, tax and accounting services and certain
milestones related to ARIKAYCE.

Amortization of intangible assets

Upon commercialization of ARIKAYCE, our intangible assets began to be amortized
over their estimated useful lives. The fair values assigned to our intangible
assets are based on estimates and assumptions we believe are reasonable based on
available facts and circumstances. Unanticipated events or circumstances may
occur that require us to review the assets for impairment.

Change in fair value of deferred and contingent consideration liabilities

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

Investment income and interest expense

Investment income consists of interest and dividend income earned on our cash
and cash equivalents and marketable securities. Interest expense consists
primarily of the accretion of debt discount, contractual interest costs and the
amortization of debt issuance costs related to our debt. Debt discount is
accreted, and debt issuance costs are amortized, to interest expense using the
effective interest rate method over the term of the debt. Our balance sheet
reflects debt, net of the debt discount, debt issuance costs paid to the lender,
and other third-party costs. Unamortized debt issuance costs associated with
extinguished debt are expensed in the period of the extinguishment.

RESULTS OF OPERATIONS

COVID-19 Update

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

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

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

                                       62

————————————————– ——————————

Contents

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

•Effective mid-December 2021, with the health and safety of our employees and
ARIKAYCE physicians, caregivers, and patients in mind, we required that all US
employees be fully vaccinated against COVID-19 with limited exceptions.

Though we continue to see use of ARIKAYCE, including new patient adds and
continued prescription renewals, there remains a general uncertainty regarding
the impact of COVID-19 on all aspects of our business, including how it will
impact our patients, physicians, employees, suppliers, vendors, business
partners and distribution channels. While the pandemic did not materially affect
our financial results and business operations through the year ended
December 31, 2021, we are unable to predict the impact that COVID-19 will have
on our financial position and operating results in future periods due to these
and other numerous uncertainties. We will continue to assess the evolving impact
of the COVID-19 pandemic and will make adjustments to our operations as
necessary.

Comparison of the years ended December 31, 2021 and 2020

Overview – Operating results

Our operating results for the year ended December 31, 2021included the following:

• Product revenue, net, up $24.0 millionor 14.6%, compared to the previous year due to the growth in sales of ARIKAYCE;

•Cost of product revenues (excluding amortization of intangibles) increased $4.3
million, or 10.7%, as compared to the prior year as a result of the increase in
sales of ARIKAYCE and the decrease in the benefit from the sale of inventory for
which the cost was incurred prior to FDA approval of ARIKAYCE;

•R&D expenses increased $91.6 million, or 50.6%, as compared to the prior year
primarily resulting from increases in clinical development and research costs
for our ongoing clinical trials;

•SG&A expenses increased $30.7 million, or 15.1%, as compared to the prior year
resulting from increases in compensation and benefit related expenses, as well
as increases related to our commercial launch efforts in Europe and Japan;

•The amortization of intangible fixed assets was in line with that of the previous year;

•Change in fair value of deferred and contingent consideration liabilities was
$7.3 million as a result of our Business Acquisition in the third quarter of
2021; and

• Interest charges increased $10.9 million compared to the previous year related to the increase in the debt discount for our debt.

Net loss for the year ended December 31, 2021 was $434.7 million, or $3.88 per
share-basic and diluted, compared with a net loss of $294.1 million, or $3.01
per share-basic and diluted, for the year ended December 31, 2020.

Product revenue, net

Product revenues, net, consists of net sales of ARIKAYCE. The following table
summarizes revenue by geography for the years ended December 31, 2021 and 2020
(in thousands):

                                     For the Year Ended December 31,                       Increase (decrease)
                                       2021                    2020                    $                       %
US                              $        159,510          $    157,520          $      1,990                 1.3%
Japan                                     16,006                     -                16,006                  NA
Europe and rest of world                  12,945                 6,893                 6,052                 87.8%
 Total product revenues, net    $        188,461          $    164,413          $     24,048                 14.6%


Product revenues, net, for the year ended December 31, 2021 increased to $188.5
million as compared to $164.4 million in 2020 as a result of the growth in sales
of ARIKAYCE due primarily to the launches in Japan and certain European markets.

