Insmed Inc

NASDAQ:INSM

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Insmed conference call to discuss company second quarter financial results. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blaine Davis, Head of Investor Relations. You may begin, sir.

[Blaine Davis, executive]

Thanks, Nancy. Good morning, everyone, and welcome to today's conference call to discuss our second quarter financial results for 2019.

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 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. 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, Insmed's Chairman and Chief Executive Officer; Roger Adsett, Chief Commercial Officer; and John Goll, Chief Accounting Officer. Once we complete our prepared remarks, we'll open the call to take your questions.

With that, let me turn the call over to Will.

[William Lewis, executive]

Thank you, Blaine. Good morning, everyone, and thank you for joining us.

It's been a very exciting first half of 2019 for Insmed, and we have a lot of progress to update you on across our portfolio. Let me start by making some comments on the U.S. commercial launch of ARIKAYCE. We remain very excited about the strong progress of the U.S. launch through the second quarter of 2019. We continue to see encouraging trends across a variety of metrics as well as very positive reception from treating physicians, payers and most importantly, patients.

As we discussed in the early days of our launch, the breadth and depth of prescribing have continued to exceed our expectations, underscoring the significant unmet need for ARIKAYCE in this difficult-to-treat patient population. With 3 full quarters of performance now completed, we grow increasingly confident in the long-term potential of ARIKAYCE. Patient starts, discontinuations and reauthorizations are all trending positively, and Roger will go into each of these in greater detail. Overall, we are off to a great start, and our optimism is growing for the potential of ARIKAYCE to help patients with refractory MAC lung disease. As a result of our strong early performance over the first 3 quarters of launch, we are raising our full year revenue guidance to $110 million to $120 million from our previous guidance of $90 million to $105 million.

In May, we attended the American Thoracic Society Meeting, which was an important venue for us to engage with the physician, scientific and advocacy communities. We also released data from our pivotal CONVERT study in a late-breaking session, which showed that 63% of patients taking ARIKAYCE plus guideline-based therapy remained culture-negative 3 months after stopping all treatment versus 0% of patients receiving guideline-based therapy alone. It's worth noting that this is the primary end point in our marketing authorization application in the EU. These data demonstrate the potential longer-term value of ARIKAYCE in maintaining culture conversion after treatment. We believe the treating community found these data very compelling.

The data also provide insight into the high rate of reinfection that occurs with MAC lung disease. We believe that the rate of reinfection shown in our CONVERT study supports the long-term need for ARIKAYCE in these patients. As patients initiate therapy with ARIKAYCE and are treated for the recommended treatment duration, there will inevitably be patients who come off all drugs, get reinfected and likely have to reinitiate therapy. The pathophysiology of MAC lung disease is such that patients are predisposed to the disease, and because of the ubiquitous nature of the bacteria, the reinfection rate of refractory patients remains high. While we continue to look for new solutions to overcome this challenge, we are pleased that ARIKAYCE is available to help appropriate patients if the disease recurs.

ATS also provided a forum for sharing exciting developments in the treatment of NTM lung disease caused by Mycobacterium abscessus, the second most common NTM pathogen. In an oral session, researchers presented data from an Insmed-supported investigator-initiated study of once daily ARIKAYCE in a prospective cohort of patients with NTM lung disease caused by Mycobacterium abscessus that included both cystic fibrosis and noncystic-fibrosis patients. In this open-label trial, 11 out of 30, or 37% of patients receiving ARIKAYCE for at least 4 months met the primary end point of achieving sputum culture conversion without reversion by month 12.

Now let me provide an update on our strategic priorities for the remainder of 2019. Our first and most important priority remains our execution of the U.S. launch of ARIKAYCE. We plan to continue to fully resource all aspects of the launch as we move from the early phase into a more sustained phase of growth. Beyond the U.S. launch of ARIKAYCE, we recently filed our MAA for the approval of ARIKAYCE with the European Medicines Agency for the treatment of patients with persistent MAC lung infection as part of a combination antibacterial drug regimen in adults.

The MAA has subsequently been validated by the EMA. The proposed indication reflects the same population of refractory MAC lung disease patients for which ARIKAYCE is approved in the U.S. Our initial dialogue with the co-rapporteurs, Ireland and Poland, has gone very well, and we look forward to working closely with the EMA to continue to advance our application in the coming months. We expect a 12-month review cycle with a potential European launch if our MAA is approved in the second half of 2020, beginning with the U.K. and Germany. Of note, we are closely following developments related to Brexit and its potential impact on the regulatory process in the U.K.

In Japan, we remain on track to file for regulatory approval of ARIKAYCE in the first half of 2020. Our recent meeting with the PMDA indicated that our clinical data package is sufficient, and the team is now hard at work putting the filing together for submission. Importantly, the Japanese authorities have approved our proposal to have the medical device reimbursed separately from the drug itself, which is an important component in creating a successful business model to make ARIKAYCE available for appropriate patients in Japan if and when it gets approved. We are very optimistic about the potential for ARIKAYCE to make a difference in the lives of patients with refractory MAC lung disease in both the EU and Japan.

Beyond Europe and Japan, we are exploring the use of a distributor-based named patient program model at the U.S. price in select countries with high rates of NTM lung disease. These distributors can help us reach patients in need in countries where we do not currently have an infrastructure.

As we continue our efforts to expand our geographic footprint for ARIKAYCE, we are seeking ways to grow the addressable population through appropriate clinical trial work. Since our approval, we have been engaged in a very productive dialogue with FDA on this topic, and following our most recent meeting, we now have a path for advancing our confirmatory clinical trial and ultimately seeking to move ARIKAYCE into additional lines of therapy. Let me take a few moments to walk through the next steps.

