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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from                          to                         

Commission File Number 0-30739

INSMED INCORPORATED

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            Yes  [ü]    No   [    ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [ü]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).             Yes   [ü]    No  [    ]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2004 was $86,024,160 (based on the closing price for shares of the registrant’s Common Stock as reported on the Nasdaq National Market on that date). In determining this figure, the registrant has assumed that all of its directors, officers and persons owning 10% or more of the outstanding Common Stock are affiliates. This assumption shall not be deemed conclusive for any other purpose.

As of February 29, 2005, there were 44,986,996 shares of the registrant’s common stock, $.01 par value, outstanding.

Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the registrant’s fiscal year ended December 31, 2004, and to be delivered to shareholders in connection with the 2005 Annual Meeting of Shareholders, are incorporated in Part III by reference.

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INSMED INCORPORATED

INDEX

REPORT: FORM 10-K

In this Form 10-K, the “Company,” “Insmed,” “Insmed Incorporated,” “we,” “us” and “our” refer to Insmed Incorporated, a Virginia corporation. This Form 10-K also contains trademarks of third parties. Each trademark of another company appearing in this Form 10-K is the property of its owner.

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PART I

Insmed may from time to time make written or oral “forward-looking statements”, including statements contained in our filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the Exhibits hereto and thereto), in our reports to stockholders and in other communications. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. One can identify these forward-looking statements by their use of words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” “outlook” or similar expressions. In particular, these include statements relating to our beliefs, plans, objectives, goals, future actions, prospective products or product approvals, future performance or results of current and anticipated products, the outcome of contingencies, such as legal proceedings, and financial results. These statements are based upon the current beliefs and expectations of management and are subject to significant risks and uncertainties. Our actual results may differ materially from those set forth in the forward-looking statements. Forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond our control). Factors that could cause or contribute to differences in our actual results include those discussed in Item 1 under the section entitled “Risk Factors Related to Our Business,” as well as those discussed in Item 7 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report on Form 10-K and in any other documents incorporated by reference. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our 10-Q and 8-K reports to the Securities and Exchange Commission.

Overview

Insmed Incorporated is a biopharmaceutical company focused on the development and commercialization of drug products for the treatment of metabolic diseases and endocrine disorders. Currently, our development activities focus on drugs that modulate IGF-I activity in the human body. We currently have 3 lead drug candidates, recombinant human insulin-like growth factor-I bound to recombinant human insulin-like growth factor binding protein-3 (rhIGF-I/rhIGFBP-3; also known as SomatoKine^®) rhIGFBP-3 and INSM-18. We are actively developing these drugs to treat indications in the metabolic and oncology fields.

The endocrine system regulates metabolism through the use of hormones. IGF-I is a naturally occurring hormone necessary for normal growth and metabolism. Growth hormone (GH) regulates the cellular production of IGF-I, which mediates the majority of its growth-promoting effects. In the human body, IGF-I circulates in the bloodstream bound to a second protein called IGFBP-3, which serves to regulate the tissue distribution of IGF-I, therefore playing a major role in controlling its actions. GH deficiency (GHD) results in inadequate IGF-I production, which can result in growth disturbance in children. GH replacement therapy causes an increase in IGF-I levels and is used to successfully treat this condition. However, we believe many individuals have normal GH secretion, but because their cells are insensitive to this hormone they become IGF-I deficient and suffer from growth disturbance. Individuals with this condition are candidates for IGF-I replacement therapy. We believe that to ensure that IGF-I replacement is carried out in a physiologically relevant way, it is desirable to administer it bound to IGFBP-3, therefore maintaining the normal equilibrium of these important proteins in the bloodstream. rhIGF-I/rhIGFBP-3 is a recombinant protein complex that mimics the effects of IGF-I/IGFBP-3 in the bloodstream.

rhIGF-I/rhIGFBP-3 is currently in development for a number of metabolic and endocrine indications. The most advanced indication in development is the treatment of severe growth disturbance due to growth hormone insensitivity syndrome (GHIS) (i.e., Laron’s Syndrome). In children, this condition is characterized by a height

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standard deviation score three standard deviations below normal and an IGF-I standard deviation score three standard deviations below normal. GHIS can lead to a range of other metabolic disorders, including lipid abnormalities, decreased bone density, obesity and insulin resistance.

We have been granted Orphan Drug Designation by the United States Food and Drug Administration (FDA) and European Agency for the Evaluation of Medicinal Products (EMEA) for rhIGF-I/rhIGFBP-3 in the treatment of GHIS. A worldwide Phase III clinical trial for this indication is in progress.