                                       63

————————————————– ——————————

Contents

Cost of product revenue (excluding amortization of intangible assets)

Cost of product revenues (excluding amortization of intangibles) for the years
ended December 31, 2021 and 2020 were comprised of the following (in thousands):

                                         For the Year Ended December 31,                      Increase (decrease)
                                            2021                    2020                   $                      %
Cost of product revenues (excluding
amortization of intangibles)         $        44,152           $    39,872          $      4,280                10.7%
Cost of product revenues, as % of
revenues                                        23.4   %              24.3  %


Cost of product revenues (excluding amortization of intangibles) increased by
$4.3 million, or 10.7%, to $44.2 million for the year ended December 31, 2021 as
compared to $39.9 million in 2020. The increase in cost of product revenues
(excluding amortization of intangibles) in the year ended December 31, 2021 was
directly attributable to the increase in total revenues discussed above.

R&D expenses

R&D expenses for the years ended December 31, 2021 and 2020 were comprised of
the following (in thousands):

                                                           For the Years Ended December 31,                      Increase (decrease)
                                                               2021                    2020                   $                      %
External Expenses
Clinical development and research                      $         107,096          $    45,709          $     61,387               134.3%
Milestone payment to AstraZeneca                                       -               12,500               (12,500)             (100.0)%
Manufacturing                                                     29,503               16,912                12,591                74.5%
Regulatory, quality assurance, and medical
affairs                                                           17,734               15,557                 2,177                14.0%
Subtotal-external expenses                             $         154,333          $    90,678          $     63,655                70.2%
Internal Expenses
Compensation and benefit related expenses              $          82,909          $    63,507          $     19,402                30.6%
Stock-based compensation                                          17,814               11,789                 6,025                51.1%
Other internal operating expenses                                 17,688               15,183                 2,505                16.5%
Subtotal-internal expenses                             $         118,411          $    90,479          $     27,932                30.9%
 Total R&D expenses                                    $         272,744          $   181,157          $     91,587                50.6%


R&D expenses increased to $272.7 million during the year ended December 31, 2021
from $181.2 million in 2020. The $91.6 million increase was primarily due to a
$61.4 million increase in clinical development and research costs related to the
Phase 3 ASPEN trial of brensocatib and the initiation of the ARIKAYCE frontline
clinical trial program, a $25.4 million increase in compensation and benefit
related expenses and stock-based compensation due to an increase in headcount,
as well as a $12.6 million increase in manufacturing expenses to support ongoing
clinical trials, partially offset by the prior year's $12.5 million milestone
payment obligation due to AstraZeneca upon the first dosing in our Phase 3 ASPEN
trial.

External R&D expenses by product for the years ended December 31, 2021 and 2020 included the following (in thousands):

                                         For the Year Ended December 31,                      Increase (decrease)
                                            2021                    2020                   $                      %

ARIKAYCE external R&D expenses $61,887 $46,509

         $     15,378                33.1%
Brensocatib external R&D expenses              62,065               37,775                24,290                64.3%
Other external R&D expenses                    30,381                6,394                23,987                375.1%
 Total external R&D expenses        $         154,333          $    90,678          $     63,655                70.2%


We expect R&D expenses to increase in 2022 relative to 2021 primarily due to our
clinical trial activities and related spend including our Phase 3 ASPEN trial of
brensocatib, our confirmatory clinical trial of ARIKAYCE in a front-line
treatment setting for patients with MAC lung disease, our TPIP clinical trials
and other research efforts for future product candidates.