First, the FDA continues to express the view that the primary end point for examining the effectiveness of a potential NTM treatment must be a clinical end point, and further, that until a correlation to a clinical outcome can be established, culture conversion as the primary end point in a pivotal trial for the approval of NTM treatments is not sufficient. This is consistent with what we heard during our adcom last year. Consequently, we have initiated efforts to evaluate an appropriate patient-reported outcome, or PRO, tool that will enable the assessment of therapies for the treatment of NTM lung disease. Once our PRO tool is verified through a short-term study, we plan to begin the confirmatory clinical study of ARIKAYCE in a front-line setting of patients with MAC lung disease and conduct a study in M. abscessus with approximately 200 patients in each study.

I would like to recognize the hard work of our Head of Clinical Development, Kevin Mange, and his team for their stewardship in advancing the ARIKAYCE life cycle management programs. Alongside Kevin and his team, our Chief Product Strategy Officer and former Chief Medical Officer, Gene Sullivan, continues to provide his input into the ARIKAYCE development programs. We remain very optimistic about the opportunity to expand the label for ARIKAYCE and look forward to initiating these studies.

Turning to our pipeline. We are looking forward to near-term data from the WILLOW study, our 6-month global Phase II trial of INS1007 in patients with noncystic-fibrosis bronchiectasis. We completed enrollment of this trial in the middle of the year and remain on track for top line data in the first quarter of 2020. I would like to spend a bit of time discussing the mechanism of action of INS1007 and why this is such an exciting opportunity for the treatment of non-CF bronch.

INS1007 is a novel, oral, reversible inhibitor of dipeptidyl peptidase 1, or DPP1, an enzyme that catalyzes the activation of neutrophil serine proteases, or NSPs. NSPs are key agents of neutrophil-mediated inflammation, tissue damage and excessive mucus production involved in non-CF bronch. This is a new mechanism of action to address a clear unmet need. Non-CF bronch stands out as one of the more significant pulmonary diseases with no approved therapies. It is a debilitating disease marked by frequent pulmonary exacerbations, requiring antibiotic therapy and/or hospitalization. Prevalence estimates range from about 340,000 to 520,000 in the U.S., with significant overlap with patients who have NTM lung disease.

Now let me spend a moment on the details of the Phase II WILLOW study. We've enrolled 256 patients of a targeted 240 who had at least 2 documented pulmonary exacerbations in the 12 months prior to screening. Patients were randomized to receive INS1007 10 milligrams in a once-daily oral dose solid, or INS1007 25 milligrams once daily, or placebo, for a period of 24 weeks. As of today, more than half of patients have already completed this double-blind study. The primary end point for the study is time to first pulmonary exacerbation, with secondary end points covering a range of pulmonary measures, including frequency of pulmonary exacerbations. The powering of this study and the selected end points will give us the necessary data to clearly evaluate whether we can have an impact on this difficult-to-treat population. We are also advancing our INS1009 program, a novel, dry-powder formulation of treprostinil, which we expect will enter the clinic as a once- or twice-a-day product and produce data in 2020.

I now want to take a moment to comment on the allocation of our financial resources. As we advance our development programs and support our commercial operations, we are attuned to the market environment and recognize the criticality of having a continued focus on our operating expenses. As we've successfully transitioned from a development stage to a commercial-stage company with increased revenue growth, we are simultaneously sharpening our focus on operating expenses.

As a result, we expect to see our operating expenses flat to down from the first to second half of this year. We forecast operating expenses for the second half of the year to be in the range of $140 million to $155 million from the $155 million spent in the first half of 2019. This reduction and new lower expected run rate reflect a disciplined approach to resourcing while fully funding those activities that will drive top line performance in the U.S. and abroad while we continue to accelerate our near to midterm pipeline. We will also continue to be opportunistic, bringing in additional programs we believe have a clear path to value creation through their impact on unmet medical needs.

Let me now turn the call over to Roger for some additional insights into our commercial activities. Roger?

[Roger Adsett, executive]

Thanks, Will, and good morning, everyone. We are very encouraged by the strength of the U.S. launch of ARIKAYCE, in which we are continuing to outperform on a variety of our internal metrics.

For the second quarter of 2019, which was the third quarter of our launch, we are pleased to report net sales of $30 million, of which $29 million is attributable to the U.S. launch and $1 million is attributable to our named patient programs in France and Germany. Let me take a moment to walk through some of the metrics we're using to measure launch performance in the U.S. beyond revenue.

During the second quarter, we saw a stabilization of new patient starts at the level of approximately 600 new patients initiating therapy. We believe the strength of new patient starts in the first 3 quarters reflects the unmet treatment needs for the estimated 12,000 to 17,000 refractory MAC lung disease patients in the U.S. We anticipate that as treating physicians gain additional experience with ARIKAYCE, combined with the rollout of our new branded marketing campaign, the impact of positive engagement and awareness at ATS, and continued strong execution of our field teams, we will continue to see this strength in patient starts. We remain hopeful that the NTM treatment guidelines that are currently being updated will be issued in the second half of this year, which could enhance awareness of MAC lung disease and, if ARIKAYCE is included, drive appropriate use of our drug in the near to medium term in patients with refractory MAC lung disease.

During the quarter, we also continued to see strong prescribing trends, with more than 1,300 unique ARIKAYCE prescribers since launch. As expected, we have seen increased adoption from existing prescribers and a slight deceleration of new prescribers. This is a common dynamic in rare disease launches and was expected given the concentrated pool of patients in the top tier of prescribers. We plan to drive future growth by increasing the depth of current prescribers while continuing to seek out new prescribers. Our market research indicates a strong intent to prescribe ARIKAYCE for the right patient, and we believe that helping those physicians identify the nonconverted patient is important for continued growth.

