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Edited Transcript of INSM earnings conference call or presentation 25-Feb-20 1:30pm GMT

Q4 2019 Insmed Inc Earnings Call

RICHMOND Mar 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Insmed Inc earnings conference call or presentation Tuesday, February 25, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eugene J. Sullivan

Insmed Incorporated - Chief Product Strategy Officer

* Roger Adsett

Insmed Incorporated - COO

* Sara M. Bonstein

Insmed Incorporated - CFO

* William H. Lewis

Insmed Incorporated - President, CEO & Chairman

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Conference Call Participants

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* Adam Anderson Walsh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Graig Suvannavejh

Goldman Sachs Group Inc., Research Division - Executive Director & Senior Equity Research Analyst

* Liisa Ann Bayko

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Mark William Connolly

Crédit Suisse AG, Research Division - Research Analyst

* Matthew Kelsey Harrison

Morgan Stanley, Research Division - Executive Director

* Ritu Subhalaksmi Baral

Cowen and Company, LLC, Research Division - MD & Senior Biotechnology Analyst

* Eleanor Barriser;Argot Partners, LLC;Assistant Vice President

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Presentation

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Operator [1]

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Good day and welcome to the Insmed Fourth Quarter and Full Year 2019 Results Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Eleanor Barriser, Investor Relations. Please go ahead.

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Eleanor Barriser;Argot Partners, LLC;Assistant Vice President, [2]

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Thank you, Elissa. Good morning, and welcome to today's conference call to discuss our fourth quarter and full year financial results for 2019 and provide a business update. Please note this conference call features slides, which can be found through the webcast on the Events and Presentations page of the Insmed website. Before we start, let me remind you that today's call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today, and may involve risks and uncertainties that may cause actual results to differ materially from the results discussed in the forward-looking statements.

Please refer to our filings with the SEC, which are available through the SEC's website at www.sec.gov or from our website for information concerning the risk factors that could affect the company.

We plan to reference a non-GAAP financial measure during today's call. For a reconciliation of that measure to our GAAP results, please refer to the earnings release we issued earlier today.

Additionally, the information on today's call is not intended for promotional purposes and not sufficient for prescribing decisions.

Joining me on today's call are members of the Insmed executive management team, including Will Lewis, Chairman and Chief Executive Officer; Roger Adsett, Chief Operating Officer; Dr. Martina Flammer, Chief Medical Officer; Dr. Eugene Sullivan, Chief Product Strategy Officer; and Sara Bonstein, Chief Financial Officer.

Let me now turn the call over to Will Lewis for prepared remarks. Upon completion of those remarks, we will open the call up for your questions.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [3]

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Thank you, Eleanor. Good morning, everyone, and thank you for joining us. 2019 proved to be a remarkable year for Insmed. We executed across all areas of our business and advanced our mission of transforming the lives of patients with serious and rare diseases. The start of 2020 finds us with significant momentum having just concluded our first full year as a commercial enterprise, following the successful U.S. launch of ARIKAYCE. And having released the top line results of our Phase II WILLOW study in non-CF bronchiectasis.

In addition, several new members of the senior management team recently joined our ranks to help us accomplish our mission. These include: Dr. Martina Flammer, our Chief Medical Officer; Sara Bonstein, our Chief Financial Officer; and Fred Zussa, our Senior Vice President of Business Development. Their arrival heralds the start of a new chapter in Insmed's history as we prudently resourced the advancement of several incredibly promising programs and international expansion efforts.

Today's call will also feature a more detailed look at our pipeline and the introduction of 2 new programs. As you can see on Slide 5, with the talent, resources and history of successful execution, Insmed is poised for significant potential growth over the coming years. Importantly, what this means for our investors is that we are now a company guiding both commercial and clinical development in several programs, each of which we believe has the potential to generate in excess of $1 billion in revenue in markets with no alternative approved treatment options. In particular, ARIKAYCE enjoys multiple layers of market exclusivity, and has issued patent protection into 2035 in the United States, Europe and Japan and through 2033 in China.

Similarly, for INS1007, we have broad patent protection into 2035 in the United States, Europe, Japan and China with the opportunity for additional patent extensions. It is rare to find a company with such a wealth of promising development opportunities for diseases with unmet needs built upon a successful commercial track record. Behind each of those substantial potential opportunities, are a vast number of patients who will potentially benefit from first-ever approved compounds in their respective diseases.

This is what drives us to execute against these significant opportunities. 2019 was arguably the strongest year yet in Insmed's history, and our achievements across all areas of the business have laid the groundwork for our next wave of growth as we seek to build a leading global multiproduct biopharmaceutical company.

Let me now turn the call over to Roger for an operational update. Roger?

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Roger Adsett, Insmed Incorporated - COO [4]

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Thanks, Will, and good morning, everyone. From an operational perspective, I'm pleased to report that we are well positioned to execute on our strategy. We continue to deliver across all areas of our organization, including research and development, manufacturing, international expansion and commercial execution and look forward to another standout year.

During today's call, I want to primarily focus on our commercial organization. As shown on Slide 7, I'm pleased to report that we had a strong finish to the year, maintaining a solid performance around the U.S. commercialization of ARIKAYCE and with continued inroads into our global expansion opportunities.

Let's now turn to Slide 8. As we announced earlier today, we reported total net sales of $136.5 million for 2019, coming in at the higher end of our guidance of $133 million to $138 million for the year. $132.1 million of these sales is attributable to the U.S., and $4.4 million is attributable to our compassionate use and named-patient programs in France and Germany.

For the fourth quarter, we reported net sales of $45.7 million, with $44.3 million attributable to U.S. sales, and $1.4 million attributable to our compassionate use and named-patient programs. Sara will discuss our 2020 financial guidance later in the call, but I wanted to provide our perspective on our landscape in the year ahead.

We believe there are a number of potential catalysts at play as we look to build upon our 2019 success. First, we expect a peer-reviewed paper will soon be published that will provide potential practical solutions to address the most common adverse events that can accompany uses of ARIKAYCE in the treatment of refractory MAC lung disease. Second, we anticipate the near-term introduction of new guidelines from multiple scientific societies, including the American Thoracic Society or ATS, and the Infectious Diseases Society of America, or IDSA, which we remain optimistic will support the use of ARIKAYCE for appropriate patients.

Third, while we made strong inroads with patients in the first 15 months since U.S. launch, there remains a significant number of the estimated 12,000 to 17,000 refractory MAC patients in the U.S. still eligible for treatment. And while we have made great progress in reaching physicians, and have had over 1,900 physicians prescribe ARIKAYCE, that leaves approximately 3,000 of our initial targets who have not yet initiated patients on therapy.

Finally, 2020 will be the first year where we will begin to get a greater understanding of the duration of therapy for patients as well as the potential retreatment of patients who experience a reinfection. With that said as background, I'll first address new patient starts, which were approximately 550 in the fourth quarter. This number is down slightly from the third quarter, but consistent with our expectations for variability of the metric quarter-to-quarter. In the fourth quarter, we anticipated a decline in patients initiating therapy around the year-end due to the holidays.

Early signs in the first quarter of 2020 indicate that the annual donut hole effect resulting in an extended time to fill prescriptions will be significant. As many of you know, at the beginning of the year, many patients' deductibles reset, forcing patients to pay out of pocket. This can be particularly problematic for patients insured through Medicare as Insmed is unable to directly assist patients with government insurance. As you may recall, approximately 55% of ARIKAYCE patients are insured by Medicare. This trend is common at this time of the year, and we do not expect its impact to extend beyond the first quarter.