                                       64

————————————————– ——————————

  Table of Contents


SG&A Expenses

General and administrative expenses for the years ended December 31, 2021 and 2020 included the following (in thousands):

                                                       For the Years Ended December 31,                    Increase (decrease)
                                                           2021                    2020                   $                    %

Compensation and benefits expenses $84,447

   $    70,923          $     13,524              19.1%
Stock-based compensation                                      28,206               24,370                 3,836              15.7%
Professional fees and other external
expenses                                                      94,549               83,902                10,647              12.7%
Facility related and other internal expenses                  27,071               24,418                 2,653              10.9%
Total SG&A expenses                                $         234,273          $   203,613          $     30,660              15.1%


SG&A expenses increased to $234.3 million during the year ended December 31,
2021 from $203.6 million in 2020. The $30.7 million increase was primarily due
to a $17.4 million increase in compensation and benefit related expenses and
stock-based compensation due to an increase in headcount, as well as a $10.6
million increase in professional fees and other external expenses primarily
resulting from our commercial launch efforts in Japan and Europe and from
resuming certain commercial activities in the US.

Amortization of intangible assets

Amortization of intangible assets for the years ended December 31, 2021 and 2020
was $5.1 million and $5.0 million, respectively. Amortization of intangible
assets is comprised of amortization of acquired ARIKAYCE R&D and amortization of
the milestones paid to PARI for the FDA and EMA approvals of ARIKAYCE.

Change in fair value of deferred and contingent consideration liabilities

The change in fair value of deferred and contingent consideration liabilities
for the year ended December 31, 2021 was $7.3 million as a result of our
Business Acquisition in the third quarter of 2021. Adjustments to the fair value
are due to changes in factors such as the probability of achieving milestones,
our stock price, or certain other estimated assumptions.

Interest charges

Interest charges were $40.5 million for the year ended December 31, 2021 compared to $29.6 million for 2020. The $10.9 million increase in interest expense during the year December 31, 2021 compared to the prior year period is mainly attributable to the increase in the discount on our debt.

(Benefit) Provision for income taxes

The income tax benefit was $1.8 million for the year ended December 31, 2021 and
the income tax provision was $1.4 million for the year ended December 31, 2020.
The income tax benefit for the year ended December 31, 2021 is primarily due to
the partial reversal of a valuation allowance as a result of the Business
Acquisition in the third quarter of 2021. The income tax provision for the year
ended December 31, 2020 reflects the income tax expense recorded as a result of
taxable income in certain of our subsidiaries in Europe and Japan as well as a
liability for certain state income taxes.

Comparison of the years ended December 31, 2020 and 2019

Please refer to the section titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2020 for a comparative discussion of our
fiscal years ended December 31, 2020 and December 31, 2019.

CASH AND CAPITAL RESOURCES

Overview

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

In May 2021, we completed an underwritten public offering of $575.0 million
aggregate principal amount of the 2028 Convertible Notes, including the exercise
in full of the underwriters' option to purchase additional notes. Our net
proceeds from the offering, after deducting underwriting discounts and offering
expenses of $15.7 million, were $559.3 million. A portion of the net proceeds
from the 2028 Convertible Notes was used to repurchase $225.0 million of our
outstanding 2025 Convertible

                                       65

————————————————– ——————————

Contents

Remarks. We recorded a loss on early extinguishment of debt of $17.7 millionmainly linked to the premium paid on the extinction of part of the 2025 Convertible Bonds.

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

In the first quarter of 2021, we entered into a sales agreement with SVB Leerink
to sell shares of our common stock, with aggregate gross sales proceeds of up to
$250.0 million, from time to time, through an at-the market (ATM) offering
program, under which SVB Leerink acts as sales agent. As of December 31, 2021,
we had not sold or issued any shares under the ATM program.

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

In the second quarter of 2019, we completed an underwritten public offering of
10,657,692 shares of common stock, including 1,042,307 shares issued pursuant to
the exercise in full of the underwriters' option to purchase additional shares
at a public offering price of $26.00. Our net proceeds from the sale of the
shares, after deducting underwriting discounts and commissions and other
offering expenses of $16.0 million, were $261.1 million. The offering also
included the sale of 400,000 shares from our Chair and Chief Executive Officer,
from which we received no proceeds.

