<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 31, 2000
INSMED INCORPORATED
(Exact name of registrant as specified in its charter)
VIRGINIA 0-30739 54-1972729
---------------------------- ------------------------ -------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
800 East Leigh Street, Richmond, VA 23219
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (804) 828-6893
<PAGE>
Item 2. Acquisition or Disposition of Assets
This Amendment No. 1 to the Form 8-K dated June 15, 2000 is being filed by
Insmed Incorporated ("Insmed") to provide required financial statements and pro
forma financial information related to the acquisition of Celtrix
Pharmaceuticals, Inc. on May 31, 2000.
Item 5. Other Events
Press Release dated July 18, 2000, issued by Insmed, regarding execution of
an agreement with Taisho Pharmaceutical Co., Ltd. for the development and
commercialization in Japan and other Asian countries of Insmed's lead compound,
INS-1, for the treatment of Type 2 diabetes and Polycystic Ovary Syndrome
(PCOS), is filed herewith as Exhibit 99 and hereby incorporated in its entirety
by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
1. Consolidated Financial Statements of Celtrix Pharmaceuticals,
Inc. for the fiscal years ended March 31, 2000, 1999 and 1998.
(b) Pro Forma Financial Information.
1. Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the fiscal year ended December 31, 1999 and for
the three months ended March 31, 2000.
2. Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 2000.
3. Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements.
(c) Exhibit
99 Press Release dated July 18, 2000.
1
<PAGE>
Report Of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Celtrix Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Celtrix
Pharmaceuticals, Inc. as of March 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Celtrix
Pharmaceuticals, Inc. at March 31, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Richmond, Virginia
June 2, 2000
2
<PAGE>
Celtrix Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
<S> <C> <C>
2000 1999
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 6,700 $ 1,258
Receivables and other current assets 115 172
---------------------------
Total current assets 6,815 1,430
Property and equipment
Machinery and equipment 170 164
Less accumulated depreciation and amortization (102) (63)
---------------------------
68 101
Assets held for sale 346 416
Intangible and other assets, net of accumulated amortization of $1,557
and $1,235 at March 31, 2000 and 1999, respectively 2,582 2,554
---------------------------
Total assets $ 9,811 $ 4,501
===========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ - $ 547
Accrued clinical expenses 89 439
Accrued compensation 54 47
Other accrued liabilities 388 188
---------------------------
Total current liabilities 531 1,221
Series A convertible / exchangeable preferred stock, $.01 par value,
authorized, 10,000 shares; 8,010 issued and outstanding at
March 31, 2000, liquidation preference $8.01 million 7,948 -
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000 shares;
33,843,770 shares and 25,061,053 shares issued and outstanding
at March 31, 2000 and 1999, respectively 338 251
Additional paid-in capital 142,656 133,437
Cumulative preferred stock dividend 382 -
Accumulated deficit (142,044) (130,408)
---------------------------
Total stockholders' equity 1,332 3,280
---------------------------
Total liabilities, preferred stock and stockholders' equity $ 9,811 $ 4,501
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Celtrix Pharmaceuticals, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
-------------------------------------------
Revenues:
Product sales $ - $ 10 $ 51
Revenues from related parties 662 - -
Licensing revenues and other 140 121 610
-------------------------------------------
802 131 661
Costs and expenses:
Cost of sales - - 1
Research and development 857 6,830 13,006
General and administrative 2,169 2,272 1,985
Restructuring costs - 5,160 -
-------------------------------------------
3,026 14,262 14,992
-------------------------------------------
Operating loss (2,224) (14,131) (14,331)
Equity in loss from joint venture (9,137) - -
Interest income, net 107 132 681
Gain on sale of investments - - 737
Proceeds from settlement agreement - 600 -
-------------------------------------------
Net loss $(11,254) $(13,399) $(12,913)
===========================================
Income available to common stockholders $(11,636) $(13,399) $(12,913)
===========================================
Basic and diluted net loss per share $(0.42) $(0.58) $(0.61)
===========================================
Shares used in basic and diluted per share
computation 27,877 22,941 21,004
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Celtrix Pharmaceuticals, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
Cumulative
Additional Preferred Total
Common Paid-in Stock Accumulated Stockholders'
Stock Capital Dividend Deficit Equity
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $153 $118,152 $ - $(104,095) $ 14,210
Issuance of 5,721,876 shares of common stock and
warrants to purchase 2,860,934 shares of common
stock in a private placement, net 57 13,274 - - 13,331
Issuance of 75,748 shares of common stock under the
Employee Stock Purchase Plan 1 116 - - 117
Unrealized loss on available-for-sale securities - - - (1) (1)
Net loss - - - (12,913) (12,913)
----------------------------------------------------------------------
Balance at March 31, 1998 211 131,542 - (117,009) 14,744
Issuance of 4,000,000 shares of common stock and
warrants to purchase 6,000,000 shares of common
stock in a private placement, net 40 1,872 - - 1,912
Issuance of warrants to purchase 75,000 shares of
common stock and options to purchase 50,000
shares of common stock to non-employees - 23 - - 23
Net loss - - - (13,399) (13,399)
----------------------------------------------------------------------
Balance at March 31, 1999 251 133,437 - (130,408) 3,280
Issuance of 1,508,751 shares of common stock for
cash, net 15 2,444 - 2,459
Issuance of 7,092,754 shares of common stock upon
exercise of stock warrants 70 6,356 - 6,426
Issuance of 181,212 shares of common stock upon
exercise of stock options 2 419 - 421
Accrued cumulative preferred stock dividends - - 382 (382) -
Net loss - (11,254) (11,254)
----------------------------------------------------------------------
Balance at March 31, 2000 $338 $142,656 $382 $(142,044) $ 1,332
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Celtrix Pharmaceuticals, Inc.