Let me now spend some time on additional metrics that help illustrate how the product is being used and reimbursed to date. We continue to see an encouraging trend with discontinuations. These have remained steady from the prior quarter and continue to be trending slightly better than the 34% demonstrated as of Month 6 in our Phase III CONVERT study. We believe this is the result of appropriate setting of expectations with patients and physicians as well as continued support from our Arikares team. We expect that this trend will continue and that the dropout rate could improve slightly over time.

In addition to monitoring patient discontinuation, we are carefully monitoring adherence to the treatment regimen. While the data is still a bit early, we continue to see adherence in line with our expectations, and within the benchmark rates of 60% to 70% seen with other inhaled antibiotics. We continue to expect that patients will take short breaks in therapy that will lead to adherence within this range while allowing them to persist with ARIKAYCE through the full recommended treatment duration.

Let me provide some early commentary regarding reauthorizations. Thus far, we are seeing strong support from physicians and payers in reauthorizations. We are looking at limited data set here, as only those patients who initiated in the fourth quarter are coming up for reauthorization, but we are seeing very positive trends. The strong trends we see indicate that reauthorization has been a smooth process for both converters and nonconverters. To date, for approximately 55% of patients, reimbursement comes from Medicare, while for approximately 33% of patients, reimbursement comes from commercial plans. For the remaining patients, reimbursement comes from Medicaid, TRICARE or other means, including cash pay.

We remain encouraged by the positive reimbursement trends and the fact that ARIKAYCE is generally being reimbursed through physician attestation for appropriate refractory MAC lung disease patients. We are working to ensure that that process continues. To support this further, we are in the process of hiring a team of field-based reimbursement professionals who will compliantly educate providers regarding the reimbursement and access landscape and problem-solving patient access challenges. Additionally, we are aware of the Senate Finance Committee proposal around drug pricing and are carefully tracking its progress and potential impacts.

As I've said before, I believe we have the right strategy, an exceptional team and the necessary resources to maintain our launch momentum as we enter the second half of 2019.

Turning to our global expansion. The commercial team is focused on and looking forward to the potential launch of ARIKAYCE in the EU in 2020 and filing in Japan in the first half of 2020. We have strong teams on the ground in both regions, and we look forward to expanding our commercial efforts. Importantly, the EU opportunity will potentially begin contributing to our top line performance as early as late 2020.

I would also like to provide an update on the buildout of our third-party manufacturing facility in partnership with Patheon. We remain on track with this project and look forward to its completion. We anticipate making clinical GMP batches this year and will potentially be able to produce commercial batches in 2020 while we wait for FDA approval of this facility. We remain very excited about the launch of ARIKAYCE at this stage and are more encouraged than ever about its long-term growth potential.

And with that, I'll hand the call over to our Chief Accounting Officer, John Goll, to review the financials. John?

[John Goll, executive]

Thanks, Roger. First I'll spend a few minutes reviewing our second quarter financial results, and then we'll cover our financial guidance.

This morning we reported total net revenues of $30 million, comprising $29 million in U.S. net sales of ARIKAYCE and $1 million in ex U.S. net sales of ARIKAYCE. The ex U.S. net sales reflect utilization from our named patient programs in both France and Germany. As you will see on our income statement, for the second quarter of 2019, we reported a net loss of $66.5 million or $0.81 per share compared with a net loss of $76.4 million or $1 per share for the second quarter of 2018.

Our gross-to-net deductions for the second quarter were approximately 10%, which represents an improvement as compared to 14% in the first quarter of 2019, when we saw the seasonal impact of the typical beginning-of-year benefit reset for the amounts related to a coverage gap or donut hole. We expect our gross to nets to remain in the low double digits for the remainder of the year. Cost of goods sold in the second quarter was $4.9 million. As expected, gross margin improved during the quarter to 84% as compared to 81% in the first quarter. It's important to remind everyone that our gross margin has been and will continue to benefit in 2019 from expensed inventory prior to FDA approval of ARIKAYCE.

Research and development expenses were $33.5 million for the quarter compared to $35.7 million in the second quarter of 2018. SG&A expenses were $52.4 million for the second quarter of 2019 compared to $37.2 million in the second quarter of 2018. The increase is primarily due to higher expenses related to our branded commercial launch of ARIKAYCE, including patient support activities, field operations and disease awareness, and to a lesser extent, an increase in head count, including noncash stock-based compensation.

In addition, in the second quarter, we completed a successful public offering of 10.7 million new shares of common stock that resulted in net cash proceeds to the company of $261.2 million, after deducting underwriting discounts and commissions and other offering-related expenses. We closed the second quarter of 2019 with $601 million in cash and cash equivalents. We feel very good about our cash position right now and believe that it puts the company in a strong position to deliver on our critical success factors.

Our cash-based operating expenses in the first half of 2019 were $155.5 million, which was at the low end of our guidance range. Looking ahead, we expect cash-based operating expenses to be in the range of $140 million to $155 million for the second half of 2019. We will continue to invest in our core operating business, which includes a successful U.S. launch of ARIKAYCE, global expansion activities in Europe and Japan and pipeline advancements.

Importantly, as we embark on the development of an NTM lung disease PRO and advance our life cycle management studies for ARIKAYCE, we do not anticipate a substantial increase in our operating expenses given the manageable number of patients in these trials. As a reminder, we define cash-based operating expenses in our earnings press release as total costs and expenses excluding cost of product revenues, stock-based compensation expense, depreciation and amortization of intangibles.