Despite these 2 seasonal trends, we believe that for 2020, it is reasonable to expect new patient starts to remain, on average, consistent with prior quarters. We see a continued strong propensity to prescribe ARIKAYCE in the treating community, and believe there are still many refractory MAC patients who have not yet been prescribed ARIKAYCE who may benefit from our product. We expect to make steady progress with physicians to initiate appropriate patients on therapy, and look forward to seeing how the growth drivers mentioned earlier play out over the course of the year.

Growth remained steady in the number of prescribers with over 1,900 physicians in the U.S. having written at least 1 prescription since launch. We remain very focused on our efforts to increase the breadth and depth of prescribing. Recently, we have been engaged with those physicians with a history of prescribing ARIKAYCE. With the expected upcoming publication of new treatment guidelines and the peer-reviewed publication proposing practical solutions to help manage adverse events, we intend to introduce a new initiative to target and educate those physicians with less experience in treating refractory MAC. We believe the impact of these new features in 2020 could serve to maintain commercial momentum.

As we advance the U.S. commercialization of ARIKAYCE, we remain proudest of the patient experience. We continue to invest in education of both health care professionals and patients to educate them on the potential adverse events associated with ARIKAYCE as well as training on our nebulizer.

Discontinuations of ARIKAYCE in the first 90 days remained steady compared to the prior quarter, and continue to trend better than the 34% reported in our Phase III CONVERT study. We believe this is the result of the appropriate setting of expectations with patients and physicians, as well as continued support from our Arikares patient support team. We expect that the publication of the paper proposing practical solutions to manage adverse events will further enhance these efforts. We anticipate that this discontinuation rate may improve slightly over time.

We now have a large number of patients using ARIKAYCE in the U.S. We are learning more about the average patient usage profile, but there are some important trends that remain to be seen. These include duration of use for patients as well as reinfection and subsequent retreatment rates, which are not yet consistent enough to allow accurate forecasting. We expect these trends will come into clearer focus later this year.

We expect the most significant potential catalyst impacting the patient usage profile will be the issuance of new guidelines. We view their arrival as an important opportunity to reinforce the appropriate approach to treating refractory MAC patients, including the recommended duration of therapy for these patients. As a reminder, the current guidelines recommend treating with a triple combination that includes a macrolide, ethambutol and rifampin to culture conversion plus an additional 12 months on therapy. For patients who do not achieve conversion, these guidelines recommend that physicians evaluate whether there is a benefit to continuing therapy.

We are also closely monitoring adherence to the treatment regimen, and we see a modest improvement over recent quarters with adherence remaining slightly above the benchmark rates of 60% to 70% seen with other inhaled antibiotics. As far as reimbursement, we continue to experience a supportive payer environment and positive trends for ARIKAYCE, with initial approval generally achieved through physician attestation for appropriate refractory MAC lung disease patients.

We fully expect this practice to continue in 2020. We also continue to observe that reauthorizations have not been an issue. We have executed a handful of contracts with major payers and continue to evaluate other potential contracting arrangements. We only plan to execute these when we feel that the terms are fair and will enhance access for patients.

Turning to our global expansion efforts, as seen on Slide 9. In Japan, which, as a reminder, has the highest diagnosed MAC patient population, we are on track to file for a regulatory submission of ARIKAYCE in the first quarter of 2020, slightly ahead of our previous guidance of a first half submission.

In addition, we are extremely excited to announce a new strategic pre-commercial agreement in Japan. We have partnered with a top generic manufacturer of one of the approved components of the current MAC standard of care, a macrolide. Unlike in the U.S., in Japan, the standard of care of macrolide, ethambutol and rifampin is approved for the treatment of MAC lung disease. Through this collaboration, we are able to deploy an intimate sales force that will be dedicated to educating Japanese physicians on MAC lung disease, and promoting the appropriate standard of care regimen, including use of a macrolide to treat patients.

We intend this innovative partnership to allow our sales force, in compliance with Japanese law, to establish and build relationships with physicians who are seeing and treating MAC lung disease patients. We expect to begin to hire our sales team in the first half of the year to execute on this opportunity.

In Europe, we continue to work with the European Medicines Agency or EMA, with respect to our Marketing Authorization Application or MAA. The MAA has been validated by the EMA, and we expect that if approved, we can potentially launch ARIKAYCE by the end of the year in Germany, with the U.K. following shortly thereafter.

We continue to believe that the undiagnosed patient population is sizable in Europe. However, we anticipate uptake in Europe will be much slower than the U.S. because once approved, we'll have to secure pricing in each country before sales can be generated. The model in Europe is also different than in the U.S. with a heavier focus on centers of excellence for the treatment of MAC lung disease. As such, we would not expect any material sales from a European launch this year, but rather, would expect to see an uptick beginning in 2021.

That said, we expect to continue to see compassionate use in named-patient sales in 2020 from certain markets outside the U.S. We have made significant progress with the commercialization of ARIKAYCE in the U.S. We are working diligently to maintain the strength of the brand and maximize the long-term potential of ARIKAYCE in the U.S., Europe and Japan. I'm very excited about what lies ahead. I want to congratulate the team for their continued commitment to the NTM community.

In anticipation of additional launches and product demand from new geographies and label expansion opportunities, we are on track with our third and largest manufacturing facility. We have partnered with Patheon and expect to bring this 450 liter facility online in 2021, which will more than double our manufacturing capacity.

With that, I'll hand the call over to our Chief Product Strategy Officer, Dr. Eugene Sullivan, to provide an update around the clinical and development programs. Gene?

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Eugene J. Sullivan, Insmed Incorporated - Chief Product Strategy Officer [5]

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Thanks, Roger. This is a particularly exciting time for Insmed with a number of important clinical advances taking place across all of our programs. I will address each of these.

To begin with, we were thrilled with the outcome of the WILLOW study of once-daily INS1007 in patients with non-CF bronchiectasis. Let's now turn to Slide 11 for an overview. To remind you, INS1007 is a novel oral reversible inhibitor of dipeptidyl peptidase 1 or DPP1, an enzyme that catalyzes activation of neutrophil serine proteases or NSPs. NSPs are key mediators of neutrophil-driven inflammation, tissue damage and excessive mucus production, which are prominent features of bronchiectasis.

The WILLOW data has highlighted a significant opportunity for Insmed, representing a promising new approach to modulating neutrophil activity. Given its novel mechanism of action, INS1007 could have applicability in a broad range of diseases, resulting in a pipeline and a product. We are proud to have what we believe to be the most advanced program in development, leveraging this new mechanism of action and are pleased with this first data in non-CF bronchiectasis. Bronchiectasis stands out as one of the more significant pulmonary diseases with no approved therapies. It is marked by frequent pulmonary exacerbations requiring antibiotic therapy and/or hospitalization.

Prevalence estimates for non-CF bronchiectasis range from about 340,000 to 520,000 in the U.S. with significant overlap with patients who have NTM lung disease. Given the strength of the top line results we observed in the WILLOW study, we plan to focus the Phase III program on bronchiectasis patients with 2 or more exacerbations within the prior year. According to our market research, this profile could represent approximately 2/3 of the potential U.S. patient population or 225,000 to 350,000 patients.

Slide 12 depicts the Phase II WILLOW study design. 256 adult patients were randomized to 1 of 3 arms: 10 milligrams of 1007, 25 milligrams of 1007 or placebo for 24 weeks with a 4-week post-treatment follow-up.