Consolidated Statements Of Cash Flows
Increase (decrease) in cash and cash equivalents
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
<S> <C> <C> <C>
2000 1999 1998
---------------------------------------
Cash flows from operating activities:
Net loss $(11,254) $(13,399) $(12,913)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write off of leasehold improvements - 5,311 -
Write off of deferred rent liability - (816) -
Reduction in deferred rent liability - (74) -
Depreciation and amortization 361 1,036 1,660
Gain on sale of investments - - (737)
Equity in loss from Celtrix / Elan joint venture 9,137 - -
Changes in operating accounts: - - -
Receivables and other current assets 57 4 (22)
Accounts payable, accrued compensation and other accrued liabilities (690) (992) 854
---------------------------------------
Net cash used in operating activities (2,389) (8,930) (11,158)
Cash flows from investing activities:
Investment in Celtrix/Elan joint venture (9,137) - -
Sales and maturities of available-for-sale securities - 7,575 40,497
Purchase of available-for-sale securities - (1,270) (43,482)
Decrease in restricted cash - - 520
Proceeds from sale of assets held for sale 70 600 -
Capital expenditures (6) (84) (187)
Increase in intangible and other assets (350) (168) (394)
---------------------------------------
Net cash (used in) provided by investing activities (9,423) 6,653 (3,046)
Cash flows from financing activities:
Proceeds from the issuance of Series A convertible/exchangeable
preferred stock, net 7,948 - -
Proceeds from issuance of common stock, net 9,306 1,935 13,448
Principal payments under lease obligations - (8) (320)
---------------------------------------
Net cash provided by financing activities 17,254 1,927 13,128
---------------------------------------
Net increase (decrease) in cash and cash equivalents 5,442 (350) (1,076)
Cash and cash equivalents at beginning of year 1,258 1,608 2,684
---------------------------------------
Cash and cash equivalents at end of year $ 6,700 $ 1,258 $ 1,608
=======================================
Supplemental disclosure:
Interest paid $ - $ 1 $ 24
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements
March 31, 2000
1. Summary of Significant Accounting Policies
Celtrix Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical company
focused on developing novel therapeutics for the treatment of seriously
debilitating, degenerative conditions primarily associated with severe trauma,
chronic diseases or aging.
The consolidated financial statements include the accounts of Celtrix and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash Equivalents and Short-term Investments
Celtrix considers all highly liquid investment securities with maturity from
date of purchase of three months or less to be cash equivalents and investment
securities with maturity from date of purchase of more than three months to be
short-term investments.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is provided on the straight-line method over the
estimated useful lives (three to seven years) of the assets.
Intangible Assets
Intangible and other assets consist primarily of patents. Patents, carried at
cost, are amortized using the straight-line method over the estimated useful
lives of the related intellectual property, generally 12 years. Celtrix
regularly performs reviews regarding the carrying value of the assets. The
reviews look for the existence of facts or circumstances, either internal or
external, which may indicate that the carrying value of the assets cannot be
recovered. To date no adjustments have been made to the carrying value of the
assets.
Revenue Recognition
Licensing revenues are recorded when contractually earned. Revenues are not
refundable if the research effort is not successful. The Company has no future
performance obligations relating to these licensing revenues. Revenue from
product sales is recognized at time of shipment.
7
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock-
Based Compensation" in October 1995, which encourages, but does not require,
companies to record compensation expense for stock-based employee compensation
plans at fair value. The Company has elected to follow the disclosure
requirements of SFAS 123 for the fiscal years ended 2000, 1999 and 1998 (see
Note 6) and will continue to measure stock-based compensation to employees in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for employee stock option grants in accordance with APB
Opinion No. 25, and, accordingly, recognizes no compensation for the stock
option grants.
Recently Issued Accounting Standard
In April 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net loss or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Total comprehensive income (loss) approximates net loss for the fiscal
years ended March 31, 2000, 1999 and 1998.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
8
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
2. Acquisition of Celtrix by Insmed Pharmaceuticals, Inc.
On May 30, 2000, the shareholders of the Company and the shareholders of Insmed
Pharmaceuticals, Inc. (Insmed Pharmaceuticals) approved Insmed Pharmaceuticals'
acquisition of Celtrix. Insmed Pharmaceuticals is a biopharmaceutical company
focused on the diagnosis and treatment of medical conditions associated with
insulin resistance, including type 2 diabetes and polycystic ovary syndrome
(PCOS). Each common share of Celtrix was exchanged for one share of common stock
in a newly formed holding company (Insmed Incorporated). The newly formed
holding company is a publicly traded company. The liquidation preference per
share ($1,000 per share) plus accrued but unpaid dividends of Celtrix Series A
Convertible/Exchangeable Preferred Stock was convertible into Celtrix common
stock at a price per share of $2.006. The holders of Celtrix Series A received
shares of common stock of Insmed Incorporated on an as converted basis. Each
share of Insmed Pharmaceuticals was exchanged for three and one-half shares of
Insmed Incorporated.
Each outstanding option, warrant or other right to purchase shares of Celtrix or
Insmed Pharmaceuticals, Inc. common stock converted automatically into a new
option, warrant or other right to purchase the number of shares of Insmed
Incorporated common stock equal to the number of shares of Celtrix common stock
or Insmed Pharmaceuticals common stock, as the case may be, issuable under the
old option, warrant or other right multiplied by one (1) in the case of Celtrix
stock options, and 3.5 in the case of Insmed Pharmaceuticals stock options,
warrants, or other rights. Shares of Insmed Incorporated common stock reserved
for future issuance in connection with the exercise of Celtrix options were
1,229,510 shares.
Costs to the Company related to the acquisition by Insmed Pharmaceuticals are
estimated to be $1.5 million, of which $531,000 had been incurred and expensed
as of March 31, 2000.
3. Joint Venture with Elan Corporation, plc
On April 21, 1999, the Company entered into an agreement with Elan Corporation,
plc to establish a joint venture (Celtrix Newco, Ltd.), a company incorporated
in Bermuda for the development of SomatoKine to treat osteoporosis using Elan's
MEDIPAD Delivery System. The joint venture company is initially owned 80.1% by
Celtrix and 19.9% by Elan. The joint venture company has licensed SomatoKine
technology from Celtrix and MEDIPAD technology from Elan. Celtrix initially
invested $8.01 million in the joint venture and Elan has invested $1.99 million.
At the time of closing, Elan International Services, Ltd. (EIS) purchased $8.01
million of Celtrix Series A Convertible/Exchangeable Preferred Stock.
9
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
3. Joint Venture with Elan Corporation, plc (continued)
The Series A Convertible/Exchangeable Preferred stock could be exchanged for an
additional ownership in the joint venture at EIS's option. As a result, it is
presented outside of permanent equity on the consolidated balance sheet. The
Series A Convertible/Exchangeable Preferred stock pays a 5% annual in-kind
dividend and has a liquidation preference of $1,000 per share or $8.01 million
plus accrued and unpaid dividends.