In addition, the company expects onetime capital expenditures in support of the large-scale manufacturing facility at Patheon and the new headquarters to be in the range of $20 million to $30 million for the second half of 2019. In terms of revenue guidance, we now expect full year 2019 net revenues for ARIKAYCE to be in the range of $110 million to $120 million.

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

[William Lewis, executive]

Thank you, John. Let me close out our prepared remarks by reiterating that the first half of 2019 has been very rewarding. I am struck by the fact that with our updated revenue guidance of $110 million to $120 million, ARIKAYCE is on track to become one of the top 10 orphan nononcology drug launches in the U.S. of all time. I'd like to thank the entire Insmed team around the world for their hard work and dedication as well as the patients and physicians we serve for their valuable input and partnership. With that, I'd like to take -- open the call to questions.

[Operator]

[Operator Instructions]

And our first question comes from Martin Auster from Credit Suisse.

[Martin Auster, analyst]

Congrats on the nice quarter. I had a couple for you -- for Roger. Thank you very much for the metrics you provided on the launch. Those are very helpful. I was wondering if you'd be able to add any more color or be able to kind of specifically pin down, for the earlier patients that were on drug that have gotten through 6 months of therapy now, I was wondering what the rate of reauthorization for those patients that have not culture converted at this point, if you have that level of detail or any kind of sense of what that might look like. And then secondly I was wondering if you could maybe just provide us a little more detail on the steps to validate the PRO that you're developing for the confirmatory trials.

[William Lewis, executive]

Roger, why don't you take the first one, I'll take the second.

[Roger Adsett, executive]

Yes. Thanks, Martin. So we don't have a breakdown of converter or nonconverters, but I would say in general, across our entire ARIKAYCE population, reauthorization has not been an impediment at all for physicians and for patients. So we estimate that approximately 1/3 of the ARIKAYCE patients have a payer-defined reauthorization criteria, and the overwhelming majority of those criteria require just an attestation from the physician as to either culture conversion or clinical benefit for that patient. So we remain very pleased with the continuation rates from that cohort of patients, and we remain very pleased with the supportive reimbursement environment that we have from the payers, and reauthorization at this point has not been an issue, and we don't anticipate that to change going forward.

[William Lewis, executive]

And on the PRO question, just to frame this out, for label expansion and the clinical trial work needed to accomplish that, I'll just tell you that we are extremely happy with where we are with the FDA on this front. The work for the PRO is already underway and we believe that this is going to give us the ability to increase the probability of success as it relates to those clinical trials and getting them executed. Obviously, there's going to be some back and forth in the coming months with the FDA to ensure that we capture everything appropriately for that PRO. I think that PRO will become the standard in the industry when looking at NTM patients and evaluating the efficacy of drugs to treat them. So for all those reasons, I think we're extremely happy, and we'll look forward to providing you folks more detail as time goes on.

[Martin Auster, analyst]

And any broad sense of time lines for validation to kind of enable you to start the confirmatory trial, Will?

[William Lewis, executive]

At this stage, I'm not going to speculate on the exact details. I would just say that the work is already underway, and as we gain clarity -- as you know, I favor commenting only once we have certainty -- so once we have that we'll certainly share it. But you can assume that we're moving this forward as quickly as we possibly can. And I would just draw attention to the fact that that includes already having sized out what we think these trials will need to look like on a confirmatory basis. Presuming certain -- the PRO behaves in a particular way, that assumption is drawn from the careful examination of the data that we already have on the impact of our drug in this patient population. The totality of that means that these trials will not be massive trials. We estimate 200 patients for each of the confirmatory trials for label expansion, both the front line and M. abscessus, so that should be something that will allow us to expedite the execution of these trials, I would say.

[Operator]

Our next question comes from Matthew Harrison from Morgan Stanley.

[Matthew Harrison, analyst]

I guess two from me. One, can you just talk broadly about the commercial efforts and what you need to do to prepare for the European launch, and what you're doing at this point, especially given the fact that you have some named patient sales there already?

And then second is, on the 600 new patient starts, can you -- I think you made a comment that you continue to expect starts around that level. Can you just maybe clarify -- are you basically giving forward guidance that you expect 500, 600, 700 patients to be added per quarter?

[William Lewis, executive]

Roger?

[Roger Adsett, executive]

Yes, thanks for the question, Matt. So I think we remain very excited about the European opportunity, and importantly, as you mentioned, we do have infrastructure currently in Europe, and that infrastructure across several countries, several of the key markets, has been busy and engaged in disease awareness and preparing for the launch. I think it's important in both Europe and Japan, I think the commercial resources and the infrastructure that we're preparing there and that we have in place is going to be fairly modest given the rare disease dynamics that we have going on here.

I think that the patients, even more than the U.S. where we see a lot of these patients treated in the community setting, the patients in Europe and in Japan will likely be concentrated in centers of excellence just because of the way the healthcare system works there. So that allows us to really focus our efforts on those centers of excellence and those key thought leaders and treating physicians. And so that's one of the reasons why we feel that we can be very effective in doing this by ourselves, leveraging a fairly modest commercial infrastructure to generate additional top line growth for the company.

Regarding the -- your second question on, are we giving forward guidance on the patients, I would not say that we're giving forward guidance on the number of patients that we expect. What we have -- what we're commenting on is the stabilization of that trend, and I think it's been informative. We've often looked to analogues and actually to IPF -- the IPF launches as particularly instructive as we think about our business and sort of the shape of the business and how to size our sales force, et cetera. And what we saw in IPF -- and it's instructive because it launched in the same month that we did -- was right around that same time, there was a stabilization of new patients with those launches as well.