We have been granted an exclusive license from Pharmacia (now Pfizer) to a large data base of historical treatment information and regulatory submissions associated with rhIGF-I. Pharmacia received approval of rhIGF-I for the treatment of GHIS in the majority of countries now in the European Union. We believe this exclusive license to Pharmacia’s regulatory dossiers and other information will be of value to us during our product registration process for rhIGF-I/rhIGFBP-3. The data received through this license include results from over 100 patients with GHIS who were treated intermittently for up to 14 years with rhIGF-I.

We believe the commercial opportunities for rhIGFI/rhIGFBP-3 reach beyond the indication of GHIS and that initial approval of our rhIGF-I/rhIGFBP-3 may offer us an opportunity to enter other potentially very large markets. These markets include other growth disturbances related to IGF-I deficiency, severe insulin resistance, diabetes, myotonic dystrophy, HIV associated adipose redistribution syndrome, severe burns and hip fracture. It is our intention to initiate clinical studies in a variety of these indications with rhIGF-I/rhIGFBP-3. Based on the results from these studies we will select the next indication to pursue for marketing authorization.

Our oncology program focuses on IGFBP-3 as a naturally occurring anti-tumor agent. This protein is normally found in the human bloodstream and several epidemiological studies have demonstrated that cancer risk increases with decreasing blood levels of IGFBP-3. rhIGFBP-3 is a recombinant protein that mimics the effects of IGFBP-3 in the bloodstream. This product is currently in pre-clinical development for a variety of cancers including those of the breast, lung, colon and prostate. A phase I clinical study to study safety and tolerance in human volunteers is in progress.

Insmed is also initiating clinical studies of a compound known as INSM-18, which has novel effects on the activity of the IGF-I and other receptors that can lead to the inhibition of growth of various tumors. Insmed is currently planning the clinical development of this compound in collaboration with the University of California, San Francisco School of Medicine and is preparing to initiate an exploratory clinical study in patients with relapsed prostate cancer.

Corporate History

In November 1999, Insmed Pharmaceuticals, Inc., our successor entity, entered into an agreement to acquire Celtrix Pharmaceuticals Inc. (Celtrix). Celtrix was 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 transaction closed on May 31, 2000, at which time Celtrix and Insmed Pharmaceuticals, Inc. became wholly-owned subsidiaries of the newly formed entity, Insmed Incorporated, which was incorporated in the Commonwealth of Virgina on November 29, 1999.

On June 1, 2000, we began trading on The Nasdaq SmallCap Market on June 1, 2000 under the ticker symbol “INSM.” We moved from The Nasdaq SmallCap Market to the Nasdaq National Market on August 8, 2000.

Scientific Background

Role of IGF-I and IGFBP-3 in Growth

Insulin-like growth factor-I (IGF-I) is required for normal growth, development and metabolism. It is produced locally in tissues throughout the body, and also circulates in the blood to be delivered to target tissues. The majority of circulating IGF-I, which is largely produced by the liver, is bound to IGF binding proteins (IGFBPs), principally IGFBP-3. The major role of IGFBP-3 is to regulate the tissue distribution and activity of IGF-I.

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IGF-I binds to IGFBP-3 with high affinity to form a binary complex, which in turns binds to an acid-labile subunit (ALS) to form a ternary complex. All three components of the ternary complex are growth hormone (GH)-dependent. IGF-I is the principal mediator of the growth-promoting properties of GH. GH-induced IGF-I, that is either produced locally or delivered via the circulation, stimulates cartilage and bone and the growth plates of long bones and is necessary for normal accrual of peak bone mass.

Insufficient blood levels of IGF-I (IGF-I deficiency) during childhood and adolescence result in growth failure and short stature. In some cases, this is the result of inadequate GH quantity or bioactivity. Children with low levels of GH (GH deficiency) can generally be treated with recombinant human GH (rhGH) replacement therapy, resulting in normalization of IGF-I production and catch-up growth in most patients. However, there are a number of conditions in which IGF-I deficiency can occur despite normal or even elevated levels of GH. These abnormalities are known collectively as GH insensitivity syndrome (GHIS), and can result from either hereditary or acquired conditions. These forms of IGF-I deficiency are unresponsive to rhGH treatment.