Although the Company owns 80.1% of the joint venture, the joint venture is
accounted for under the equity method of accounting. Celtrix has not
consolidated the joint venture company because Elan has substantive rights that
give them the ability to block significant decisions proposed by the Company and
to participate in matters arising in the ordinary course of business, which
would not normally require board of directors approval or approval by Elan. In
addition, Elan actively participates in directing and carrying out the operating
and capital activities of the joint venture's business.
The agreement with Elan also provides, at Celtrix's option, for EIS to purchase
from time to time Series B Convertible Preferred Stock up to an amount of $4.8
million, the proceeds from which sale will be used by Celtrix to fund its share
of the joint venture's operating expenses. Celtrix and Elan will be reimbursed
by the joint venture for research and development and administrative work
performed on behalf of the joint venture. The Series B Convertible Preferred
Stock is convertible into Celtrix common stock at a price of $2.006 per share
and pays a 9% annual in-kind dividend. The obligation of Elan to purchase Series
B Preferred Stock terminated at the time of the merger with Insmed. See Note 2.
Elan received a $10 million license payment from the joint venture for the use
of MEDIPAD technology while Celtrix will have an 80% share in any future
proceeds related to the further development and commercialization of the
osteoporosis product (e.g. upfront payments, milestones or royalties) received
by the joint venture, regardless of ownership, until Celtrix is paid $10
million. Thereafter, Celtrix and Elan will share the joint venture's proceeds in
accordance with their ownership interests.
10
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
3. Joint Venture with Elan Corporation, plc (continued)
In April 1999, in a separate transaction, the Company issued 1,508,751 shares of
common stock to Elan International Services, Ltd. at a price of $1.657 per
share, amounting to $2.4 million (net of expenses).
The following summarizes financial information of Celtrix Newco, Ltd. (in
thousands):
Year Ended
March 31, 2000
--------------
Costs and Expenses:
Research and Development $ 11,255
General and Administrative 189
--------------
Net Loss $(11,444)
The Company's share of the net loss was $9.17 million.
Condensed Balance Sheet
March 31, 2000
-----------------------
Current liabilities $ 11,444
Stockholders' equity $(11,444)
4. Assets Held for Sale
As a result of the September 1998 restructuring and the discontinuation of
manufacturing, the Company is in the process of selling certain equipment and
other fixed assets. The assets held for sale are recorded at the lower of
carrying values or fair value, less costs to sell.
11
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
5. Debt and Commitments
As a result of restructuring the Company and discontinuing manufacturing
operations in September 1998, the Company terminated its office, laboratory and
manufacturing facility lease effective November 1998. The Company also
terminated certain equipment operating leases as a result of the restructuring.
The Company currently leases offices in San Jose under an operating lease which
expires in June 2000. Rent expense was $186,000, $600,000, and $1.1 million for
the years ended March 31, 2000, 1999, and 1998, respectively.
6. Incentive and Benefit Plans
In September 1997, the stockholders approved an increase in the number of shares
reserved for issuance under the Company's 1991 Stock Option Plan from 1,500,000
to 3,000,000 shares of common stock. Under the 1991 Directors' Stock Option
Plan, 200,000 shares of Celtrix's common stock have been reserved for issuance.
The exercise prices under these plans are determined by the Board of Directors
or its committee and may not be less than 100% of the fair market value of
Celtrix's common stock at the time of grant. The options expire ten years from
the date of grant, unless otherwise provided in the option agreement. The
options generally become vested and exercisable over four years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to March
31, 1995 under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 2000, 1999,
and 1998, respectively: risk-free interest rates of 5.43%, 4.88%, and 6.03%,
dividend yields of zero; volatility factors of the expected market price of the
Company's common stock of .831, .801, and .792; and an expected option life of 5
years.
12
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
6. Incentive and Benefit Plans (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility and
expected option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
In September 1998, the stockholders approved an increase in the number of shares
reserved for issuance under the Company's 1991 Employee Stock Purchase Plan from
250,000 to 500,000 shares of common stock. Under the plan, employees have an
opportunity to purchase common stock of Celtrix at 85% of the fair market value
at the beginning or end of each 12-month offering period, whichever is lower.
The first offering period commenced January 1, 1994. As of March 31, 2000,
176,880 shares of common stock have been issued to company employees. There were
no shares issued, and subsequently no fair value of employees' purchase rights
estimated, for 1999 or 2000. The fair value of the employees' purchase rights
for 1998 was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 5.59%;
dividend yield of zero; volatility factor of the expected market price of the
Company's common stock of .792; and an expected life of 1 year.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for net loss per share
information):
2000 1999 1998
----------------------------------------
Pro forma net loss $(11,535) $(13,391) $(13,275)
Pro forma net loss per share $ (0.43) $ (0.58) $ (0.63)
The weighted-average fair value of options granted during 2000, 1999, and 1998
was $0.70, $1.14, and $1.59, respectively.
13
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
6. Incentive and Benefit Plans (continued)
A summary of the Company's stock option activity, which includes the 1991 Stock
Option Plan and the 1991 Directors' Stock Option Plan, for the years ended March
31 follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------------------
Shares Weighted-
Available Number of Price Per Average
for Grant Shares Share Exercise Price
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997 707,468 960,358 $1.25-$11.50 $2.61
Shares authorized 1,500,000 - - -
Options granted (1,073,783) 1,073,783 $2.00-$ 2.94 $2.34
Options canceled 272,450 (272,450) $2.44-$ 3.94 $2.60
-----------------------------------------------------------------
Balance at March 31, 1998 1,406,135 1,761,691 $1.25-$11.50 $2.39
Options granted (211,084) 211,084 $1.06-$ 2.88 $1.62
Options canceled 731,275 (731,275) $1.25-$11.50 $2.38
-----------------------------------------------------------------
Balance at March 31, 1999 1,926,326 1,241,500 $1.06-$ 8.00 $2.26
Options granted (269,222) 269,222 $1.00-$ 1.25 $1.01
Options exercised - (181,212) $1.06-$ 3.94 $2.32
Options canceled 100,000 (100,000) $2.50 $2.50
-----------------------------------------------------------------
Balance at March 31, 2000 1,757,104 1,229,510 $1.00-$ 8.00 $1.96
=================================================================
</TABLE>
The following table summarizes information concerning outstanding options at
March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted-
Average Weighted Weighted-
Options Remaining Average Options Average
Range of Exercise Price Outstanding at Contractual Exercise Exercisable at Exercise
Mar. 31, '00 Life Price Mar. 31, '00 Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00-$2.50 891,593 7.8 $1.68 436,015 $1.88
$2.51-$4.00 336,417 6.3 $2.67 271,583 $2.68
$4.01-$8.00 1,500 2.2 $8.00 1,500 $8.00
1,229,510 709,098
=========== =========
</TABLE>
Under Celtrix's 1991 retirement savings plan (``401(k) Plan''), employees may
elect to defer up to 20% of their total compensation, not to exceed the amount
allowed by applicable Internal Revenue Service guidelines. There were no
employer contributions to the plan for the years ended March 31, 2000, 1999 or
1998.