But importantly, what I want to focus on is the opportunity we have. I mentioned a number of catalysts that we have in front of us, so I think the professional campaign that we have, an award-winning professional campaign, I think is going to be very impactful in engaging the healthcare professionals around ARIKAYCE. We've launched our branded direct-to-patient campaign; that's largely a digital effort. But patients are now able to download enrollment forms, for example, off of our website, take them in to the physicians and actually discuss ARIKAYCE, as well as NTM, directly with those physicians, and we think that that's an important step for empowering patients with NTM to have the discussion about appropriate therapy and appropriate treatment with their physician.

I think the conferences that we have coming up in the fall are always a nice catalyst, and get some momentum coming out of those conferences, and then the -- I think what we're really looking forward to is the issuance of the guidelines, and we really don't have any control on when those occur, but we're hopeful and expecting that ARIKAYCE will be included in those guidelines based on the clinical trial and the evidence that we have. So maybe I'll close with, I think we've had somewhere around 1,500 patients initiated therapy since launch. We feel very confident about the addressable market, the 12,000 to 17,000 refractory NTM patients, so in my mind, we are just scratching the surface of these patients here, and there's a lot more work that we need to do to make sure that these patients get the appropriate therapy.

[Operator]

Our next question comes from Adam Walsh from Stifel.

[Adam Walsh, analyst]

So my first question is, based on what you know from the prior studies, what do you think an NTM-specific PRO should look like? And what measures would be most important in your view?

[William Lewis, executive]

Thanks for the question, Adam. I think we're going to draw from our clinical trial experience and, frankly, take in the commentary both from patients and from physicians on this point, and some of that was shared at the end points workshop that the FDA held earlier this year. The key messages that came across, I think, are -- and the symptom I would point to as probably the most notable is fatigue. These patients clearly are impacted in terms of the way they experience their daily living, and the ability to eradicate NTM from their bodies, I think, will pay dividends to them.

We do hear anecdotally about better energy, better ability to engage in their day-to-day activities, so we think that's going to be an important element. But it's but one of the domains we'll be looking at. What I would emphasize is, we have our understanding from our clinical data set; we think that's fairly detailed. We've done a lot of dialogue with physicians and patients; we'll continue to do that. But we will have a very specific process by which we interview patients through both qualitative and quantitative assessment of the measures and then validate those measures so that the objective at the other end is to have a really well-defined PRO, very specific to NTM.

It may or may not have a separate module to capture specific elements of Mycobacterium abscessus patients, for example, but we will take those forward, validate them, and that will be what is used to inform the clinical trial. And the beauty of that is that that increases the probability of success for both of those clinical trials.

[Adam Walsh, analyst]

That's helpful. And then on the guidance, you raised the midpoint by $17.5 million, which does go beyond the $4-million upside or so to consensus that you posted in the quarter, and that seems to signal confidence in the forward outlook for ARIKAYCE. And I'm wondering what you're seeing that gives you that confidence. Is it more than that the new patient adds will remain strong? Or are you expecting fewer dropouts going forward than you originally expected, or something else?

[William Lewis, executive]

Yes, thanks for the question, Adam. Look, I think what you're seeing is that we have just come off of another very successful quarter. We feel very good about where we are. I'll turn it over to Roger to comment specifically about the different elements that go into this, but I would just comment that across the board, the commercial team at this company continues to perform exceptionally well.

[Roger Adsett, executive]

Yes, thanks, Will. And Adam, I think, if I could just build on that, I think the metrics that we're tracking and the reception of ARIKAYCE in the marketplace has been remarkably robust, and so that gives us a lot of confidence, not only that the physicians are willing to use this treatment and prescribe the treatment for the appropriate patients, but the patients are there. And as I talked about, we feel very good about those refractory patients. The discontinuation rate, we're beating the metric from the clinical trial.

We're slightly ahead of that. We expect that to continue. And we do think that as physicians become more comfortable and adept at managing the AEs and setting the expectations for the patients, that we may actually see some improvement in that adherence and that discontinuation. And part of that is giving the patients a small break, a small drug holiday as they adapt, particularly in that first month, and we continue to see that making it through that first month is the most important factor, and if the patients can do that, then they're very likely to stay on therapy. And so we're very pleased with that.

So we feel very good about where we are, and as I mentioned before, I think we've got a number of catalysts coming up for the second half of the year, and so we continue to believe that we will add new patients and new prescribers going forward. With having said that, I want to reiterate that the depth of prescribers, so the physicians who have already prescribed ARIKAYCE, we know they've got additional patients in the pipeline and in their practice, and our focus will be to help identify those patients and also get them initiated on ARIKAYCE therapy.

[Adam Walsh, analyst]

That's helpful. And I'm going to slip one more in here. Can you just remind us of the powering assumptions for the WILLOW study with 1007?

[William Lewis, executive]

You bet. It's 80% powered to show a 40% delta between each of the arms and placebo.

[Operator]

Our next question comes from Ritu Baral from Cowen.

[Lyla Youssef, analyst]

This is Lyla on for Ritu. So my first question is, could you just provide a little granularity in regards to the EMA? Now that the MAA has been submitted, what kind of reimbursement discussions have been going on? What have the reimbursement consultants been telling you?