Turning to Slide 13, which shows the baseline characteristics across the 3 groups. The patient demographics highlights the severity of the condition. Over 30% of patients had been hospitalized for exacerbation in the preceding 2 years. It is also notable to see that a significant portion of the patients had coexisting COPD or asthma, conditions where INS1007 might also be expected to have an impact based on their underlying disease processes.

Turning now to Slide 14. Based on top line data, the WILLOW study met its primary endpoint of time to first pulmonary exacerbation over the 24-week treatment period for both the 10-milligram and 25-milligram dosage groups of INS1007 compared to placebo. As we have previously disclosed, the prespecified primary analysis demonstrated statistically significant results for both treatment groups, with p-values of 0.027 and 0.044 for the 10-milligram and 25-milligram groups, respectively.

Today, we can share the hazard ratios for each group. As you can see, for the 10-milligram group, the hazard ratio was 0.58 with a p-value of 0.029. For the 25-milligram group, the hazard ratio was 0.62 with a p-value of 0.046. We believe these results are compelling. For a patient, this means that the risk of having an exacerbation over the course of 6 months could be reduced by up to 40% when treated with INS1007.

Let's drill down on this data and look at the hazard ratio by subgroups, as shown on the forest plots on Slide 15. Here, you can see that for both the 10-milligram and 25-milligram doses, the point estimates of the hazard ratios favored INS1007 for nearly every subgroup. We view the consistency in this data across the various subgroups as quite compelling. The only subgroup that falls to the right side of the hazard ratio of 1 is the small group of patients aged 75 and older in the 25-milligram dose group. There were only 14 patients in this subgroup, which resulted in very large confidence samples.

Let's move on to Slide 16. As we disclosed in our top line release, treatment with INS1007 also resulted in a reduction in the frequency of pulmonary exacerbations versus placebo. This is an endpoint of particular interest because the FDA has indicated that frequency of pulmonary exacerbation should be the primary endpoint in our Phase III program.

Over the course of the 6-month study, patients treated with INS1007 experienced a 36% reduction in the frequency of events in the 10-milligram arm, with a p-value of 0.041 and a 25% reduction in the 25-milligram arm with a p-value of 0.167 versus placebo.

We expect that our Phase III program will run for 1 year, so we may see a magnified impact or more evidence of a dose response during that longer study. As we did for the primary endpoint, we also conducted a number of analyses to look at results for the frequency of exacerbations in various subgroups. The forest plots for both doses are shown on Slide 17. The results of these subgroup analyses were very similar to those seen with the primary endpoint, with nearly all of the point estimates favoring INS1007.

Let me take a moment to address some questions we received about the dose response curve. Because of the effect sizes for the 10-milligram and the 25-milligram group were similar in the top line analyses, it is reasonable to wonder whether the 10 milligrams is already at the top of the dose response curve for clinical efficacy. We think it is very important to examine the data carefully in order to understand whether the 25-milligram dose might be expected to offer important additional clinical benefit over the 10-milligram dose, particularly in the setting of a longer Phase III program.

Therefore, we are conducting a series of additional analyses to further explore the WILLOW data. For instance, we are evaluating whether factors such as randomization imbalances or outliers may have impacted the observed effect sizes, and whether events that occurred soon after randomization, before INS1007 could be expected to exert its effect, may have obscured a signal of increased benefit of the 25-milligram dose. In addition, examination of secondary endpoints and pharmacokinetic exposure response modeling will help us to better assess both dosing options. I know some of you have asked if we have seen evidence of an inverted dose response, that is not the case.

As we have drilled down into the data, including the subgroup and sensitivity analyses discussed here today, we believe that we may have 2 viable doses to consider taking forward. The top line results suggest that 10 milligrams might be nearing the top of the dose response curve, but additional analyses may suggest that 25 milligrams might provide additional clinical benefit and a longer Phase III program. We are very encouraged by the strength and consistency of the efficacy data across both dose groups and patient populations.

Turning to safety, shown on Slide 18. INS1007 was generally well tolerated in the study. AEs were generally mild to moderate in nature. The most common AEs in patients in the WILLOW study were cough, headache, sputum increase, dyspnea, fatigue and upper respiratory tract infection. Interestingly, the incidence of adverse events leading to discontinuation of treatment was actually higher in the placebo group than in either of the active treatment groups, with 10.6% in the placebo group, 7.4% in the 10-milligram group and 6.7% in the 25-milligram group.

When designing the study, we considered the genetic abnormality that leads to near total absence of DPP1, a condition called Papillon-Lefèvre syndrome. In this disease, patients experience symptoms that include periodontal disease and skin disease. We designed the study to look more thoroughly at these areas to see if our more modest inhibition of DPP1 would result in any such findings. For example, because of the concern around periodontal disease, we implemented a rigorous dental monitoring protocol for this Phase II trial. Patients who are examined by a dentist at baseline, and twice during the course of treatment, which was intended to allow us to detect any evidence of potential effect. Treatment-emergent AEs were rated by severity. And reassuringly, there did not appear to be any severe gingival periodontal events. We will certainly share this data with the regulatory authorities, but do not anticipate the need for a similar comprehensive dental monitoring during the Phase III program.

We will continue to analyze the data and look forward to presenting a more complete review of the results at the ATS conference in May in Philadelphia. We will also work with regulatory bodies to confirm the acceptability of our Phase III program. We're very pleased with the results we've seen in the WILLOW study. As a reminder, this is the largest Phase II trial ever conducted in bronchiectasis. And the robust data from this trial reinforces our confidence in the program as we move into Phase III.

Beyond bronchiectasis, we believe that INS1007 has the potential to be effective in treating other neutrophil-driven diseases, including cystic fibrosis. CF patients have even greater levels of sputum neutrophil elastase than bronchiectasis patients. And therefore, we believe 1007 may also benefit CF patients by addressing the harmful effects of neutrophil elastase and inflammation and sputum production. While our core development interest remains with bronchiectasis and CF, there is biological rationale to believe that INS1007 may be applicable across a broad range of indications. For instance, DPP1 inhibition has the potential to be beneficial in areas such as asthma, COPD, alpha-1 antitrypsin deficiency, GPA, inflammatory valve disease, lupus and rheumatoid arthritis.

Our Phase II data may have unlocked a first-in-class mechanism with potential broad applicability. We believe we are just at the beginning of the journey with INS1007, and look forward to optimizing its development in the years to come.

Let me now turn to our efforts around label expansion for ARIKAYCE. We are advancing ARIKAYCE in a frontline study that, if approved by FDA, would allow us to address the approximately 95,000 to 115,000 patients in the U.S. diagnosed with NTM lung disease. And that will serve as the necessary confirmatory study for ARIKAYCE as our -- agreed in our post-approval requirement with the FDA. We anticipate that this study will also address frontline approval requirements for Europe and Japan, using the primary endpoint of durable culture conversion.

We planned for a study duration of 13 months with treatment for 12 months, followed by 1 month of therapy. The primary endpoint of this study in the U.S. will be a composite patient-reported outcome, or PRO, in order to demonstrate clinical benefit as required by the FDA. As you can see in the latest study design captured on Slide 19, the validation of the PRO and the confirmatory study will run in parallel, pending alignment with the FDA. We plan to initiate these trials in the second half of 2020.

ARIKAYCE holds potential in Mycobacterium abscessus, the second most common NTM pathogen. We plan to advance into a registrational Phase III study in this indication as well.