14
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
7. Stockholders' Equity
In November 1998, Celtrix sold 4,000,000 shares of common stock in a private
placement at $0.50 per share, which resulted in net proceeds to the Company of
approximately $1.9 million. Additionally, the Company issued a three-year
warrant to purchase 6,000,000 shares of Celtrix common stock at $0.55 per share.
As of March 31, 2000, warrants for 210,000 shares were outstanding.
In April 1997, the Company completed a private placement of 5,721,876 newly
issued shares of common stock at $2.438 per share. For every two shares of stock
issued, the Company also issued a warrant to purchase an additional share of
Celtrix common stock at $2.682 per share. The warrants are exercisable only
after the shares of stock are held for at least one year and as of March 31,
2000, there were 492,205 warrants outstanding related to this financing (102,543
were canceled due to the sale of stock). The warrant expired in April 2000. The
net proceeds to the Company, after fees and expenses of approximately $619,000,
were $13.3 million.
8. License and Collaborative Arrangements
In July 1994, Celtrix entered into a license agreement with The Green Cross
Corporation (``Green Cross''), covering the development and commercialization of
SomatoKine for the treatment of osteoporosis in Japan. Under the terms of the
agreement, Green Cross was to be responsible for all related research,
development and marketing, as well as manufacturing the product to support its
preclinical, clinical and commercial needs in Japan. The agreement provided for
Celtrix to receive licensing fees, milestone payments upon Green Cross
accomplishing specific product development activities and royalties on future
product sales. Celtrix retained full rights outside of Japan to SomatoKine and
also to related know-how and technology developed by Green Cross. In April 1998,
Green Cross was merged with Yoshitomi Pharmaceuticals Industries, Ltd. In May
1998, Celtrix received notice from Yoshitomi of its intent to terminate this
license agreement. This license was terminated in March 1999 upon the payment by
Yoshitomi of $600,000 to Celtrix. Celtrix regained the rights to the treatment
of osteoporosis in Japan.
15
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
8. License and Collaborative Arrangements (continued)
In June 1994, the Company entered into a product development, license and
marketing agreement with Genzyme Corporation (``Genzyme'') on TGF-beta-2 which
includes equity investments, milestone payments and potential royalties to
Celtrix. As part of the agreement, Celtrix sold to Genzyme 1,550,388 shares of
Celtrix common stock in June 1994, and subsequently, in December 1995 Celtrix
exercised the option to receive an additional investment by Genzyme for
1,472,829 shares of Celtrix common stock resulting in $4.4 million of net
proceeds to the Company. Under recently amended terms, Genzyme has been granted
expanded worldwide commercialization rights for all systemic applications and
select local applications of TGF-beta-2 to include Japan, China, Korea and
Taiwan; in exchange, Genzyme released Celtrix from certain service and royalty
obligations under the original agreement. Celtrix has retained rights to select
applications of TGF-beta-2 and the Company has the option to reacquire rights to
other product applications not pursued by Genzyme. In December 1997, the Company
also entered into a new license agreement with Genzyme granting Genzyme a
worldwide exclusive royalty-bearing license to TGF-beta antibodies, and license
and sublicense rights to TGF-beta receptor. Under the terms of the agreement,
Genzyme will assume the licensing and royalty obligations of Celtrix related to
TGF-beta receptor.
Since inception, Celtrix has entered into various other research and development
and licensing arrangements. Some of these agreements contain royalty and other
obligations.
9. Restructuring Costs
During fiscal year 1999, the Company restructured to focus on the clinical
development of SomatoKine, cease manufacturing operations and reduce the cash
burn rate. As a result, the Company recognized a $5.2 million restructuring
charge in the quarter ended September 30, 1998 consisting of a $5.3 million non-
cash write-off of leasehold improvements partly offset by $816,000 non-cash
reduction of deferred rent liability, $358,000 in severance expenses, $250,000
related to non-cancelable operating lease obligations, and $75,000 in other
restructuring-related charges. As part of the restructuring, the Company reduced
its workforce by 69 employees, or approximately 90%. The reduction in workforce
affected all levels of staff in manufacturing and other functions. As of March
31, 2000, the Company had no restructuring liabilities remaining to be paid.
10. Gain on Sale of Investments
In June 1997, the Company sold 43,750 shares of Prograft Medical, Inc. preferred
stock, resulting in the recording of $737,000 of gain on investment. These
shares were held by Celtrix since 1993.
16
<PAGE>
Celtrix Pharmaceuticals, Inc.
Notes To The Consolidated Financial Statements (continued)
11. Income Taxes
At March 31, 2000, the Company had net operating loss and research tax credit
carryforwards for federal income tax purposes of approximately $137.4 million
and $4.5 million, respectively, expiring in the years 2006 through 2020. The
federal net operating loss carryforward differs from the accumulated deficit
principally due to (i) the nondeductibility for tax purposes of the charges for
in-process research and development resulting from two acquisitions, and (ii)
timing differences in the recognition of certain revenue and expense items for
financial and federal tax reporting purposes (primarily certain expenses not
currently deductible). Approximately $8.8 million of the total federal net
operating loss is available only to offset future consolidated taxable income to
the extent contributed by one of the Company's wholly owned subsidiaries.
Utilization of a portion of the net operating losses and credits is subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of March 31 are as follows (in thousands):
2000 1999
----------------------
Deferred tax assets:
Net operating loss carryforwards $ 48,000 $ 44,300
Research credits 6,100 5,900
Research expenses capitalized for tax purposes 2,400 2,400
Other (600) (1,400)
----------------------
Total deferred tax assets 55,900 51,200
Valuation allowance for deferred tax assets (55,900) (51,200)
Net deferred tax assets $ - $ -
======================
The valuation allowance increased by $4.7 million, $5.4 million, and $4.8
million during the years ended March 31, 2000, 1999 and 1998, respectively.
