INSMED INCORPORATED

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Insmmed is a global biopharmaceutical company focused on developing and commercializing therapies for serious and rare diseases.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Insmed is a biopharmaceutical company at a pivotal stage, transitioning from a primarily research and development (R&D) focused operation into a commercial enterprise, with ARIKAYCE® as their primary driver. The company’s focus is on difficult-to-treat diseases, particularly those with limited or no approved therapies. The core therapeutic areas are severe respiratory and infectious diseases, and the company continues its investment in technologies such as inhaled delivery, genomics, and advanced processing. Let’s break down the business and financials.

  • Revenue Distribution: In terms of regions, most of their revenue comes from the United States. In recent years, Insmed has been diversifying geographically and expanded the sales operations into several international markets, including Japan.

  • Trends in the Industry: This is a highly competitive and regulated industry, and the approval of ABKAYCE® was a major milestone. With the expiration of exclusivity in the US and upcoming market entries in EU and Japan, they are trying to establish first-mover advantages in other markets.

  • Margins: A major goal for the company is to improve their operating margin. A strong focus on efficiency and cost reduction will help them gain more profitability. They continue to invest significant resources to R&D.

  • Competitive Landscape: The company is competing in niche markets with other pharma and biotech companies, and even generic pharmaceutical suppliers, as such differentiation is crucial. One of the big challenges is building a wide moat, especially as a smaller biotech.

  • What Makes INSM Different:

INSMED sets itself apart through its focus on difficult-to-treat rare diseases, its inhaled delivery technology with ARIKAYCE®, and it’s strong and targeted focus on R&D to bring innovative drugs to markets. Their focus on pulmonary conditions sets them apart and allows for better outcomes for patients and can lead to future success. In recent years, expansion into international markets will give a wider reach to more patients. While many pharmaceutical companies have a large sales force, Insmmed’s sales force is more targeted and limited, allowing them to target and maintain relationships with specialized doctors who treat the disease, as such, they can create better trust in the company, also the company is able to limit expenses as the salesforce is not too big. Insmmed also has a focus on data science to generate good information and make better decisions.

  • Financials In-Depth:

    • Revenues: Insmed’s revenue is largely driven by sales of ARIKAYCE, and this revenue is expected to grow as they expand into more countries. However, there is some seasonality and variability in revenues. In the latest quarterly report, they have reported a positive increase in revenues, however, this has been from price increases. It is very important to also focus on volume to evaluate the long-term success. The company continues to struggle with profitability. It’s important to analyze if this will continue and for how long will investors have to wait before the company is profitable.

    • Expenses: Insmed’s expenses include the cost of products, R&D, sales, marketing, and administrative expenses. R&D expenses are substantial, reflecting their focus on developing new treatments, and selling expenses show they are now shifting focus towards sales. R&D expenses may also show volatility due to acquisitions of new molecules. Looking at their income statements from the recent quarters, those costs are significantly above revenues, which is concerning.

    • Balance Sheet: The balance sheet shows large deficits and significant levels of debt, which shows the company needs to secure more capital. Cash has significantly reduced in the recent quarters, which implies a higher need for the company to raise money, or start making profit. The company’s intangible assets, especially acquired research and development (IPR&D), represent a big part of its total assets, which will depreciate over time.

  • Moat Rating: 2 / 5

Insmmed’s moat is narrow, reflecting the company’s current market position, strong focus on R&D, unique inhalant technology, and regulatory approvals for its main drug, ARIKAYCE®. They focus on a very specific market that has high unmet needs. However, the risk of competition and possible technological obsolescence limit their potential. In particular, companies who operate as a single player with just a few products. For the moat to be strong, it has to cover more sources of moat, like economies of scale. Insmmed is more focused on the quality and innovation of its products, it needs to focus on more moats. The management seems to have an understanding of this and are also focusing on distribution and expansion to solidify their moat.

  • Legitimate Risks:
    • Competition: The pharmaceutical industry is very competitive, with several other companies pursuing therapies for rare lung diseases. Insmmed faces considerable challenges from existing players and new market entrants. In particular, Insmmed must fight for market share in markets where its competitors already established themselves.
    • Regulatory Hurdles: Regulatory approval from authorities is a very time-consuming process, and new regulations or changes in existing regulations could affect profitability. Additionally, with new expansions into Japan and Europe, the company must meet different regulatory agencies.
    • Product Pipeline Risk: The future success of the company is largely dependent on the success of its current main drug and upcoming pipeline, and there is no assurance of approvals for future products. If they fail the trials, or other issues appear, profitability would be severely impacted.
    • Financial risk: The company has lots of debt and negative earnings. It needs to secure more funding to sustain their operations. Financial risk would impact the ability to reinvest and develop, slowing down growth.
    • Concentration of revenue The company’s revenue comes from only few products and locations, which makes the revenue vulnerable to outside shocks. A single product failure or negative development in one country may have severe impacts on revenue.
  • Business Resilience:
    • Focus on Niche Areas: Insmmed focuses on rare diseases with limited or no options, which makes their products less susceptible to competitors and their products are more relevant to their customers.
    • Strong relationships with doctors: As the company focuses on a smaller, targeted niche with very sick people, having good relationships with doctors is very important, and it will help sustain sales.
    • Innovative technology: By focusing on innovation, the company can stay ahead of its competitors in the long run, although this moat can be easily eroded if competition introduces better technology.
  • Understandability: 3/5 The company’s core business of developing and commercializing pharmaceutical products is relatively easy to understand. However, the complexities involved with rare diseases, regulatory procedures and the intricate valuation of intangible assets make it a bit difficult for less experienced investors to understand. There are many external factors to take into account to understand the future.
  • Balance Sheet Health: 2/5 The company has high debt levels and continues to run a negative earnings. They have a decent amount of intangible assets, but if they do not bring profitability to the company, they may be worthless. A significant drop in cash in the latest quarters implies the company’s financial health is concerning. Although having high debt levels in a biotech company is quite common, it can still create risks to shareholders and the company may face financial troubles if not monitored.

Recent Concerns and Management Viewpoint:

  • Drug trial delay: One trial faced some delays due to Covid-19 and the company expects to release a readout from the Phase III study during the second half of 2024.
  • International expansion: Launch in Europe is underway, but they have some complexities related to reimbursements. However, they have had better than expected progress, where the company continues to have good relations with regulatory agencies in Europe.
  • R&D Pipeline: Management has reiterated their focus on developing innovative products and are focused on new treatments. They are also looking to use technology to improve current treatments. This could create new revenue streams in the future and improve the company’s performance. They have also started the phase 3 trial of another product.
  • Profitability: Although there was an increase in revenue during the past quarter, the management acknowledges that the company needs to start becoming profitable. However, as they expand to more markets and develop more products, the company will face more costs. The company is showing that it is working on reducing costs to improve margins.
  • Capital Structure: The management is focused on reducing debt, and has also received enough cash to have a longer runway. Although the current debt is significant, the management seems to have a plan to reach profitability and reduce debt.