IGF-I deficiency due to GHIS can be the result of genetic abnormalities involving the GH receptor or other genes in the GH signal transduction pathway or be the result of mutations in the IGF-I gene itself. Acquired conditions include the development of neutralizing antibodies to GH in response to rhGH treatment in children with deletions of the GH gene (GH deficiency type IA). Regardless of the cause of IGF-I deficiency, replacement therapy with rhIGF-I can correct the abnormality. Co-administration of rhIGF-I with rhIGFBP-3 can accomplish this in a more physiologic manner by delivering the IGF-I to tissues bound to its natural regulatory protein.

Role of IGF-I and IGFBP-3 in Glucose Metabolism

Insulin is the primary hormone responsible for controlling glucose metabolism. Although less potent than insulin, IGF-I is capable of stimulating hepatic and muscle glucose uptake. IGF-I can affect the set point for insulin action and, like insulin, block protein and lipid breakdown. IGF-I causes a decrease in circulating GH levels via negative feedback, which further affects glucose metabolism. Thus, the proper balance of insulin, GH and IGF-I is extremely important for normal glucose metabolism.

Short-term clinical studies with rhIGF-I/rhIGFBP-3 and longer-term studies with rhIGF-I reported in scientific literature demonstrate that IGF-I therapy can reduce insulin requirements, improve glycemic control, and increase insulin sensitivity in both type 1 and type 2 diabetes. Fujisawa Pharmaceutical Co., Ltd., with whom Insmed has entered into a license agreement (see Strategic Relationships), has received approval of rhIGF-I in Japan for the treatment of the most severe forms of diabetes, referred to as extreme insulin resistance. Extreme insulin resistance includes a number of chronic diseases distinguished by severe insensitivity to insulin due to inherited or acquired causes. Treatment with rhIGF-I/rhIGFBP-3 is intended to improved glycemic control and reduce insulin dose requirements in this patient population.

Role of IGF-I and IGFBP-3 in Cancer

IGF-I plays an essential role in normal growth throughout fetal and childhood development. In adult life, IGF-I continues to function by regulating cellular metabolism, inducing cell division and protecting against cell death. IGFBP-3 is the most abundant naturally-occurring IGF-I binding protein in the circulation and controls the actions of IGF-I by regulating its tissue distribution. When bound to IGFBP-3, IGF-I is incapable of binding to the IGF-I receptor. IGFBP-3 also has independent actions of its own that can inhibit cell proliferation and stimulate cell death.

A number of epidemiological studies suggest that increased circulating levels of IGFBP-3 are associated with a decreased risk for the development of several common cancers, including those of the prostate, lung, rectum and bladder. Therefore, administration of rhIGFBP-3 may represent a novel therapeutic approach to a variety of human cancers. Insmed has initiated a clinical program with prominent oncologists to develop rhIGFBP-3 as a therapeutic agent. To date, we have evaluated the efficacy of rhIGFBP-3 alone and in combination with standard chemotherapeutic agents in pre-clinical models of breast, lung, prostate and colon cancers.

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Insmed is also initiating clinical studies of a compound known as INSM-18, which has novel effects on the activity of the IGF-I and other receptors that can lead to the inhibition of growth of various tumors. Insmed is currently planning the clinical development of this compound in collaboration with the University of California, San Francisco School of Medicine and is preparing to initiate an exploratory clinical study in patients with relapsed prostate cancer.

Primary Therapeutic Indications

Growth Failure Due to GHIS Resulting in IGF-I Deficiency

GHIS is a condition affecting a specific subset of patients suffering from growth failure because of a deficiency in IGF-I. This deficiency can be due to hereditary or acquired defects in the GH receptor or GH signal transduction. Characteristics of this condition include:

Physicians use height standard deviation score, or height SDS, to indicate how many standard deviations a person’s height is from the average of the normal population of the same age and sex. The American Academy of Pediatrics and the American Academy of Clinical Endocrinology define short stature as a height that is more than two standard deviations below the average. Children with severe GHIS typically have height SDS < -3. Similarly, in evaluating IGF-I deficiency, physicians can use an IGF-I SDS < -2 to define abnormally low serum IGF-I levels.

Extreme Insulin Resistance

Insulin resistance describes an abnormality whereby the body is incapable of responding appropriately to circulating insulin. This abnormality can occur in many forms and results in varying degrees of disease severity. Extreme insulin resistance can result from defects in the insulin receptor gene or other genes involved in insulin signal transduction. These conditions include:

Type A syndrome patients have high circulating concentrations of insulin with impaired glucose tolerance or diabetes. They also have hyperandrogenism, resulting in hirsutism, acne, abnormal menstruation, and infertility. High doses of insulin fail to provide adequate glycemic control in these patients and there is no satisfactory treatment currently available.