We may need to raise additional capital to fund our operations, including the
Phase 3 ASPEN study, the continued commercialization of ARIKAYCE, the ARISE and
ENCORE clinical trials related to ARIKAYCE, launch readiness activities for the
potential launch of brensocatib, if approved, other clinical trials for
brensocatib, TPIP, and our future product candidates, and to develop, acquire,
in-license or co-promote other products or product candidates, including those
that address orphan or rare diseases. While we believe we currently have
sufficient funds to meet our financial needs for at least the next 12 months, we
expect to opportunistically raise additional capital and may do so through
equity or debt financing(s), strategic transactions or otherwise. Our cash
requirements for the next 12 months will be impacted by a number of factors, the
most significant of which we expect to be the ASPEN trial, expenses related to
our commercialization efforts and our ARISE and ENCORE clinical trials for
ARIKAYCE, and other development activities for brensocatib, and to a lesser
extent, expenses related to the clinical development of TPIP and other product
candidates.

Cash Flows

As of December 31, 2021, we had cash and cash equivalents of $716.8 million, as
compared with $532.8 million as of December 31, 2020. In addition, as of
December 31, 2021, we also had marketable securities of $50.0 million. The
$184.0 million increase in cash and cash equivalents was primarily due to our
May 2021 underwritten public offerings of the 2028 Convertible Notes and our
common stock, partially offset by the repurchase of a portion of our 2025
Convertible Notes and cash used in operating activities. Our working capital was
$701.9 million as of December 31, 2021 as compared with $504.1 million as of
December 31, 2020.

Net cash used in operating activities was $363.3 million and $219.3 million for
the years ended December 31, 2021 and 2020, respectively. The net cash used in
operating activities during the years ended December 31, 2021 and 2020 was
primarily for the commercial, clinical and manufacturing activities related to
ARIKAYCE, as well as other SG&A expenses and clinical trial expenses related to
brensocatib and TPIP. The increase in cash used in operating activities for the
year ended December 31, 2021 compared to 2020 was primarily due to the increase
in R&D expenses to support our ongoing clinical trials. The increase was also
due to the net change in working capital, driven by an in increase in other
assets and accounts receivable and a decrease in accounts payable.

Net cash used in investing activities was $64.3 million and $6.8 million for the
years ended December 31, 2021 and 2020, respectively. The net cash used in
investing activities during the years ended December 31, 2021 and 2020 was for
purchases of available-for-sale securities and purchases of fixed assets in
2021, and purchases of fixed assets in 2020.

Net cash provided by financing activities was $612.5 million and $271.0 million
for the years ended December 31, 2021 and 2020, respectively. Net cash provided
by financing activities was primarily due to net cash proceeds from the issuance
and extinguishment of debt during the year ended December 31, 2021 and the net
proceeds from the issuance of common stock during the years ended December 31,
2021 and 2020.

Contractual Obligations

In May 2021we completed a bought deal public offering of $575.0 million
aggregate principal amount of the 2028 Convertible Bonds under an indenture between the Company and Wells Fargo Bank, National Associationas trustee (the

                                       66

————————————————– ——————————

Contents

Indenture). Our net proceeds from the offering, after deducting underwriting
discounts and offering expenses of $15.7 million, were $559.3 million. The 2028
Convertible Notes bear interest payable semiannually in arrears on June 1 and
December 1 of each year, beginning on December 1, 2021. The 2028 Convertible
Notes mature on June 1, 2028, unless earlier converted, redeemed, or
repurchased. The 2028 Convertible Notes are convertible into common stock of the
Company under certain circumstances described in the indenture. For more
information, see Note 8 - Debt in our notes to the consolidated financial
statements.

In January 2018, we completed an underwritten public offering of $450.0 million
aggregate principal amount of the 2025 Convertible Notes pursuant to the
Indenture. 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. A portion of the net proceeds from the 2028
Convertible Notes was used to repurchase $225.0 million of the Company's
outstanding 2025 Convertible Notes. The Company recorded a loss on early
extinguishment of debt of $17.7 million, primarily related to the premium paid
on extinguishment of a portion of the 2025 Convertible Notes. The 2025
Convertible Notes bear interest payable semiannually in arrears on January 15
and July 15 of each year, beginning on July 15, 2018. The 2025 Convertible Notes
mature on January 15, 2025, unless earlier converted, redeemed, or repurchased.
The 2025 Convertible Notes are convertible into common stock of the Company
under certain circumstances described in the Indenture. For more information,
see Note 8 - Debt in our notes to the consolidated financial statements.