Let me also provide a brief update around 2 additional pipeline programs. As shown in Slide 20, behind 1007, we are advancing INS1009 for the treatment of pulmonary arterial hypertension or PAH. We believe that 1009, our dry powder inhaled treprostinil prodrug formulation developed in our own labs, has the potential to address limitations of existing prostanoid therapies. Not only does INS1009 have potential as a long-lasting vasodilator, it also has the potential to be disease modifying, as it has been shown to significantly affect vascular remodeling in animal models of PAH.

In an animal model, INS1009 showed a better response than sildenafil across a number of measures, including vasodilation, right ventricular hypertrophy, pulmonary arterial wall thickness and obliteration. We are planning for a steady cadence of data presentation around our work with INS1009 this year, beginning with ATS in May. Designed for once-daily dosing, INS1009 may prolong the duration of treatment effects and could offer PAH patients greater consistency in reducing pulmonary arterial pressure over time. INS1009 also has the potential to reduce side effects associated with treatment. We intend to file an IND and initiate a Phase I study of 1009 this year.

Let's now turn to Slide 21. Today, I am pleased to introduce a promising preclinical new chemical entity, which we call RV94. We are evaluating RV94 for the treatment of gram-positive infections. This compound has been under development for several years in our labs. RV94 is a semi-synthetic lipoglycopeptide designed to be used once-daily or less frequently by inhalation in CF patients with pulmonary MRSA infection. By inhibiting peptidoglycan synthesis and disrupting the bacterial cell membrane, RV94 is designed to help reduce sputum bacterial load, and by virtue of inhalation delivery, to reduce systemic drug exposure. From a clinical perspective, our aim with inhaled RV94 is to help improve pulmonary function and respiratory symptoms and to reduce the frequency of exacerbations and overall antibiotic usage. In an in vitro MRSA MIC assay, RV94 was 30-fold more potent than the existing standard of care antibiotic, vancomycin. In addition, RV94 has shown up to 60-fold greater potency than vancomycin for the treatment of gram-positive MRSA pulmonary infections in animal models. If further research continues to be supportive, and if RV94 were to be approved, this novel antibiotic would represent a major step forward in the treatment of CF patients with pulmonary MRSA.

Let's now turn to Slide 22. Taking a step back and looking at our product portfolio more broadly, we want to draw your attention to the commercial overlap between our programs, particularly when you look at NTM bronchiectasis and CF. In ARIKAYCE, we have an approved therapy for refractory MAC in the U.S. We know that many CF patients also have NTM lung infection. According to the CF Foundation website, 13% of CF patients in the U.S. tested positive for NTM species in 2017. In addition, approximately 30% of bronchiectasis patients have NTM lung disease.

For 1007, with the positive WILLOW data, we are now one step closer to bringing forward a product for bronchiectasis, and we have a new mechanism of action that we believe may help treat the inflammation and sputum production in CF. MRSA is becoming more common in CF patients, and is now found in about 25% of patients with the disease. Studies show having MRSA lung infections for longer than 2 years can affect survival rates in CF patients. Therefore, we believe we have a unique opportunity to address an unmet need in CF with RV94.

And with that, I'll pass the call to our Chief Financial Officer, Sara, for the financial update.

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Sara M. Bonstein, Insmed Incorporated - CFO [6]

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Thanks, Gene, and good morning, everyone. As you've heard from the team, 2019 proved to be a very productive year where we made significant progress across all of our programs, while remaining keenly focused on the management of our operating expenses.

As we start 2020, Insmed is well positioned to support the next wave of its growth. The cash flows from our ARIKAYCE sales are an important contributor in meeting our cash needs. As Gene just outlined, we believe we have several promising programs in development, and we have the resources to take these programs to key value inflection points. As part of our longer-term efforts, we continue to explore business development initiatives and alternative financing options as potential sources of capital.

Our quarterly and full year results are detailed in our press release issued this morning. For today's call, I want to draw your attention to a few key line items and share our outlook for the year. This morning, we reported total net revenue for the full year 2019 of $136.5 million, comprising $132.1 million in U.S. net sales of ARIKAYCE and $4.4 million in ex-U. S. net sales of ARIKAYCE. The ex-U. S. net sales reflect utilization from the compassionate use and named-patient programs in both France and Germany.

In terms of revenue guidance, as Roger mentioned, we anticipate 2020 will potentially see a number of significant factors play out, making forecasting more challenging than usual. Despite our challenges of accurately forecasting quarter-to-quarter last year, we delivered exceptional results, exceeding expectations. Our takeaway is that the process of forecasting in this new indication is not straightforward, and our current guidance reflects this uncertainty. As the year develops and the various potential drivers play out, we will fine-tune our preliminary estimates.

With that said, for today's call, we project revenues for the full year of 2020 to be in the range of $180 million to $220 million, as shown on Slide 24. We're extremely pleased with the commercialization of ARIKAYCE sedate in the U.S. We will continue to focus on maintaining the strength of the brand, expanding our prescriber base and reaching more appropriate refractory MAC patients who may benefit from ARIKAYCE.

Our gross to net for the full year 2019 were approximately 10%. We expect our gross to net to be in the mid-teens in 2020. It is important to remember that as with many companies in our space, we expect our Q1 gross to net to be higher, due primarily to the coverage gap as a result of the benefit reset at the beginning of the calendar year.

Cost of product revenues for the full year was $24.2 million. The gross margin was approximately 82% for the year. It is important to note that our gross margin benefited in 2019 from inventory expense prior to the FDA approval of ARIKAYCE, and this will not continue at the same rate in 2020.

Turning to expenses. For the full year 2019, research and development expenses were $131.7 million. SG&A expenses were $210.8 million for the full year 2019. Our operating expenses for 2019 were $347.5 million compared to $314.8 million in 2018. Our adjusted operating expenses for the year were $300.1 million versus $283.7 million in 2018. We define adjusted operating expense in our earnings press release as GAAP operating expenses, excluding stock-based compensation expenses, depreciation, amortization of intangibles and a milestone owed to the CF Foundation related to ARIKAYCE.

For 2020, we will continue to invest in our core operating business, which includes continued commercialization of ARIKAYCE, global expansion activities in both Europe and Japan and pipeline advancements.

In addition, we will begin to invest in the preparation for the planned Phase III program for INS1007. Consequently, we expect adjusted operating expenses for 2020 to be in the range of $340 million to $360 million. We ended the year with a strong cash position of $487.4 million. It is important to highlight our ending cash position is in line with our ending cash position as of December 2018. We believe this illustrates our ability to maintain a strong balance sheet, where we manage appropriate development investment with responsible financing and revenue. We will continue to remain disciplined and judicious with investments in our business and conscious of preserving our capital in order to maintain a strong balance sheet.

With that, let me turn the call back to Will for closing remarks. Will?

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [7]

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Thank you, Sara. Let me close out our prepared remarks by reiterating that we are extremely proud of the continued execution by the team at Insmed. Our ongoing commercial efforts for ARIKAYCE continued to progress, and we are creating a strong franchise with the potential for additional launches in Europe and Japan.

We are advancing our efforts to expand the market by moving forward studies in the frontline and M. abscessus settings. Behind ARIKAYCE, we are pursuing high-value opportunities in the areas of unmet need. With 1007, we have a unique and significant opportunity with a potential first-in-class therapy for bronchiectasis, if we are successful with our Phase III program. We believe we are just scratching the surface of what we can achieve with this compound, which we believe has significant potential in other disease states.