12. Revenues from Related Parties
Revenues from related parties are from the joint venture formed by Celtrix and
Elan Corporation, plc. These revenues cover services performed on behalf of the
joint venture and $550,000 for the reimbursement, at Celtrix's production cost,
of the anticipated total amount of SomatoKine drug substance provided by Celtrix
to the joint venture for use in the clinical trial currently planned by the
joint venture.
17
<PAGE>
Insmed Incorporated
PRO FORMA CONDENSED CONSOLIDATED FINANICAL STATEMENTS
The following Pro Forma Condensed Consolidated Financial Statements reflect
the accounting for the acquisition of Celtrix by Insmed Pharmaceuticals in
accordance with generally accepted accounting principles. Insmed Incorporated is
a holding company formed by Insmed Pharmaceuticals in order to facilitate the
acquisition in accordance with the acquisition agreement. The acquisition
agreement provided that:
. each share of issued and outstanding common and preferred stock of
Insmed Pharmaceuticals was exchanged for 3.5 shares of Insmed
Incorporated common stock;
. each outstanding share of common stock of Celtrix was exchanged for
one share of Insmed Incorporated common stock; and
. the liquidation preference per share ($1,000 per share) plus accrued
but unpaid dividends of Celtrix Series A Convertible/Exchangeable
Preferred Stock was convertible into Celtrix common stock at a price
per share of $2.006 and the holders of Celtrix Series A received
shares of common stock of Insmed Incorporated on an as converted
basis.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
based upon and should be read in conjunction with the historical consolidated
financial statements of Insmed Pharmaceuticals and Celtrix, including the notes
thereto. The Insmed Pharmaceuticals financial statements for the fiscal year
ended December 31, 1999 are included in the joint proxy statement/prospectus
dated May 4, 2000. The Celtrix Pharmaceuticals financial statments for the
fiscal year ended March 31, 2000 are included beginning on page 2.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1999 gives effect to the acquisition of Celtrix by
Insmed Pharmaceuticals and related transactions as if such transactions had
occurred on January 1, 1999. Celtrix's fiscal year end is March 31. Therefore,
for the purpose of the 1999 historical data included in the Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the Year Ended December 31,
1999, the unaudited financial data from the nine months ended December 31, 1999,
was combined with the unaudited financial data for the three months ended March
31, 1999.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Three Months Ended March, 31, 2000 gives effect to the acquisition of
Celtrix by Insmed Pharmaceuticals and related transactions as if such
transactions had occurred on January 1, 2000.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March
31, 2000, gives effect to the acquisition of Celtrix by Insmed Pharmaceuticals
and related transactions as if they occurred on March 31, 2000. The Unaudited
Pro Forma Condensed Consolidated Balance Sheet gives effect to the exchange of
shares described above and in note 1, reflects the expected allocation of the
purchase price described in note 2, the formation of Insmed Incorporated and the
$34.5 million equity financing.
For accounting purposes, the historical basis of Insmed Pharmaceuticals
assets and liabilities carried over to Insmed Incorporated. The acquisition of
Celtrix was accounted for using the purchase method of accounting, so the total
purchase costs of the acquisition were allocated to the tangible and intangible
assets and liabilities acquired based upon their estimated fair values.
18
<PAGE>
The preliminary purchase price allocation is based on an independent third-party
valuation. This valuation has not yet been finalized. Accordingly the
preliminary purchase price allocation is subject to change. The amount of
purchase price allocated to tangible assets acquired, in process research and
development and liabilities assumed, could differ from the amounts and
allocation discussed in Note 2. The Registrant is not aware of any significant
unrecorded obligations or contingencies, and do not believe that the final
purchase price allocation will differ materially from that included in the pro
forma financial information contained herein. The final allocation of the
purchase price will be made based upon valuations and other studies that have
not been completed.
In addition, Insmed Pharmaceuticals and Celtrix expect to incur costs
directly attributable to the acquisition of approximately $2.1 million and $1.4
million, respectively. The $2.1 million of transaction costs Insmed
Pharmaceuticals expects to incur have been included in the determination of the
preliminary purchase price. The $1.4 million Celtrix expects to incur will be
expensed as incurred. Approximately $531,000 in transaction costs were incurred
through March 31, 2000. These costs were reversed out of the Unaudited Pro Forma
Condensed Statements of Operations, as they are nonrecurring charges.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do not:
(a) purport to represent what the results of operations or financial
condition actually would have been if the acquisition of Celtrix by
Insmed Pharmaceuticals and the other transactions described below had
occurred as of the dates indicated or what such results will be for
any future periods,
(b) give effect to certain nonrecurring charges expected to result from
the transaction, or
(c) reflect any anticipated expenses that we expect that Insmed
Incorporated will incur as a result of combining the companies.