In April 2020, we entered into a master services agreement with PPD pursuant to
which we retained PPD to perform clinical development services in connection
with certain of our clinical research programs. The master services agreement
has an initial term of five years. Either party may terminate (i) any project
addendum under the master services agreement for any reason and without cause
upon 30 days' written notice, (ii) any project addendum in the event of the
other party's breach of the master services agreement or such project addendum
upon 30 days' written notice, provided that such breach is not cured within such
30-day period, (iii) the master services agreement or any project addendum
immediately upon the occurrence of an insolvency event with respect to the other
party or (iv) any project addendum upon 30 days' written notice if (a) the
continuation of the services under such project addendum would post material
ethical or safety risks to study participants, (b) any approval from a
regulatory authority necessary to perform the applicable study is revoked,
suspended or expires without renewal or (c) in the reasonable opinion of such
party, continuation of the services provided under such project addendum would
be in violation of applicable law. We have entered into project addenda with PPD
to perform clinical development services over several years for, but not limited
to, our ARISE, ENCORE, ASPEN studies and other brensocatib and TPIP studies. We
currently expect to incur approximately $280 million of costs related to these
project addenda.

In September 2018, we entered into an agreement (the Lease) with Exeter 700
Route 202/206, LLC to lease 117,022 square feet of office space located in
Bridgewater, New Jersey for our corporate headquarters. Subject to certain
conditions, we have the one-time option to expand the leased premises by up to
50,000 rentable square feet, exercisable prior to the fifth anniversary of the
Commencement Date, which was October 1, 2019. The initial Lease term runs 130
months from the Commencement Date and we have the option to extend that term for
up to three additional five-year periods. In addition, we are responsible for
operating expenses and taxes pursuant to the Lease. Future minimum payments
under the Lease during the initial Lease term are approximately $21.4 million.
The Lease contains customary default provisions, including those relating to
payment defaults, performance defaults and events of bankruptcy.

In October 2017, we entered into certain agreements with Patheon related to the
increase of our long-term production capacity for ARIKAYCE. The agreements
provide for Patheon to manufacture and supply ARIKAYCE 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 ARIKAYCE. 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 aggregate investment to increase our long-term production
capacity, 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 $80 million.

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 brensocatib). 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. In December 2020, we incurred a $12.5 million milestone
payment obligation upon first dosing in a Phase 3 clinical trial of brensocatib.
We are obligated to make a series of additional contingent milestone payments to
AstraZeneca totaling up to an additional $72.5 million upon the achievement of
clinical development and regulatory filing milestones. If we elect to develop
brensocatib for a second indication, we will be obligated to

                                       67

————————————————– ——————————

Contents

make an additional series of contingent milestone payments totaling up to
$42.5 million, the first of which occurs at the initiation of a Phase 3 trial in
the additional indication. 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-teens on
net sales of any approved product based on brensocatib 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 brensocatib in
chronic obstructive pulmonary disease or asthma.

In September 2015, we entered into the Fill/Finish Agreement with Althea, for
Althea to produce, on a non-exclusive basis, ARIKAYCE 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 ARIKAYCE produced each calendar year
during the term of the Fill/Finish Agreement. The Fill/Finish Agreement became
effective as of January 1, 2015, and following extensions in 2018 and 2021, the
agreement remains in effect until December 31, 2022. Currently, Althea
manufactures placebo for use in our ARIKAYCE clinical trials.

We have a licensing agreement with PARI for the use of optimized Lamira for
delivery of ARIKAYCE 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
optimized Lamira, to exploit the system with ARIKAYCE for the treatment of such
indications, but we cannot manufacture the nebulizers except as permitted under
our Commercialization Agreement with PARI, as described below. Lamira has been
approved for use in the US (in combination with ARIKAYCE), the EU and Japan.
Under the licensing agreement, we made an upfront license fee and milestone
payments to PARI. Upon FDA acceptance of our NDA and the subsequent FDA and EMA
approvals of ARIKAYCE, we made additional milestone payments of €1.0 million,
€1.5 million, and €0.5 million, respectively, to PARI. In October 2017, we
exercised an option to buy-down the royalties payable to PARI, which was
included within selling, general and administrative expenses in the fourth
quarter of 2017. PARI is entitled to receive royalty payments in the mid-single
digits on the annual global net sales of ARIKAYCE, pursuant to the licensing
agreement, subject to certain specified annual minimum royalties.