Moreover, our growing pipeline has strategic leverage with the advancement of 1009 and our newest candidate, RV94. Taken together, we believe we have one of the strongest portfolios in the pulmonary rare disease space. I want to congratulate the Insmed team for a phenomenal 2019. As we sit here at the beginning of 2020, we are very excited about what lies ahead for the company.

With that, I'd like to open the call to questions. Operator, can we take the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Ritu Baral of Cowen.

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Ritu Subhalaksmi Baral, Cowen and Company, LLC, Research Division - MD & Senior Biotechnology Analyst [2]

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Will and team, can you talk a little bit more about the structure of the PRO? What modifications were made to the existing scale? And any more detail that you can give us on the forward phase III powering assumptions? And time line for cohort data? At the end of the day, when can we feel more secure that you've got your handle around the PRO? And how the PRO will behave in the Phase III? And I've got a follow-up.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [3]

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Sure. Appreciate the question. So let me just say, when we talk about the PRO and its development, this is a process that began in sort of the middle of last year in earnest with the FDA. And so we've had a lot of back and forth. And I think -- feel pretty good about where we are in that process. There's a whole lot of effort and research that goes into making sure a PRO is appropriate and works as expected. And we're well underway in the first part of that assessment, which is making sure that it's appropriate and that requires additional research. We then confirm that what we have to bring forward is something the FDA is comfortable with. And then we initiate the trial to validate that PRO.

The unique design of our post-approval requirement program contemplates that validation trial running in parallel to the full approval trial as you've seen on the slide that was outlined today and was presented for the first time at JPMorgan. So for those reasons, we are awaiting the final sort of sign-off from FDA, but I don't anticipate that, that will be problematic. And my expectation is that this trial -- both of those trials will begin in the second half of this year. As far as the PRO itself, it's made up of a modified QOL-B questionnaire, which is a quality of life bronchiectasis questionnaire that was explicitly discussed with FDA. And indeed, they encouraged us to consider if we wanted to, and we thought it was appropriate, using a modified existing questionnaire. So I think we feel like we're on very solid ground there. What we hope to discern in the validation study, is which of the specific questions and domains seem to have the greatest response rate in the patients that are being treated with our drug. And with that information, we can then confirm the statistical analysis plan that outlines how we will test the efficacy of our drug using the PRO in the post-approval requirement study.

So all of that is sort of framed out in the study design, and we've talked about it previously. We've estimated, and these are estimates, somewhere in the neighborhood of 200 to 300 patients in the post-approval requirement study. Those might move a little bit, but we don't expect them to move massively, although there is always more to be learned, and we want to caveat that our dialogue with FDA is ongoing and may influence that a little bit. But overall, I would tell you, I think we feel very good about the study design. As we outlined in the comments, we expect it to run for a little over a year, 12 months on drug and then 1 month off. We expect this study to also be satisfactory using the primary endpoint of durable culture conversion for both Europe and Japan. So if we fast forward, the study kicks off in the second half of this year, both run. We have the outcome of that study, and that should satisfy U.S., Europe and Japanese regulatory requirements, securing for us frontline approval for this drug's use in the treatment of NTM MAC. And that increases the addressable market we're talking about in each of our territories by something north of 5 fold. So this is a massive opportunity, and we want to make sure we get it right, but we're also as eager as the investment community to get it started.

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Ritu Subhalaksmi Baral, Cowen and Company, LLC, Research Division - MD & Senior Biotechnology Analyst [4]

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But how long does that validation study need to run before you feel like you've got a good handle on the PRO and the PRO powering?

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [5]

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So going into the study, I think we already feel like we have a good handle on that. We have a number of different sources of data that we use to inform the design of that study, including some specifically with the newly-designed PRO. But we also have data from the non-CF bronchiectasis QOL-B questionnaire that was administered during our Phase II program. We've looked at patients in other databases who have the refractory NTM, and I think the collective takeaway from all of that analysis is that we think this PRO is going to be appropriate. We think we understand the powering, and the way to think about that parallel study structure is that, that will be confirmed before we read out the final result of the mainline study.

And I think that is the point of greatest comfort, at least for me, when I look at the probability of success of that study. We will have the PRO with a high level of confidence, and data directly relevant to our belief that it's going to be effective in teasing out impact of ARIKAYCE. But we will also be able to confirm that prior to the reveal of the Phase IV post-approval requirement study. And that will allow us the opportunity because that study will still be blinded to make adjustments should we need to in that statistical analysis plan.

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Ritu Subhalaksmi Baral, Cowen and Company, LLC, Research Division - MD & Senior Biotechnology Analyst [6]

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Got it. And my follow-up was just on the low end of the guidance, Sara, that you mentioned today, the $180 million to $220 million. What was the calculus that went into the low end? Is it sort of what if the guidance doesn't work and patient starts slow down? And you're not effective in these last 3,000 prescribers? Or is it more of the contracting, the increasing -- and the increasing gross to net in just...

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [7]

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Yes. So I appreciate that question, Ritu. And obviously, we spent a lot of time thinking about this. I would define the year 2020 as being marked by both uncertainty and opportunity. The uncertainty that surrounds the performance of some of the key metrics as we go forward, it's the same kind of uncertainty that we -- that was frustratingly experienced last year where we struggled to really be able to discern where the commercial launch was going to go because no one's ever launched in this disease state and the performance and use of this drug is still yet to be fully defined.

If we revisit the guideline-based treatment of patients using our drug, it would contemplate treatment-to-culture conversion plus an additional 12 months. So we're just at the front end of patients defining what that full duration of use is. And that's a really important and uncertain metric as we move forward. It's not the only one, but it's an important one. And I think we want to acknowledge that we still don't know how that's going to unfold. We have some perspective on it, and we have every reason to be confident that we will be able to deliver in 2020 as we did in 2019, but it would be imprudent in my judgment to not acknowledge some of the uncertainty. Offsetting that, I think, are the significant opportunities that Roger outlined. The arrival of a paper that's peer reviewed, that talks about how to use ARIKAYCE and minimize side effects. The arrival of treatment guidelines that will reinforce appropriate duration of use. These sorts of things and some other creative programs, and I know the commercial team are working on to really continue to take advantage of what we believe to be that remaining patient and physician population that have not chosen to use ARIKAYCE yet.

But at the heart of your question, is it the uncertainty of the metrics that are driving use of drug? Or is it the lack of confidence in the access to patients and physicians? It is absolutely the former, not the latter. And I don't know, Roger, if you want to add any additional clarity to that?

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Roger Adsett, Insmed Incorporated - COO [8]

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Yes. Thanks, Will. I do want to reiterate that, first of all, that we've had incredibly strong performance from ARIKAYCE and from our team executing through the launch and the U.S. commercialization. And fundamentally, I think our franchise is strong. We continue to receive positive feedback from physicians and from patients who are experiencing ARIKAYCE. But we know that there is a very strong propensity to prescribe ARIKAYCE for the refractory patients.