19
<PAGE>
<TABLE>
<CAPTION>
INSMED INCORPORATED
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1999
(in thousands, except per share data)
Financing Pro
Historical Pro Forma Insmed as Historical Reorganization References Forma
Insmed Adjustments Adjusted Celtrix Adjustments (Note 2) Combined
---------- ----------- --------- ---------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 663 $ - $ 663 $ 763 $ - $ 1,426
Costs and expenses:
Research and development 6,320 6,320 1,027 7,347
General and administrative 2,189 2,189 1,953 4,142
Non cash stock compensation 285 285 - 285
-------- --------- --------- -------- ------- ---------
8,794 - 8,794 2,980 - 11,774
-------- --------- --------- -------- ------- ---------
Operating loss (8,131) - (8,131) (2,217) - (10,348)
Equity in loss from joint venture - - (8,973) (8,973)
Amortization of goodwill - - - (537) (J) (537)
Interest Income 338 338 85 423
Proceeds from settlement agreement - - 600 600
-------- --------- --------- -------- ------- ---------
Net loss $ (7,793) $ - $ (7,793) $(10,505) $ (537) $ (18,835)
======== ========= ========= ======== ======= =========
Net loss per share - basic and diluted $ (2.16) $ (0.40) $ (0.19)
======== ======== =========
Shares used in computing basic
and diluted net loss per share 3,606 26,176 99,306
======== ======== =========
</TABLE>
20
<PAGE>
Insmed Incorporated
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Financing Pro
Historical Pro Forma Insmed as Historical Reorganization References Forma
Insmed Adjustments Adjusted Celtrix Adjustments (Note 2) Combined
---------- ----------- --------- ---------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 90 $ - $ 90 $ 90 $ - $ 180
Cost and expenses:
Research and development 2,441 2,441 227 2,668
General and administrative 680 680 746 (531) (K) 895
Non cash stock compensation 8,389 8,389 - 8,389
---------- ----------- --------- ---------- -------------- --------
11,510 - $ 11,510 973 (531) 11,952
---------- ----------- --------- ---------- -------------- --------
Operating loss (11,420) - (11,420) (883) 531 (11,772)
Equity in loss from joint venture - - (165) (165)
Amortization of goodwill - - - (134) (J) (134)
Interest income, net 119 119 33 152
---------- ----------- --------- ---------- -------------- --------
Net loss $ (11,301) $ - $ (11,301) $ (1,015) $ 397 $(11,919)
========== =========== ========= ========== ============== ========
Net loss per share - basic and diluted $ (2.85) $ (0.03) $ (0.11)
========== ========== ========
Shares used in computing basic
and diluted net loss per share 3,966 31,863 107,042
========== ========== ========
</TABLE>
21
<PAGE>
Insmed Incorporated
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Financing Insmed Pro
Historical Pro Forma References as Historical Forma References Pro
Insmed Adjustments (Note 2) Adjusted Celtrix Adjustments (Note 2) Forma
---------- ----------- --------- -------- ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,615 $ 32,600 (A) $ 35,215 $ 6,700 $ - $ 41,915
Marketable securities 2,812 2,812 - 2,812
Prepaids and other current
assets 43 43 115 158
------- --------- --------- -------- --------- ---------
Total current assets 5,470 32,600 38,070 6,815 - 44,885
Property and equipment, net 261 261 68 329
Assets held for sale - - 346 (346) (C) -
Goodwill - - - 10,735 (J) 10,735
Other assets 912 912 2,582 1,088 (B)
(2,582) (C)
(2,000) (D) -
------- --------- --------- -------- --------- ---------
Total assets $ 6,643 $ 32,600 $ 39,243 $ 9,811 $ 6,895 $ 55,949
======= ========= ========= ======== ========= =========
Liabilities and stockholders'
equity
Current liabilities:
Accounts payable $ 1,144 $ - $ 1,144 $ - $ 1,088 (B) $ 2,232
Other current liabilities 202 202 531 - 733
------- --------- --------- -------- --------- ---------
Total current liabilities 1,346 - 1,346 531 1,088 2,965
Exchangeable preferred stock - - 7,948 (7,948) (E) -
Stockholders' equity:
Preferred Stocks 97 97 - (97) (F) -
Common Stocks 44 56 (A) 100 338 42 (E)
(107,041,998 pro forma shares 340 (F)
outstanding) 250 (G) 1,070
Additional capital 39,310 32,544 (A) 71,854 142,656 8,288 (E)
(243) (F)
(250) (G)
(142,044) (H)
54,433 (I)
(2,928) (C)
(2,000) (D)
10,735 (J) 140,501
Cumulative preferred stock
dividend - - 382 (382) (E) -
Notes receivable from stock
sale (61) (61) - - (61)
Accumulated deficit (34,081) (34,081) (142,044) 142,044 (H)
(54,433) (I) (88,514)
Accumulated other
comprehensive loss (12) (12) - - (12)
------- --------- --------- -------- --------- ---------
Total stockholders' equity 5,297 32,600 37,897 1,332 13,755 52,984
------- --------- --------- -------- --------- ---------
Total liabilities and
stockholders' equity $ 6,643 $ 32,600 $ 39,243 $ 9,811 $ 6,895 $ 55,949
======= ========= ========= ======== ========= =========
</TABLE>
22
<PAGE>
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
Note 1
The unaudited pro forma condensed consolidated financial statements reflect
the conversion of all of the outstanding shares of Celtrix and Insmed
Pharmaceuticals common and preferred stock into Insmed Incorporated. The table
below is based on the respective companies' capitalization at March 31, 2000,
using the conversion ratio of one (1) share of Insmed Incorporated common stock
for each share of Celtrix common stock and 3.5 shares of Insmed Incorporated
common stock for each share of Insmed Pharmaceuticals stock. No exercise of
options or warrants outstanding at March 31, 2000 was assumed.
<TABLE>
<CAPTION>
Shares of
Insmed
Number of Conversion Incorporated
Company Stock Shares Ratio to be Issued
--------------- ------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Insmed Pharmaceuticals, Inc. Series A Preferred 6,144,599 3.5 21,506,097
Insmed Pharmaceuticals, Inc. Series B Preferred 3,581,761 3.5 12,536,164
Insmed Pharmaceuticals, Inc. Common 4,359,477 3.5 15,258,170
Celtrix Pharmaceuticals, Inc. Series A Preferred 8,010 1.0 (1) 4,183,426
Celtrix Pharmaceuticals, Inc. Common 33,843,770 1.0 33,843,770
Insmed Pharmaceuticals, Inc. Common 5,632,678 (2) 3.5 19,714,373
--------------
Number of Pro Forma Outstanding Shares at March 31, 2000 107,042,000
==============
</TABLE>
(1) As of March 31, 2000, there were 8,010 shares of Series A Preferred Stock
outstanding. These shares have a liquidation preference of $1,000 per
share. Dividends accreted and unpaid related to this stock were $381,952 at
March 31, 2000. The aggregate liquidation preference and dividends are
convertible into Celtrix common stock at a price of $2.006 per share, which
would provide for the issuance of 4,183,426 shares of Insmed Incorporated
common stock if the transaction occurred on March 31, 2000.
(2) These shares represent common stock of Insmed Pharmaceuticals issuable upon
closing the $34.5 million equity financing.
The acquisition closed May 31, 2000. The purchase price allocation set
forth in the pro forma condensed financial statements is reflective of the
estimated tangible and intangible net assets at closing.