[William Lewis, executive]

Sure. Appreciate that question, and I'll just set the backdrop here with reminding everybody that while modest in terms of investment, we have had a complete team across the EU working for the last several years, and one of the things that reflects that is the success we've had in both France, in particular, and Germany, with named patient programs. Under the ATU program, I think it's a harbinger of things to come. This has just been a fantastic early experience that patients have had with our drug and its ability to have impact, and I think that sets an important backdrop to all discussions, both regulatory as well as reimbursement. And I'll just turn it over to Roger.

[Roger Adsett, executive]

Thanks, Will, yes. And I think if maybe I could add some color, so I just want to remind everybody that we do -- of course we reported our sales from the ATU and from the named patient in Germany, and so the reimbursement in France currently is at around the EUR-82,000 mark, and so we think that that's an important benchmark and shows the French government's support for this therapy with the appropriate patients. And as regards to how we've been engaging with payers, I think we -- I know we've been preparing.

We've had some engagement with NICE already; I think it's important to note that we will not have to go through the NICE process in the U.K., so we've already been engaging with that and we will be working with specific regions, which will have an authorized pathway to prescribe ARIKAYCE, so we're encouraged about the progress we've made in the U.K. We're continuing to prepare for engagement with other markets, but in general, I feel very good about where we are from a pricing perspective within Europe, and we feel that we will have significant progress and successful outcomes there.

[Lyla Youssef, analyst]

Okay. Great. And if I could just maybe slip in one more, could you provide any clarity on what you expect the proportion of the EU price is in relation to the U.S., if you happen to have those metrics now, or estimates?

[William Lewis, executive]

Well, I just will comment that we have not set the European price yet, but that obviously what we do have right now is the EUR-83,000-ish price in France that has been supported without any resistance, and I think most importantly, that's driven by the value. I can tell you anecdotally, from having tracked closely that ATU program, we have literally brought patients back from the brink of death who have had infections, both MAC and abscessus, including in patients with CF, and I just -- I need to call out the excellent work of our team over in France. Both Yves and Francois have done exceptional work in helping those patients. I don't know, Roger, if you want to add anything on the commentary with regard to proportionality of price.

[Roger Adsett, executive]

No. I think that's right, and look, it's -- Europe is not monolithic, right? So they will be -- it's made up of a bunch of individual countries with their own specific rules, and the list price is a complicated discussion for each of those markets, but I think that as Will said, at least what's indicative of where we may end up is around the French price, and -- but we'll have to see and monitor that, and we'll continue to have discussions, and we'll be influenced by a number of factors.

[Operator]

Our next question comes from Joseph Schwartz from SVB Leerink.

[Joseph Schwartz, analyst]

I was wondering if you could provide us with some more color on the new patients who are going on ARIKAYCE and how many of your gross adds now are coming from new centers versus penetrating current centers deeper? How much more room is there to penetrate existing practices? Is there any way to characterize how saturated the existing practices are versus how many more patients can be in the queue there before having to beat the bushes in a broader sense?

[William Lewis, executive]

Roger, you want to take that one?

[Roger Adsett, executive]

Yes, sure. Yes, thanks, Joseph, for the question. I would say that, as I mentioned in my comments, we think that we're just scratching the surface of the addressable population, and I do think that within the initial prescribers, that there's a significant potential to get more patients and to get repeat prescriptions out of those prescribers. We think that that's probably, at least in the near term, that's probably an easier driver or a more close driver to adding new patients than to expand the prescribing base.

But we're certainly looking to expand new prescribers as well, but the patients and the physicians -- excuse me, the physicians who have the experience with ARIKAYCE and have that positive feedback and that positive experience in treating their patients, we think that that's an opportunity for us to continue to leverage and to get them to expand their prescribing. And importantly, we do believe that there's a number of patients in each of those practices, and of course it will vary from physician to physician and tier to tier, but we think that there's a number of patients there that are awaiting therapy and we just need to make sure that we're helping those physicians identify those patients who have not yet converted.

[William Lewis, executive]

And I'd just add to that, I think the other element here that's going to start to appear, and I made some comments on it during our earlier remarks, is the reinfection of these patients, right? We know these patients are susceptible to getting this infection again even after they've been treated. Our data is quite clear in Phase III; we have remarkable impact on these patients in a positive way, but there are a significant number of these patients who will get reinfected. And so we'll have to see how that dynamic plays out.

But if you just recall our data at 3 months off all drug, 63% of patients continued to be culture-negative, whereas none on guideline-based therapy remained culture-negative, and as one of the KOLs said, that means they have to start to think differently about how they're going to treat these patients. And I think it's going to shift people into a more aggressive posture over time.

[Joseph Schwartz, analyst]

That's really helpful. Thanks for the insight. I'd like to ask on the WILLOW trial as well; I was wondering, is there an extension study? And if so how many patients have elected to remain on -- or to get out to progress over to that extension study?

[William Lewis, executive]

So there's not an extension study per se. The trial will run for the 6 months, and then patients are off drug for 1 month, where we will track them during that time. And then we will assess the data, which we expect in the first quarter of next year, and get ready for what we hope will be a progression into Phase III. This will be 2 Phase III studies if we do go forward, because it is a substantial patient population, so we're going to set an extremely high bar in order to feel confident that we want to move forward and deploy capital in that way, so you can expect that level of discipline from us in our review of these data.

[Joseph Schwartz, analyst]

Okay. Great. And then what is the background exacerbation rate that you would expect from this population that you incorporated in your powering assumptions? And do you have any insight into what it's been looking like on a blinded basis for the population that's enrolled overall?

[William Lewis, executive]

Yes, so if you look at precedent trials, that's probably the best way to think about it. These are patients to inform that particular metric. So what we require for this trial is that they've had at least 2 exacerbations within the last year, and we will be segmenting this population when we do the analytics to look at patients who have had more frequent or less frequent exacerbations, as we look at background rates in the last trials, which you saw, and that helped inform how we think about what we could expect from this kind of a population.