I think, in addition, we talked about the number of catalysts and also the uncertainty around their variable for how long these patients are going to receive therapy. And maybe a good way to think about this, I know we had shared this metric on the previous call, we talked about for those patients -- that cohort of patients who started in the fourth quarter of 2018, which was our first quarter of launch, these are the patients who have had the longest exposure or potential exposure to ARIKAYCE. We had reported that as of the end of the third quarter of 2019, for those patients who have made it to at least month 4, so made it through those first 90 days, that 80% of those patients were still on therapy at the end of the third quarter of '19. So we continue to track that cohort. And surely, over time, that cohort will become less meaningful as we get more experience with a much larger group of patients. But an update on that specific Q4 cohort, again, for the patients who make it at least to month 4, we see 60% of those patients were still on therapy at the end of 2019. So initiated therapy in the fourth quarter of '18, 60% of those patients who made it to month 4 and still on therapy at the end of the year, we think that, that's an encouraging metric, and we'll continue to track this and look at duration of therapy. That's our key variable. There's just -- as we have mentioned, there's some uncertainty around that, that will have a significant influence on ARIKAYCE moving forward.

One of the reasons why we're anxiously awaiting the guidelines is that opportunity to reinforce the duration of therapy for physicians. Obviously, the KOLs understand this, the centers of excellence understand this, the opportunity will be to reinforce that duration and the appropriate refractory treatment for physicians in the community setting.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [9]

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And I would just close by saying, we faced some of this uncertainty last year, and I think we performed incredibly well. My confidence in the commercial team is not abated in any way. In fact, if I could give one piece of insight to all the research analysts and investors on the phone, it would be the degree of energy and enthusiasm that exists within Insmed today. We are in as strong a position as we have ever been in terms of our enthusiasm for both the ARIKAYCE opportunity and the potential of our pipeline, including 1007, 1009 and RV94, among other things. So we enter 2020 with a very positive sense of momentum and direction. And we'll see how that plays out, and we certainly will update you as the year goes on.

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Operator [10]

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The next question today comes from Matthew Harrison of Morgan Stanley.

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Matthew Kelsey Harrison, Morgan Stanley, Research Division - Executive Director [11]

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I guess, first one, just maybe on the guidance again. Can you be -- to the extent you can, maybe just provide a little bit more clarity in terms of how you think some of the factors that you highlighted in terms of gross to net and COGS and some of those other things are going to sort of move throughout the year? I know you gave us a broad view, but maybe you could give us a little bit more -- a clearer view around how much you think 1Q is going to be impacted? And do you expect the donut hole to be a bigger impact this year? And then I have a follow-up.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [12]

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Yes. So I'll just frame out. At the outset, I think we did call out the donut hole's impact as being more magnified this year. That is absolutely the case. There's nothing we can do about it. It is a feature of products like ours in the Medicare populations that, that donut hole pinches in January every year. And certainly, we saw that this year. However, I feel the rest of the year is before us. And in the early part of February, that, that is a temporal event, a seasonal effect, if you will. And so it is, for all intents and purposes, behind us. I think our attention now turns to taking advantage of the opportunities that present themselves in terms of some of the things we just mentioned in the script and during the last question response.

On the specifics of gross to net and gross margin, I'll just ask Sara to comment on what our guidance is for the year. We obviously don't have any more details, but maybe to frame out those metrics.

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Sara M. Bonstein, Insmed Incorporated - CFO [13]

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Absolutely. Thanks, Will, and thanks, Matthew, for your support and for your great questions. So on gross to net, as we stated, full year 2019 was approximately 10%. We anticipate 2020 to be in the mid-teens. Q1 will be higher, but on average for the year, we anticipate it to be in the mid-teens. That is primarily related to the change year-over-year kind of primarily related to some of the contracting and pricing, but still favorable gross to net. On COGS, we obviously had previously expensed material in 2019, which we were able to benefit from. We had a gross margin of about 82%. We will not see that same level of benefit into 2020. But we are also very cognizant of keeping our COGS at appropriate levels. So hopefully, that provides a little more color for you.

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Matthew Kelsey Harrison, Morgan Stanley, Research Division - Executive Director [14]

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Okay. And then follow-up, just on the guidelines, maybe just your current expectations around when we see them.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [15]

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Yes. This is one of our favorite questions. We were told by the Chair of the Guideline Committee at ERS last year that they would be out by the end of the year. Here, we sit at the beginning of the next year, awaiting their arrival. Everything we hear, and of course, we're not directly involved with the committee, but everything we hear from them is that they are imminently forthcoming. I was encouraged to see an explicit session called out in the agenda for the American Thoracic Society meeting where they will be discussed and reviewed. So I think that portends their imminent arrival. And I think the sooner they come out, the sooner we can take advantage of them.

I will say that I am confident that they are coming out. And that when they do come out, these will be a force that will benefit us for not just the immediate term, but over the course of the next several years. They will be the featured discussion at American Thoracic Society, European Respiratory Society, Infectious Diseases Society of America and CHEST. And I highlight within that group, the European Respiratory Society, because these guidelines will not just be coming from U.S. societies, but their European counterparts as well. So it's conceivable that when they're issued, the European societies will have endorsed the use of ARIKAYCE for the treatment of refractory patients prior to their approval by EMA, and I think that's a strong statement, if indeed, that ends up being the case of the appropriate potential for this compound for those patients.

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Operator [16]

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The next question comes from Martin Auster of Crédit Suisse.

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Mark William Connolly, Crédit Suisse AG, Research Division - Research Analyst [17]

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This is Mark on for Marty. Thanks for the comprehensive update today. I guess, first, maybe a little different with respect to guidance, but getting at the same question. I'm curious, from your interaction with doctors, what's the actual script duration including refills that they are typically prescribing to patients? And then my second question is with respect to 1007 and thinking about the dose response. Was there a higher rate of exacerbations relative to the rest of the trial population and those that had periodontal disease?

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [18]

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Appreciate the questions. On the first question, what is the duration of use that we're seeing from -- hearing about from physicians, what I would say generally, is that the physician community we hear from is very much a proponent of treating to guidelines. And so that would suggest that they will treat to culture conversion and that, that -- for an additional 12 months. There are a variety of physician perspectives on this. I've heard some physicians who feel that they've seen benefit with their patients on drug and intend to keep them on the drug longer. I've also heard physicians who have patients that treat patients for a period of time, they have some success, the patient wants to go off drug. And what's interesting about that patient, and this is one of the big uncertainties and opportunities in 2020 and really 2021, is that we know the reinfection rates in these patients are extremely high, particularly in refractory patients. And so it would be my expectation and many of the physicians' expectations that these patients are going to show up and require retreatment. And the question before us that is uncertain is how soon will that patient be identified once they are reinfected? How quick is the physician inclined to retreat with ARIKAYCE, given that, that's a refractory patient? And when will we begin to see those patients come back into the top of the funnel, if you will? So that's my perspective. I don't know, Roger, if you want to add anything to duration?

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Roger Adsett, Insmed Incorporated - COO [19]

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Sure. Thanks, Will, and I'm happy to. So I think that the question is really along what's the intent for the physician to prescribe. And I would agree with what Will is saying is that, in large part, physicians' intention is to prescribe according to the guidelines, as treat to conversion plus another 12 months. They also are encouraged, I think, for a check-in at 6 months. And if patients haven't converted, to make that assessment as to whether that's continued therapy or not. And we shared that previous -- the metric around the fourth quarter, '18 cohort of patients, and 60% of those patients a year after initiating therapy, are still on therapy as of the end of the year.