In connection with the purchase of Celtrix, Insmed Incorporated expects
approximately $54.4 million of the purchase price to be allocated to in-process
research and development. Insmed Pharmaceuticals management has engaged an
independent third-party appraisal company to perform a valuation of the
intangible assets acquired. It is expected that Insmed Incorporated will enter
into various corporate collaborations and agreements to manufacture, market,
distribute, and develop the in-process research and development acquired in the
purchase of Celtrix. The terms and conditions of these agreements could differ
substantially from the assumptions made by management. It is also likely that
the terms and conditions of existing corporate collaboration agreements could be
amended or terminated, which could also significantly affect the assumptions
associated with the in-process projects.
The value assigned to purchased in-process research and development was
determined by
23
<PAGE>
estimating the costs to develop the purchased in-process research and
development into commercially viable products; estimating the resulting net cash
flows from such projects; and discounting the net cash flows back to their
present value. This valuation analysis is based on management's estimates as of
March 31, 2000 of anticipated future costs and net cash flows of the projects
described below. Management expects that its estimates of future costs and net
cash flows will change over time as it gathers more data. It is possible that
the estimates described below could change significantly in the future.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion and/or acceleration of existing development programs, including the
mandatory completion of several phases of clinical trials and the general and
administrative costs necessary to manage the projects and trials. Assuming the
approval of the drug by the FDA, costs related to the wide scale manufacturing,
distribution, and marketing of the drugs are included in the projection. The
resulting net cash flows from such projects are based on Insmed Incorporated
management's estimates of revenues, cost of sales and research and development,
sales and marketing and, general and administrative costs, and the anticipated
income tax effect.
The discounting of net cash flows back to their present value is based on
the weighted average cost of capital ("WACC"). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
that enterprise. The discount rates utilized in discounting the net cash flows
from purchased in-process research and development range from 33% to 45%. These
discount rates may be higher than the WACC due to the inherent uncertainties
surrounding the successful development of the purchased in-process research and
development.
The forecast data employed in the analyses was based upon internal product
level forecast information maintained by Celtrix management in the ordinary
course of managing its business. Insmed Incorporated management has reviewed and
challenged the forecast data and related assumptions and utilized the
information in analyzing in-process research and development. The forecast data
and assumptions are inherently uncertain and unpredictable. However, based upon
the information available at this time Insmed Incorporated management believes
the forecast data and assumptions to be reasonable. These assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the forecasted results. Any such variance may result in a material adverse
effect on Insmed Incorporated's financial condition and results of operations.
In the allocation of purchase price to the IPR&D, the concept of
alternative future use was specifically considered for each of the programs
under development. The acquired IPR&D consists of Celtrix's work to complete
each of the identified programs. The programs are very specific to the disease
and market for which they are intended. There are no alternative uses for the
in-process programs in the event that the programs fail in clinical trials or
are otherwise not feasible. The development effort for the acquired IPR&D does
not possess an alternative future use for Insmed Incorporated as defined by
generally accepted accounting principles.
Below is a brief description of in-process research and development
projects including an estimation of when management believes Insmed Incorporated
may realize revenues from the sale of these products in the respective
application.
24
<PAGE>
SomatoKine: Diabetes
Diabetes is typically characterized by the inadequate production or
utilization of insulin. Insulin is a vital hormone needed by the body for normal
control of blood glucose levels. The findings from a Phase II study in 12
patients to treat patients with type 1 diabetes suggests that SomatoKine is a
potential therapeutic for improving insulin sensitivity in both type 1 and type
2 diabetes and helping patients to manage their disease, thus avoiding the
complications which ultimately accompany the disease. Several additional studies
will be required to develop the product for this indication. We expect to resume
Phase II trials immediately.
The valuation of this program assumes that Phase II studies will continue
until 2003, that Phase III studies will be completed by 2005, that the
product will launch in 2006 and that future costs for this program will be about
$3 million a year through 2005. A discount rate of 35% was utilized in
discounting these estimated cash flows.
SomatoKine: Severe Osteoporosis
Osteoporosis is a chronic, debilitating disorder in which the bones become
increasingly porous, brittle and subject to fracture. We believe the
findings from a Phase II feasibility study in hip fracture patients present an
argument for further development of SomatoKine for the treatment of severe
osteoporosis. The Phase II study suggests that a relatively short period of
treatment with SomatoKine offers the potential to restore the patient's bone
mineral density and improve supportive muscle strength as opposed to current
treatments which are used primarily to prevent further bone loss. We expect to
begin a second Phase II study later this year.
The valuation of this program assumes that Phase II studies will continue
until 2003, that Phase III studies will be completed by 2006, that sales
will be made in 2007 and that future costs of this program will be about $4
million a year through 2006. A discount rate of 34% was utilized in discounting
these estimated cash flows.
SomatoKine: Protein Wasting and Severe Burns
Many critically ill patients suffer from serious protein wasting
conditions, which contribute to physical weakness and increase their risk of
morbidity and mortality. The results for the Phase II study conducted in burn
patients demonstrates potential efficacy for SomatoKine to treat serious medical
conditions associated with muscle and weight loss, and provides further evidence
supporting the use of SomatoKine to treat wasting diseases associated with
cancer cachexia, AIDS and advanced kidney failure. A discount rate of 45% was
utilized in discounting these estimated cash flows.
In persons suffering from traumatic burns over at least 20% of their body
surface, very low levels of IGF-I, along with major tissue damage are associated
with the disruption of biological processes that are essential for healing and
protections from burn complications. In a Phase II study conducted within this
population patients who received SomatoKine through two skin graft cycles
indicated substantial improvement in restoring the balance between protein
synthesis and degradation which is a prerequisite for accelerated wound healing
and reduced hospital stay. A discount rate of 33% was utilized in discounting
these estimated cash flows.
25
<PAGE>
The valuation of these programs assumes that sales of SomatoKine could
begin in 2003 to treat severe burns and in 2006 to treat protein wasting and
that the aggregate future costs to develop these indications will be $30
million. Because the value of protein wasting and severe burn indications is low
in relation to diabetes and severe osteoporosis, we will defer further trials in
these indications until we obtain additional data from the planned studies for
the more valuable indications.
TGF-beta-2: Dermal Ulcer
Celtrix entered into a product development, license and marketing agreement
with Genzyme Corporation ("Genzyme") in June 1994 for TGF-beta-2. The objective
is to commercialize this product for tissue repair and treatment of systemic
applications. Under the terms of the agreements, Genzyme assumed responsibility
for all costs related to developing TGF-beta-2 for these indications. Celtrix is
entitled to receive milestone payments and royalties if such development is
successful. The valuation of this program is based on receipt of milestone
payments of $2.5 million between 2001 and 2004, and royalties beginning in 2005.