The twin Phase IIIs that were done in the inhaled antibiotics setting had a background rate of about 1.2 in the placebo arm, so we'll see what reads out in ours. Obviously, that'll be an important metric to track because we need to have these events take place and then we need to see our drug have impact on the events. It's important to note that we will be looking at this temporally as well, meaning on a time-ordered basis because the DPP1 inhibitors takes a few weeks to get fully active in the patient, so we're really looking at a 5-month impact timeframe for this drug in this patient population. They start taking the DPP1; after about a month, it's fully active; and that's when we would expect to see the impact.

Maybe one other point of refinement and detail here, it inactivates the neutrophil serine proteases, one of which is neutrophil elastase, and we will be checking the levels of neutrophil elastase in these patients so that we can create a clear direct correlate between the biological impact of this drug on that NSP and its impact, potentially, on the exacerbations and other pulmonary symptoms these patients show.

[Joseph Schwartz, analyst]

That's super helpful. Can I just ask one more? In terms of how you're -- what counts as an exacerbation, is that a fairly standard definition, or have there been any modifications to the criteria that you all have?

[William Lewis, executive]

It is a standard definition. It's one we're tracking closely, and that is one of the learnings from the last clinical trials. And so I might just put a footnote here and say, we spent a great deal of time reviewing the Bayer/Nektar, Aradigm/Grifols trials, where there was some success but some failure, and I think a lot of learnings to be taken from those trials, which we have included in our trial design and the pursuit of this trial. I will say I'm quite proud of the persecution of this trial. This is a very robust, detailed and high-quality trial.

This data will stand the test of time if it's good, and we just don't know whether it will be. It's double-blind, and we have no idea what's going on in the trial. I can say that the data safety monitoring boards have met and have made no recommended changes to the trial, so we find that to be encouraging, but we'll just have to see whether or not the biological impact is as expected. I know there's a lot of enthusiasm among KOLs around this and it is a substantial opportunity if it were to be positive.

[Operator]

Our next question comes from Josh Schimmer from Evercore.

[Joshua Schimmer, analyst]

Maybe starting with guidance, to come back to this one. So the low end of the guidance range implies essentially no incremental growth going forward; the top end implies very modest growth. So in light of all the positive commentary about the adoption curves, why is the guidance actually as conservative as it is?

[William Lewis, executive]

So I think what I would say about that is, we're coming off of continued strength quarter-to-quarter, and we felt confident enough to raise guidance on each of these preceding quarters. I think what we're trying to do here is really, as we learn more, give as much clarity as we can in the moment for what we see and can control. There's a lot of efforts that we're going to be making, as Roger referenced, that will hopefully continue to drive success, but there's still unknowns that are out there and we have to acknowledge those and be thoughtful about them as we continue to move forward. I don't know, Roger, if you want to add anything to that, but.

[Roger Adsett, executive]

No, and look, I think, as you mentioned, we're on track to be one of the top 10 rare disease launches of all time, so as I think about our guidance and I think about the revenue we're putting up this year, I'd hate to think about it as being conservative. I think that we've got opportunity ahead of us and we've got a number of catalysts that we have in front of us that we'll be able to hopefully capitalize on, but I think the trends we see are very encouraging. There's a number of variables, as Will said, that we'll continue to monitor and track, and hopefully those will all align and we'll be able to continue to perform.

[William Lewis, executive]

I think if I remember correctly, the original guidance that came out last year, a few months after this, was for $45 million in revenue in 2019. So I'm just going to throw that out there to say that I think we're continuing to perform, and your point is a fair one, Josh; we're just going to be continuing to try to execute the heck out of this, and we'll see where that takes us.

[Joshua Schimmer, analyst]

And then for the Medicare Part D population, can you estimate, if any, what attrition there has been due to patient copays, and ultimately, if the donut hole does at least narrow for patients, how that might be able to change persistence due to copays?

[Roger Adsett, executive]

Thanks. I'm not sure I got the full question there. I think it was around Medicare and have we seen attrition from a copay perspective for Medicare patients, and does the donut hole influence that? So if I missed that, then please ask again, but we actually have seen strong uptake in the Medicare population. That's the majority of our patients, are actually Medicare-eligible. I think we saw in the first quarter we did not -- we continued to see strong demand from the Medicare patients and didn't see the impact of the benefit reset, at least in adding new patients.

We saw it in our gross to nets, as we actually paid those discounts through the donut hole. Patients -- typically for Medicare, patients avail themselves of charities to help with their copay, so it's a significant payment that they have to make, and it's a burden for many patients, and so they seek out charitable assistance to help them with that. And to date, that's something that we've not seen as being an impediment for Medicare patients to start on our therapy, and we expect that to continue going forward.

[Joshua Schimmer, analyst]

Great. And then for the European and Japan launches, you'd indicated that you do have some commercial presence in place and looking for fairly modest infrastructure. So what step-up in SG&A should we see when these new territories come online for full commercialization?

[William Lewis, executive]

We're not guiding specifically to the SG&A around those areas on a regional basis. What I would say is that you can expect an operating expense discipline going forward, and what we're trying to do is set as close to a new normal of operating expense with this effort to really center on our key priorities that will drive value for shareholders. And while that may be a mantra many people express, I think you're starting to see it play out in terms of coming in at the low end of our expense guidance and setting what we hope will be a flat to down expense level in the second half of the year, and that fully contemplates all of the priorities that we reviewed during our comments -- life cycle management, continued U.S. launch execution, international expansion and pipeline resourcing.