So we think that, that's encouraging. And to support that, we mentioned that reauthorizations have not been an issue for us to date. And so while the insurance companies have been -- obviously, we're looking for the appropriate patients to be starting on therapy, they really are looking for the judgment of the physician as to whether continue -- to continue those patients on therapy. And so we think that, that's an encouraging metric. And the guideline opportunity will give us an opportunity to reinforce that duration of therapy with physicians and reinforce what we think is the practice largely at this point.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [20]

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And I guess, I would just say also, we're aware of a lot of the surveys that some of the research and investment community have done. We've heard the inputs from those. Those are not inconsistent with our experience and what we've heard. I think our guidance reflects what we believe to be the existence of some uncertainty as we have always tried to transparently convey to the investment community. But it should not be interpreted that we have an insecurity. I think it is a matching of uncertainty with opportunity, and our ambition to go out and address those opportunities in a way that will benefit patients and ultimately -- therefore, our shareholders. On the second question, with regard to 1007, I'll ask Gene to address that.

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Eugene J. Sullivan, Insmed Incorporated - Chief Product Strategy Officer [21]

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Sure, thanks. Yes, so this was a question about periodontal findings and maybe correlations with efficacy. And I think that's a really interesting question, I can say at the outset. I don't have a direct answer for you at that time. This is the type of analyses we want to conduct. I think from a big picture standpoint, the events that we saw that are periodontal were mild to moderate. And some of the work that we're going to do is to try to understand to what extent these were spontaneous events that were reported by patients, and to what extent actually they were elicited by having these dental exams.

So I think it's like a Heisenberg thing. We -- because we were looking at it, we may have detected more than we otherwise would, had we not had those periodontal dental exams. So that's an aspect we want to look at. But certainly, understanding whether patients who seem to have some type of periodontal manifestation, are those the ones that got the most efficacy? That will be an interesting question. I think along those lines, we're also going to look at exposure response for both safety and efficacy. So are the patients who had the highest exposure tend to be the ones who have the most efficacy, and does that correlate with any of the safety findings. So that's the type of work we really want to delve into. I don't have an answer for you today. I think it's really important that we look closely at it so that we really fully understand the effects, both from the safety and efficacy side as we make decisions about Phase III.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [22]

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And the only thing I would add to that is that I -- as of right now, it's not our expectation that, that kind of periodontal exam using a dentist will be required in Phase III, which I think speaks to the preliminary takeaways of the Phase II data assessment in that regard.

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Operator [23]

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(Operator Instructions) The next question today comes from Adam Walsh of Stifel.

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Adam Anderson Walsh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [24]

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Congrats on all the recent success. So my first question is, I'm trying to get a little better handle on the duration and reinfection. And I don't want to beat a dead horse, but Roger, you said previously that 60% of the patients that started on original therapy at approval were still on the drug at year-end '20. And I guess, my question, do we have any information as to why the 40% came off? What the average duration of therapy that they were on prior to coming off? And whether or not those patients could be mischaracterized as just drug holiday patients as we've heard a lot of docs have been using drug holidays to temporarily pause the medication and keep them on for a longer period of time? And then finally, have any of those patients that have come off, reemerged for reinfections? In other words, what do we know about reinfections at this point in time?

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Roger Adsett, Insmed Incorporated - COO [25]

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Adam, thanks for the question. And certainly, as you're trying to get your arms around that, we're certainly doing the same thing. And we don't have perfect information or insight, as I'm sure you can appreciate. You're right with that metric. So that 60% of the patients who made it to month 4 in that Q4 '18 cohort, were still on therapy at the end of 2019. Now we think that's a very encouraging number. What happened to the other 40%? We don't have, again, perfect insight there, but it's a mixture of things. So there are patients who are assessed to have completed therapy. There are patients who decided that they no longer wanted to continue with therapy. And again, this is just feedback anecdotally that we're getting through our specialty pharmacies, through our Arikares network. I would say it's probably not drug holidays necessarily, unless you think about patients who may have -- to your point, the reinfection. They may have stopped prematurely with -- and certainly, at this point, they would not have had the additional 12 months of therapy that the guidelines recommend to make sure you've eradicated that disease. So it's not unreasonable, in that case, to think about reinfections popping up. I'd say it's too early at this stage to comment on reinfections, but we know that, from all the literature, and we're expecting in the real-world setting, that you are -- will see some of these patients returning with a new infection and will need to be retreated. And importantly, I think, having a positive experience with ARIKAYCE, physicians tell us and report to us that they will be very happy to initiate our case for those patients once again, if there is that reinfection.

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Adam Anderson Walsh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [26]

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Great. And then just another one, if I could. On the guidelines, we talked a little bit about the potential kind of acute and longer-term benefit. Roger, you mentioned that you have 3,000 physician targets left still to kind of hit. And how quickly do you think the guidelines might have an impact on that broader pulmonary community that maybe isn't as familiar with how to use the drug at this point? So the acute aspect, how kind of impactful do you think that could be maybe over the course of the next 4 to 6 quarters?

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Roger Adsett, Insmed Incorporated - COO [27]

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Yes. Thanks, Adam. So I think we've looked at this -- at analogs. We've looked at precedent. And I think that there's a variety of different impacts that we see as -- that might inform this. So I'd hate to hazard a specific guess as to what that looks like. But for us, I mean, anecdotally, and what we think we can do with this commercial team, having those guidelines, we think that, that will have a positive impact. There's -- like you said, the 3,000 physicians that have not yet written a prescription for ARIKAYCE, our impression is it's not that they don't have that positive perspective, but they're looking for reinforcement and the right ARIKAYCE -- right refractory patient who is suitable for ARIKAYCE. The guidelines will give us that opportunity to reinforce that. Looking at all the literature, this is how you define a refractory patient, and this is what the appropriate therapy is according to the medical societies. And I think that, that's a very powerful message for us to supplement the great efforts that we have from an education and promotion effort with our commercial and medical teams.

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Operator [28]

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The next question today comes from Graig Suvannavejh of Goldman Sachs.

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Graig Suvannavejh, Goldman Sachs Group Inc., Research Division - Executive Director & Senior Equity Research Analyst [29]

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I've got 2. My apologies if they may have been asked before. Maybe my first question just has to do with the outstanding physicians who have yet to use ARIKAYCE. And maybe can you just give us your interpretation or your color as to what ARIKAYCE having been on the market for some time, why they have yet to use ARIKAYCE? And then my second question, congrats on the recent additions to the management team and senior leadership. In terms of your new BD hire, can you just give us a sense kind of as you look into 2020 and beyond, and having added a pipeline asset, which is great news, but what kind of deals are you looking for on a go-forward basis in terms of whether they're in-licensing opportunities? Speedy partnering? Out-licensing opportunities? Any color would be great there.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [30]

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Sure. I appreciate the question. I'll ask Roger to address the first one.

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Roger Adsett, Insmed Incorporated - COO [31]

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Yes, thanks. So I think it's a great question around the why we haven't seen all the physicians prescribe ARIKAYCE at this point. And I would say that as we're thinking about the tail, and we're thinking about those 3,000 physicians, there's a couple of factors. First of all, the propensity to prescribe remains very strong. So when we do our market research, and we talk to physicians across the board, their intent to use ARIKAYCE in the appropriate patient is very strong. So that leads us to believe that it's identifying that appropriate refractory patient.