In July 2014, we entered into a Commercialization Agreement with PARI for the
manufacture and supply of Lamira as optimized for use with ARIKAYCE. Under the
Commercialization Agreement, PARI manufactures Lamira except in the case of
certain defined supply failures, when the Company will have the right to make
Lamira 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 that began in
October 2018. 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 February 2014, we entered into a contract manufacturing agreement with
Therapure Biopharma Inc., which has been assumed by Resilience, for the
manufacture of ARIKAYCE, on a non-exclusive basis, at a 200 kg scale. Pursuant
to the agreement, we collaborated with Resilience to construct a production area
for the manufacture of ARIKAYCE in Resilience's existing manufacturing facility
in Canada. The agreement has an initial term of five years, which began in
October 2018, 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 ARIKAYCE produced each
calendar year.

In 2004 and 2009, we entered into research funding agreements with CFFT whereby
we received $1.7 million and $2.2 million in research funding for the
development of ARIKAYCE. As a result of the US approval of ARIKAYCE and in
accordance with the agreements, as amended, we owe milestone payments to CFFT of
$13.4 million in the aggregate payable through 2025, of which $2.5 million has
been paid as of December 31, 2021. Furthermore, if certain global sales
milestones are met within five years of the commercialization of ARIKAYCE, we
would owe up to an additional $3.9 million. We have determined the likelihood of
meeting such global sales milestones and have accrued for these contingent
obligations proportionally based on net sales of ARIKAYCE.

Future funding needs

We may need to raise additional capital to fund our operations, including the
continued commercialization of ARIKAYCE, current and future clinical trials
related to ARIKAYCE, development of brensocatib and TPIP, and the potential
development, acquisition, in-license or co-promotion of other products or
product candidates, including those that address orphan or rare diseases. We
expect that our future capital requirements may be substantial and will depend
on many factors, including:

• The timing and cost of our ongoing and planned clinical trials for our product candidates, including our Phase 3 ASPEN trial;

• The timing and cost of our current and future clinical trials of ARIKAYCE for the treatment of patients with NTM lung infections, including the ARISE and ENCORE trials;

                                       68

————————————————– ——————————

Contents

•The cost of discovering or licensing additional product candidates;

•The costs of activities related to the regulatory approval process and the timing of approvals, if received;

•The cost of supporting sales and marketing efforts necessary to support ARIKAYCE’s ongoing business efforts;

•The cost of any support for commercial launches of brensocatib, TPIP and our other product candidates;

• The cost of filing, prosecuting, defending and enforcing patent claims;

•The costs of our manufacturing-related activities;

•The cost of hiring more staff to support our ongoing development and commercialization efforts;

• The levels, timing and collection of revenue from sales of ARIKAYCE and other approved products in the future, if any.

We have raised $1.3 billion in net proceeds from securities offerings since
2019. 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 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 ESTIMATES

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 and we regularly evaluate these estimates and assumptions. The
amounts of assets and liabilities reported in our consolidated balance sheets
and the amounts reported in our consolidated statements of comprehensive loss
are affected by estimates and assumptions, which are used for, but not limited
to, the accounting for revenue recognition and indefinite-lived intangible
assets. The accounting estimates discussed below involve a significant level of
estimation uncertainty and have had or are reasonably likely to have a material
impact on our financial condition or results of operations. Actual results could
differ materially from our estimates. For additional accounting policies, see
Note 2 to our Consolidated Financial Statements-Summary of Significant
Accounting Policies.