[Joshua Schimmer, analyst]

Good. Then last question on product margins. So where in the process are you in terms of working through the ARIKAYCE inventory that's already been expensed? And once the new facility comes online, how will that impact product margins? It seems like you've got forces going maybe in a couple of different directions here.

[William Lewis, executive]

Well, we do continue to see the benefit from the product -- the inventory that was expensed last year prior to the approval of the drug, and we would expect our gross margin to be impacted by that once that rolls over. That was the commentary we gave in terms of guidance for 2019. We haven't given forward guidance on 2020 yet in terms of what that would look like, but you can expect that we'll give some direction when we set that for next year.

[Joshua Schimmer, analyst]

And from the new facility in terms of its impact?

[William Lewis, executive]

So the new facility is, just to clarify for people, 450 liters of scale, compared to the 200 liters we currently operate right now. So there's obviously some benefit from that, and we would expect that that will be beneficial as far as costs related to production of drug product, but we'll be operating out of both facilities for the foreseeable future, for sure, as we both maintain inventory and address the demand that we see that's out there. So I think probably the best way to answer that question with some specificity is, you're going to see Patheon coming online; we're super excited about that, particularly because tech ops projects can go sideways. This one has not. It's gone like clockwork.

And here I'll just call out the excellent work of Don Nociolo and the team in the tech ops group at Insmed for getting that project running as smoothly as they have. As Roger mentioned in his comments, we're going to be producing batches already, and hopefully those will be commercial batches once the FDA approval process is completed, and that gives us both redundant and substantial supply for global demand, as well as hopefully some improvement on the gross margin side as it relates to the production.

[Operator]

Our next question comes from Liisa Bayko from JMP Securities.

[Liisa Bayko, analyst]

I noticed you took an 8% price increase not that long ago; can you maybe comment, is that the right way to be thinking about your pricing strategy going forward with about 3 quarters into the launch? And just curious if that's indicative of future pricing increases.

[William Lewis, executive]

Yes, sure. Roger, you want to talk about our strategy there?

[Roger Adsett, executive]

Yes, thanks, Liisa. Yes, so as you mentioned, we took an 8% price increase, and I think that this reflects not only the value that we're providing to patients and to physicians but also the continued investment we're making as well as outlined in developing a PRO, expanding into the NTM front-line therapy as well as doing work in abscessus, and those are all significant commitments that we're undertaking for the NTM community. So I don't want to provide any guidance as to what the forward-looking price increases might look like; I think that that's a complicated question, and as we said, we're monitoring the Senate finance bill, so there's a lot of factors that we would have to take into account as we make decisions, but I think as we make those decisions we will be very conscious of the value that we provide, the investments we're making, and all the constituents and stakeholders that are impacted by that decision.

[Liisa Bayko, analyst]

Okay. And in terms of the European regions that you're going to focus on, can you review some of the patient numbers in those particular regions for us?

[William Lewis, executive]

Roger, you want to?

[Roger Adsett, executive]

Yes, absolutely. So I think as we look at Europe, there's a -- the literature, and I think this is one of the confounding factors as we look at the opportunity within Europe, the literature will suggest that there's about 14,000 diagnosed NTM patients and about 1,400 total refractory MAC patients in Europe. I think that there's not consensus as to how many patients are out there, but I think there is consensus that those -- that probably underestimates the number of patients. And we've previously discussed the machine-learning work that we've done, profiling patients who were diagnosed with NTM and what that NTM likely patient population might look like, and in the U.S., we believe that there's 2 currently undiagnosed patients in the system for every 1 that's currently diagnosed.

And so they're working their way through for that diagnosis. I think if you think about Europe, there's no reason to believe that they're -- that based on the patient profile and the demographics, that those patients -- that there will be substantially less patients in Europe than there are in the U.S., so I think that the literature just hasn't caught up yet. So we're doing that same kind of work, looking at national databases. I think that, and I believe that the patient opportunity is perhaps understated in Europe; we'll find out more when we actually launch and these patients start working their way through the pathways.

I think in Europe it probably will be -- take longer to identify these patients simply because, as we mentioned, a lot of this is a center of excellence sort of a process, so referral centers and pathways are not yet mature in Europe, and I think as we see those mature, it will help with the diagnosis and identifying of those patients. But for now, the best estimate from the literature we have is those 1,400 refractory MAC patients.

[Liisa Bayko, analyst]

Okay. And then I guess finally, just wanted to ask about -- I'm sitting on a dock right now in Canada, actually, taking this call from a dock at my cottage up here, and wondering about your strategy for Canada, particularly in light of the bill that is -- that Trump has proposed regarding importation of drugs from Canada. Is that something that's on your radar in terms of a region to launch in, or are you thinking about putting it on the back burner to see how this bill evolves?

[William Lewis, executive]

Well, the first thing I'll say is that I hope you're up there doing research and not up there for an ailment, but I'll turn it over to Roger to talk about our Canadian strategy.

[Roger Adsett, executive]

Yes, thanks. Yes, that's a really good question, and actually we've taken a look at Canada. We've taken a look at the number of patients that we expect to be in Canada. And also as you said, importantly, the dynamics of the pricing in that market and the support that Canada has for rare disease, which is actually fairly limited for a rare disease product, so that makes it a very difficult decision. So for now, we have no plans to launch in Canada, but we are supporting those Canadian patients with compassionate use product as appropriate.

[Operator]

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

[William Lewis, executive]

Thanks, everyone, for joining us this morning.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect, and have a good day.