And this is a rare disease, I want to remind everybody, a rare disease. We've made the strategic decision to go more broadly into the community, and these physicians don't see these patients every day. So they do come in periodically. We know that those patients are there. And so it's an opportunity for us to reinforce how to identify those refractory patients for NTM and to reinforce with them that if these patients haven't converted after that standard of care treatment, that you should be thinking -- considering adding ARIKAYCE to that regimen. And so it's, fundamentally, in our opinion, nothing more than that. It's raising that awareness, reminding them of when those patients come in to assess the culture status, and make that decision as to introduce ARIKAYCE for that appropriate refractory patient. The propensity to prescribe familiarity with ARIKAYCE is very positive.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [32]

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And on the second question, you asked about the BD hire. And I think there the intention was simply to bring in somebody who has a great deal of experience that can help us formalize what has been a very active business development effort in the 7.5 years that I've been here. We looked at literally well over 100 opportunities. You've seen the 1007 results, and I think they speak to the ability of the team to discern what is a promising program, and present some real arbitrage for our investors, while we're out in pursuit of a therapy that may be able to benefit patients, if it clears all the regulatory and clinical hurdles. I'd like to repeat that, and I'd like that to be in a very systematic fashion. But our hurdle is high. It remains high. And we're very cognizant of the scope of the development that we are taking on in terms of these various programs. And so I think if I were to frame out what we'd be looking at, my ambition would be to look at either the commercial end of the spectrum and see how we can really build off of the tremendous success that the commercial team has already established or indeed something that could be complementary to where we are already pursuing programs.

I will say that we view ourselves as a rare disease company. And so we don't feel restricted to the pulmonary rare space. We happen to be -- have a lot of overlapping products and programs there that I think are going to complement one another extremely well and allow us to get a lot of leverage around the world as we build out. But we don't feel exclusively restricted to that. We think where patients are particularly challenged, where there isn't a lot of competition and where we have the ability to go in and help on the education front, that's probably where we can have the greatest impact. And Fred's arrival heralds a real formal approach to that. But it's not inconsistent with what we've been doing to date.

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Operator [33]

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And our last question today comes from Liisa Bayko of JMP.

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Liisa Ann Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [34]

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I want to ask a little bit more about kind of your next steps for 007 (sic) [1007]. So is there any situation where there's a faster market strategy here? And I ask that just because the data -- the quality of the data and the unmet medical need in that setting of bronchiectasis. Just curious if there is any faster market strategy or something where you parallel path to the Phase III?

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [35]

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Yes. I appreciate the question, Liisa. I think, look, we share your enthusiasm for 1007 and all that, that represents. Our next step here is to talk to the agency about where we go from here. We have a design already prepared for Phase III. It contemplates 2 trials, and it contemplates, at this moment, 2 doses. More to be learned once we have that interaction with the regulatory agencies around the world. And I think in order for those interactions to be productive, we have to complete our detailed analysis of the data, and that's something that's underway at the moment. Who is to say what the path will be, I'm just framing out our base case expectations. And if we learn more or see additional opportunities, we'll certainly share those.

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Liisa Ann Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [36]

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Okay. So you just kind of gave a little prelude to my next question, which was really around how you're thinking about the trial design. You talked a little bit about that. Any more color? What about duration? When do you think you might start? How long do you think it might take to recruit? And assuming these are global studies, maybe give us a little more color so we can start to think about timing in terms of getting...

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [37]

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Yes. So we were ready for the lottery ticket, as I described it, to go the right way. We have 2 designs prepared. We have it as a corporate goal to start these studies by the end of this year. That will be subject to our interaction with regulatory authorities. We expect the studies to each be 1 year in length, which has been the history of non-CF bronc development. And so that's as much as we know at this time. When we talk about numbers of patients in the studies, et cetera, that's more work, I think we want to refine before we come back. But I would believe, given the enthusiasm of the community, that these will enroll relatively quickly. And that they will be studies that will satisfy approval in multiple territories around the world. And I think that is an extremely exciting opportunity. DPP1 is now a very strong set of data out there validating. It is a mechanism of action, and that is changing the equation for how people think about this mechanism, not just for bronchiectasis, but for other diseases as well.

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Liisa Ann Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [38]

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And then when would you be prepared? Or what's the -- maybe you can give us just a little bit more granularity on timing of looking at this molecule in diseases, some of the ones you mentioned, CF, a alpha-1 antitrypsin, those kind of other diseases?

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [39]

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Yes. So some of that work has already been done, quite frankly. We did some animal model work in a couple of these other disease states. We think there's more to be done, particularly in light of the learnings from the Phase II program. So that will be ongoing this year, and I think it will inform where we go next and how we do that.

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Liisa Ann Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [40]

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Okay. And then just final question from me. RV94, interesting molecule. Maybe you can talk a little bit more about where that came from. And then how is that different from the compound that Savara has also in development for MRSA infection in the lung?

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [41]

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Sure. So that compound is from our own labs, much like ARIKAYCE, we developed it internally. Incredibly capable group of people, and we -- they have a lot of stuff going on. But when it gets to ready for prime time, then we bring it forward. RV94, we think beats that threshold. I'll let Gene comment on how it differs from the compound you're talking about over at Savara, which is the vancomycin, inhaled vancomycin, and some of the metrics that we outlined today.

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Eugene J. Sullivan, Insmed Incorporated - Chief Product Strategy Officer [42]

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Sure, thanks. Yes, I mean, we think that, in general, the hypothesis that treating MRSA in CF patients may improve outcomes is a very reasonable hypothesis. We thought that vancomycin may not be the right drug for it, though. So Walter Perkins and his group in our research group, spent quite some time looking at a number of different compounds, novel compounds for 2 characteristics. One is potency against MRSA and the other is the lung kinetics, so the retention time in the lung. And so we spent quite a -- we went through quite a number of different compounds, trying to optimize that. And the clearly superior agent was this RV94, which in various in vitro testing is clearly more potent, significantly more potent than vancomycin both in vitro -- I've mentioned the MIC assays, we have biofilm assays in which it outperforms vancomycin and other, even the related lipopeptide drugs and also in animal models of MRSA. So we think it's -- and my thought of it is that this is a reasonable thing to attack, and we think we have a very strong candidate in RV94. It is early, and we have a lot more work to do on it, but it is very exciting.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [43]

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And then let me just comment, maybe, given the scope of what we talked about from a development point of view here. When we talk about RV94, when we talk about 1009, there are -- and 1007, these are compounds that may find creative ways to get funded as we go through the development process. So RV94 as an example, is one that may be able to benefit from foundation support, given that it has a potentially prominent role to play, if it continues to perform as it has. We look at 1009, and we think of that as entering a fairly competitive market, but with disease-modifying possibilities, that drug represents a potential source of development for us or for others in a partnership. And we've seen recently how disease-modifying agents in PAH have been valued. And finally, 1007, while we intend to bring it forward in bronchiectasis in the various territories around the world, we also think potentially about its role in a place like China, which is a prevalence rate, as we understand it, of bronchiectasis, it's about tenfold greater than what it is in the U.S. So it's quite a significant opportunity, and we are going to think very creatively about how we might be able to offset some of the development costs for these various programs in a way that allows them to progress, but doesn't necessarily result in an endless cycle of need for additional equity issuance. And I think that's an important point for people to digest. Bottom line, I was asked by a couple of portfolio managers with the result of 1007, which we described as a lottery ticket, did we have any other lottery tickets at Insmed? And that's why today, we've decided to draw attention to 1009 and RV94, both of which, I think, fall into that category.

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Operator [44]

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This concludes our question-and-answer session. I would like to turn the conference back over to Will Lewis for any closing remarks.

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William H. Lewis, Insmed Incorporated - President, CEO & Chairman [45]

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Thank you all very much for joining us today.

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Operator [46]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.