Revenue recognition

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

Product revenues, net, consist of net sales of ARIKAYCE. Our customers in the US
include specialty pharmacies and specialty distributors. In December 2020, we
began recognizing product revenue from commercial sales of ARIKAYCE in Europe.
In July 2021, we began recognizing product revenue from commercial sales of
ARIKAYCE in Japan. Globally, product revenues are recognized once we perform and
satisfy all five steps of the revenue recognition criteria mentioned above.

Revenue is recorded at net selling price (transaction price), which includes
estimates of variable consideration for which reserves are established for
estimated government rebates, such as Medicaid and Medicare Part D
reimbursements, and estimated managed care rebates. These reserves are based on
the amounts earned or to be claimed on the related sales and are classified as a
current liability. Where appropriate, these estimates take into consideration a
range of possible outcomes which are probability-weighted for relevant factors
such as our historical experience, current contractual and statutory
requirements, and forecasted customer buying and payment patterns. Overall,
these reserves reflect our best estimates of the amount of consideration to
which we are entitled based on the terms of the applicable contract. The amount
of variable consideration included in the transaction price may be constrained
and is included in the net sales price only to the extent that it is probable

                                       69

————————————————– ——————————

Contents

that a significant reversal in the amount of the cumulative revenue recognized
will not occur in a future period. Actual amounts of consideration ultimately
received may differ from our estimates. If actual results in the future vary
from estimates, we adjust these estimates, which would affect net product
revenue and earnings in the period such variances become known.

Rebates: We contract with government agencies and managed care organizations, or
collectively, third-party payors, so that ARIKAYCE will be eligible for purchase
by, or partial or full reimbursement from, such third-party payors. We estimate
the rebates we will provide to third-party payors and deduct these estimated
amounts from total gross product revenues at the time the revenues are
recognized. These reserves are recorded in the same period in which the revenue
is recognized, resulting in a reduction of product revenue and the establishment
of a current liability. The current liability is included in accrued liabilities
on the consolidated balance sheets. We estimate the rebates that will be
provided to third-party payors based upon (i) our contracts with these
third-party payors, (ii) the government mandated discounts applicable to
government-funded programs, (iii) a range of possible outcomes that are
probability-weighted for the estimated payor mix, and (iv) information obtained
from our specialty pharmacies.

If some or all of our actual experience differs from the above estimates, we may need to adjust prior period accruals, which will affect revenue during the adjustment period.

Indefinite life intangible assets

Indefinite-lived intangible assets consist of In-Process Research & Development
(IPR&D). IPR&D acquired directly in a transaction other than a business
combination is capitalized if the projects will be further developed or have an
alternative future use; otherwise they are expensed. The fair values of IPR&D
project assets acquired in business combinations are capitalized. We generally
utilize the Multi-Period Excess Earning Method to determine the estimated fair
value of the IPR&D assets acquired in a business combination. The projections
used in this valuation approach are based on many factors, such as relevant
market size and share, probabilities of success, anticipated patent protection,
and expected pricing. The estimated future net cash flows are then discounted to
the present value using an appropriate discount rate. These assets are treated
as indefinite-lived intangible assets until completion or abandonment of the
projects, at which time the assets are amortized over the remaining useful life
or written off, as appropriate.

Intangible assets with indefinite lives, including IPR&D, are tested for
impairment if impairment indicators arise and, at a minimum, annually. However,
an entity is permitted to first assess qualitative factors to determine if a
quantitative impairment test is necessary. Further testing is only required if
the entity determines, based on the qualitative assessment, that it is more
likely than not that an indefinite-lived intangible asset's fair value is less
than its carrying amount. Otherwise, no further impairment testing is required.
The indefinite-lived intangible asset impairment test consists of a one-step
analysis that compares the fair value of the intangible asset with its carrying
amount. If the carrying amount of an intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess. We consider
many factors in evaluating whether the value of our intangible assets with
indefinite lives may not be recoverable, including, but not limited to, expected
growth rates, the cost of equity and debt capital, general economic conditions,
our outlook and market performance of our industry and recent and forecasted
financial performance.

For more information regarding our estimates, including the quantitative impacts on our financial results, see Note 2 to our Consolidated Financial Statements – Summary of Significant Accounting Policies.

© Edgar Online, source Previews