Type B syndrome is characterized by the presence of autoantibodies to the insulin receptor that interfere with proper receptor functioning. These patients have hyperinsulinism, erratic glycemic control, hyperandrogenism, and other autoimmune disorders. High doses of insulin fail to provide adequate glycemic control in these patients and there is no satisfactory treatment currently available.

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Rabson-Mendenhall syndrome and Leprechaunism are also characterized by high circulating concentrations of insulin with alternating episodes of hyperglycemia and hypoglycemia. They also have hyperandrogenism and growth failure. High doses of insulin fail to provide adequate glycemic control in these patients and there is no satisfactory treatment currently available.

Diabetes

Patients with type 1 diabetes are characterized by their inability to produce insulin. In these patients, insulin deficiency leads to glucose intolerance in childhood. In type 1 diabetes, down-regulation of GH receptors in the liver results in reduced circulating IGF-I levels, which can lead to GH hypersecretion. This in turn causes decreased insulin sensitivity and worsening of metabolic control. Treatment of type 1 diabetes with rhIGF-I/rhIGFBP-3 can reduce GH levels and improve insulin sensitivity and glycemic control, while decreasing insulin dose requirements.

Type 2 diabetes is characterized by insulin resistance. In addition to low circulating levels of IGF-I, these patients have an increased number of insulin/IGF-I hybrid receptors. Increased expression of these hybrid receptors positively correlates with a decrease in both insulin binding affinity and insulin sensitivity. Treatment of type 2 diabetics requiring insulin therapy with rhIGF-I/rhIGFBP-3 also leads to improved glycemic control while decreasing insulin dose requirement.

Cancer

The World Health Organization estimates that by 2020, the number of annual worldwide cancer related deaths is expected to reach 10 million. To date, the FDA has approved over 110 oncology drugs for more than 25 indications. Up to two-thirds of these drugs are cytotoxic agents, many of which exhibit significant systemic toxicity and decrease the quality of life of the patient.

Identification of the signaling pathways that regulate tumor growth has led to novel strategies for the treatment of cancer. As a result, new agents that target growth factors and their receptors are emerging as promising new treatments. To this end, both IGFBP-3 and INSM-18 have emerged as promising novel treatments for a variety of cancer types. Both treatments interact with the IGF system to reduce tumor growth.

Business Strategy

Our focus is on the development and commercialization of products for the treatment of metabolic and endocrine diseases with unmet medical needs. Our initial goal is to obtain the approval of rhIGF-I/rhIGFBP-3 for the treatment of GHIS and establish proof-of-concept clinical data with rhIGFBP-3 in the treatment of breast or other cancers. Our long-term strategy is to capitalize on many other potential endocrine and metabolic indications with rhIGF-I/rhIGFBP-3 and additional cancer indications with rhIGFBP-3. Key elements of our strategy for achieving these goals include:

Seek FDA and EMEA approval of rhIGF-I/rhIGFBP-3 replacement treatment for GHIS.    We submitted a New Drug Application (NDA) on January 3, 2005 for the use of rhIGF-I/rhIGFBP-3 in the treatment of GHIS, which was accepted for review by the FDA on March 4, 2005. We are continuing our Phase III clinical trial in patients with GHIS in order to obtain long term data and plan to submit a Marketing Authorization Application (MAA) to the EMEA for this indication. Children with this disorder have a significant unmet medical need because no effective treatment is currently available on the market. The proprietary information we have licensed from Pharmacia demonstrates that replacement therapy with rhIGF-I given twice daily will significantly improve height velocity in these severely growth disturbed patients. Data from our clinical studies demonstrates that we can achieve similar circulating concentrations of IGF-I and efficacy results following administration of rhIGF-I/rhIGFBP-3 as was achieved in the Pharmacia studies following administration of rhIGF-I. Furthermore, these blood levels and efficacy were achieved with one injection of rhIGF-I/rhIGFBP-3 per day as opposed to the two injections needed with rhIGF-I alone. In addition to having the advantage of once-a-day dosing, our animal and clinical data suggest less severe side effects with rhIGF-I/rhIGFBP-3 when compared with rhIGF-I.