A discount rate of 34% was utilized in discounting these estimated cash flows.
The total acquisition cost is estimated to be approximately $71.5 million,
determined as follows (in thousands):
<TABLE>
<S> <C>
Fair value of Insmed Incorporated shares(1)............................................ $59,823
Fair value of Insmed Incorporated stock options(2)..................................... 9,697
Insmed Pharmaceuticals transaction costs, consisting primarily of financial advisory,
legal and accounting fees(3)........................................................... 2,000
-------
$71,520
=======
</TABLE>
(1) The fair value per share was calculated by averaging the Celtrix closing
price for the five days prior to and subsequent to the signing of the
definitive reorganization agreement on November 30, 1999. The result of
this calculation is $1.94886 which was multiplied by the shares outstanding
on an as converted basis as of November 30, 1999 of 30,696,461.
(2) Options and warrants outstanding at November 30, 1999 of 10,244,113 were
multiplied by the fair value of each grant. The fair value of these options
and warrants were estimated as of November 30, 1999 using the Black-Scholes
pricing method assuming a risk free interest rate of 6.0%, no dividends, a
volatility factor of .801, and a weighted average expected life of .33 to
.50 years. The application of this method resulted in a fair value per
option and warrant between $0.01 and $1.41.
(3) Under purchase accounting the $2.0 million in transaction costs Insmed
Pharmaceuticals expects to incur are included in the determination of the
purchase price. The $1.5 million in transaction costs Celtrix expects to
incur will be expensed as incurred.
Based upon preliminary estimate of the valuation of tangible and intangible
assets acquired and liabilities assumed, Insmed Pharmaceuticals has allocated
the total cost of the purchase to the
26
<PAGE>
net assets of Celtrix, as follows (in thousands):
March 31,
2000
Tangible assets acquired: ---------
Cash $ 6,700
Receivables and other current assets 115
Property and Equipment 68
In-Process research and development 54,433
Goodwill 10,735
Liabilities assumed (531)
--------
$ 71,520
========
The Celtrix research and development programs in process were valued as follows:
SomatoKine: Diabetes $ 36,122
SomatoKine: Osteoporosis 12,650
SomatoKine: Severe Burns 1,224
SomatoKine: Protein Wasting 3,169
TGF-beta-2: Dermal Ulcer 1,268
--------
$ 54,433
========
The in-process research and development has been written off against the
consolidated accumulated deficit. Because the charge is nonrecurring, it has not
been reflected in the pro forma condensed consolidated statement of operations.
We currently anticipate spending approximately $8.9 million in 2000 to
continue the development and clinical trial studies of SomatoKine for its
applications in diabetes and severe osteoporosis. The results of these trials
will dictate the amount of future funds and company resources that may be
ultimately dedicated to these projects. These results may lead management to
conclude to continue development, revise or postpone development plans, or
possibly terminate the pursuit of SomatoKine commercialization for one or both
of these applications.
Note 2
The pro forma condensed consolidated balance sheet includes the adjustments
necessary to give effect to the acquisition as if it occurred on March 31,
2000. The balance sheet also reflects the allocation of the preliminary purchase
price to the estimated fair value of tangible and intangible assets acquired and
liabilities assumed, a charge to the accumulated deficit for acquired in-process
research and development and the elimination of Celtrix and Insmed
Pharmaceuticals' equity accounts. Adjustments included in the pro forma
condensed consolidated balance sheet are summarized as follows (in thousands
except share and per share amounts):
(A) Sale of 5,632,678 shares of Insmed Pharmaceuticals common stock,
immediately prior to the acquisition close, and sale of warrants to
purchase 6,901,344 shares of common stock of Insmed Incorporated.
Proceeds, net of estimated transaction costs of $1.9 million, are
expected to approximate $32.6 million.
(B) Increase the accrual for Insmed Pharmaceuticals' estimated
transaction-related costs to $2,000 principally for investment
banking, legal and accounting services. Approximately $912 has been
incurred through March 31, 2000.
(C) Adjustment of net assets based upon purchase price allocation.
(D) Reclassification of the estimated transaction costs incurred by Insmed
Pharmaceuticals to reflect their inclusion in the determination of the
preliminary purchase price.
(E) The exchange of Celtrix preferred stock and cumulative dividends on an
as converted
27
<PAGE>
basis into 4,183,426 shares of Insmed Incorporated common stock at the
exchange ratio prescribed in the Celtrix Certificate of Incorporation.
(F) Conversion of Insmed Pharmaceuticals Convertible Participating
Preferred Stock, Series A and Convertible Preferred Stock, Series B
into 34,042,261 shares of Insmed Incorporated common stock.
(G) Conversion of Insmed Pharmaceuticals and Celtrix common stock into
68,816,313 shares of Insmed Incorporated common stock.
(H) Elimination of Celtrix accumulated deficit.
(I) Charge to operations for in-process research and development of
$54,433.
(J) Record amount allocated to goodwill of $10,735 in the Unaudited
Proforma Condensed Consolidated Balance Sheet and amortization expense
of $537 and $134 in the Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the year ended December 31, 1999 and the
three months ended March 31, 2000, respectively. An amortization
period of twenty years was used.
(K) Reverse the non-recurring transaction costs of $531 incurred by
Celtrix through March 31, 2000.
Note 3
Pro forma basic and diluted net loss per share amounts for the year ended
December 31, 1999 and the three months ended March 31, 2000, are based upon the
estimated weighted-average number of shares expected to be outstanding
subsequent to the reorganizations. The determination of the pro-forma weighted-
average shares outstanding used in the calculation of pro forma basic and
diluted net loss per share for the three months ended March 31, 2000 is included
in the table in Note 1 on page 23. The impact of outstanding options and
warrants, including Insmed Pharmaceuticals and Celtrix options converted, is not
included in the calculation of basic and diluted net loss per share as the
effect would be antidilutive.
28
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INSMED INCORPORATED
Date: August 14, 2000 By: /s/ Michael D. Baer
------------------------
Michael D. Baer
Chief Financial Officer
29
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INSMED INCORPORATED
INDEX TO EXHIBITS
Exhibit Number
99 Press Release dated July 18, 2000.
30