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Our strategy is to maintain a dual manufacturing source for our products. We currently manufacture rhIGF-I/rhIGFBP-3 at our manufacturing facility, Insmed Therapeutic Proteins (ITP), in Boulder, Colorado and plan to continue our manufacturing program with Avecia Limited, a third party contract manufacturer in the United Kingdom. Based on discussions with the FDA, we are conducting several studies, including analytical, pre-clinical and clinical to compare the drug substance previously manufactured at Avecia to the new drug substance produced at ITP. The results of this comparison will become part of our submissions to the regulatory authorities.

Expand the GHIS indication to other growth disorders related to IGF-I deficiency.    A number of growth disorders related to IGF-I deficiency other than GHIS represent conditions with significant unmet medical needs. While seeking approval in GHIS, we plan to investigate these other indications and further develop those that will provide the best market opportunity for label expansion. We will then seek this label expansion through supplemental regulatory submissions. It is likely that we will conduct one or more clinical studies to support label expansion.

Develop rhIGF-I/rhIGFBP-3 in additional indications.    We intend to initiate clinical studies of rhIGF-I/rhIGFBP-3 in additional indications. Based on the data from these studies, we will select the most promising indications for further development and commercialization. The indications we are considering are extreme insulin resistance, diabetes, myotonic dystrophy, HIV associated adipose redistribution syndrome, recovery from severe burn injury, recovery from osteoporotic hip fracture and retinopathy of prematurity.

Establish a sales and marketing organization for the United States.    We intend to develop a sales and marketing force to target the approximately 400 active U.S.-based pediatric endocrinology centers where children with growth disorders are evaluated and treated. These physicians are primarily hospital-based and concentrated in major metropolitan areas and we believe that they will be best served by a focused marketing organization and specialized sales force. In addition, we intend to conduct continuing medical education programs, medical symposia, and regional speaker programs aimed at establishing awareness of rhIGF-I/rhIGFBP-3 in the medical community. We also intend to conduct post-marketing studies and establish a patient registry to provide further data on the safety and efficacy of rhIGF-I/rhIGFBP-3.

Establish a sales and marketing organization or obtain a Marketing Partner for Europe.    We are exploring several opportunities in Europe to partner with an established sales and marketing organization. We expect to conduct continuing medical education programs, medical symposia, and regional speaker programs aimed at establishing awareness of rhIGF-I/rhIGFBP-3 in the European physician community. We also intend to conduct post-marketing studies and establish a patient registry to provide further data on the safety and efficacy of rhIGF-I/rhIGFBP-3.

Initiate clinical studies with rhIGFBP-3    We are currently conducting a Phase I clinical study to establish the pharmacokinetic profile of rhIGFBP-3 and plan to proceed to Phase II clinical studies in one or more of the following cancer types: breast, colorectal, lung and/or prostate.

Broaden endocrinology and oncology portfolio based on our expertise.    Our longer-term strategy for growth is to pursue the development and commercialization of additional products for the treatment of significant unmet medical needs that complement our activities within the fields of metabolic and endocrine diseases and oncology.

Retain commercial rights to market products in selected markets.    Our goal is to retain relevant marketing rights to our products and commercialize them in selected niche markets.

Establish corporate partnerships in certain markets.    We plan to establish corporate partnerships to develop, market and commercialize our products in markets outside of our core focus.

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Research and Development

We have devoted substantially all of our resources since we began our operations to the research and development of pharmaceutical product candidates for metabolic and endocrine diseases. Our focus is principally in developing and commercializing late-stage products. We conduct very little of our own preclinical laboratory research. However, we actively maintain ongoing discussions with academic research institutions and other companies regarding rhIGF-I/rhIGFBP-3, rhIGFBP-3 and other projects in endocrinology and oncology. We are currently conducting a Phase III clinical study with our lead product, rhIGF-I/rhIGFBP-3, and plan to investigate other potential indications with this product. We are also conducting pre-clinical studies with our other lead compound, rhIGFBP-3 and plan on conducting clinical studies with this product in the future. Our research and development expenses were approximately $23.3 million in 2004, $7.1 million in 2003, and $18.1 million in 2002.

Strategic Relationships

Fujisawa Pharmaceutical Co., Ltd.

In January 2004, Insmed was granted a non-exclusive license to patent rights pertaining to the use of IGF-I therapy for the treatment of extreme or severe insulin resistant diabetes from Fujisawa Pharmaceutical Co., Ltd. Under the terms of the agreement, Insmed obtained worldwide rights in territories (excluding Japan) where a valid patent claim exists, including the United States and Europe. We have made a commitment to use reasonable commercial efforts to make rhIGF-I/rhIGFBP-3 available on a named patient basis to patients with extreme insulin resistance.

Tzamal Pharmaceutical

In October 2004, we entered into a letter of intent promotion agreement with Tzamal Pharma, a subsidiary of Fox Pharma headquartered in Jerusalem Israel. The agreement calls for Tzamal to be our exclusive distributor in Israel and Palestinian autonomous territories, West Bank and Gaza. The agreement has a term of one year and on the anniversary of the agreement it may be renewed via a joint agreement between Insmed and Tzamal for another twelve months.

Pharmacia Inc.

Pharmacia, Inc. was granted marketing approval in several European and Scandinavian countries for rhIGF-I in the treatment of GHIS. In August 2002, we entered into an agreement with Pharmacia that grants us an exclusive worldwide license to Pharmacia’s portfolio of regulatory filings and proprietary information pertaining to rhIGF-I for the treatment of GHIS. We have made a commitment to make rhIGF-I/rhIGFBP-3 available on a named patient basis to GHIS subjects that were previously being treated with rhIGF-I supplied by Pharmacia.

Avecia Limited

In July 2002, we entered into an agreement with Avecia Limited, Europe’s largest privately held specialty chemical company, for the process development and manufacture of rhIGF-I/rhIGFBP-3. In consideration for the work performed under this agreement, we have paid process development and manufacturing costs associated with the production of rhIGF-I/rhIGFBP-3.

Patents and Proprietary Rights

Insmed Patent Portfolio

Proprietary protection is important to our business, and our policy is to protect our technology by filing patent applications for technology that we consider important. We intend to file additional patent applications, when appropriate, relating to improvements in our technology and other specific products that we develop. As with any pending patent application, there can be no assurance that any of these applications will issue in the United States or a foreign country. There also can be no assurance that a subsequent U.S. or foreign patent will later be held valid and enforceable.

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We hold 28 United States patents relating to the composition, production, antibodies and methods of use for rhIGF-I/rhIGFBP-3 and rhIGFBP-3, including:

Two issued patents for rhIGFBP-3 composition-of-matter;

15 therapeutic use patents for rhIGF-I/rhIGFBP-3, IGF-I, rhIGFBP-3 or rhIGFBP-3 fragments for the treatment of various disease conditions; and

11 patents regarding novel expression, production or analysis methods, some of which may be used for the manufacture of rhIGF-I/rhIGFBP-3 and pharmaceutical compositions of rhIGF-I/rhIGFBP-3.

As part of the ongoing development of rhIGF-I/rhIGFBP-3 and rhIGFBP-3, we have filed or intend to file patent applications related to new production methods, improved formulations, new medical uses and new dosing regimens in the United States and in many of the major international pharmaceutical markets. The various issued patents related to rhIGF-I/rhIGFBP-3 and rhIGFBP-3 compositions, methods of production and methods of treatment expire at various times during the years 2010 through 2019.

In addition, foreign counterparts to the above-referenced U.S. patents have issued or are pending issue in the major pharmaceutical markets, such as Europe, Canada and Japan.

With respect to Europe, Insmed recently decided to withdraw one of its patents, EP 451,194 (“the 194 patent”), which is directed to compositions and methods of using IGFBP-3. This patent expires in 2009. We do not believe that a competitor is developing IGFBP-3 or will engage in activities encompassed by this patent prior to 2009. As such, the costs of maintaining this patent outweigh its estimated value. Therefore, Insmed has withdrawn its approval of the text of the ‘194 patent. As a result of this action, we expect the European Patent Office will soon revoke the ‘194 patent.

As part of our development and manufacturing agreement with Avecia Limited, we are currently negotiating to obtain certain non-exclusive rights to Avecia’s proprietary manufacturing technology. In January 2004, Insmed was granted a non-exclusive license to patent rights pertaining to the use of IGF-I therapy for the treatment of extreme or severe insulin resistant diabetes from Fujisawa Pharmaceutical Co., Ltd.

Reflecting our commitment to safeguarding proprietary information, we require our employees and consultants to sign confidentiality agreements. These agreements prohibit unauthorized disclosure of Insmed’s proprietary information. Despite our efforts to protect our proprietary information, unauthorized parties may attempt to obtain and use our proprietary information. Policing unauthorized use of our proprietary information is difficult, and the steps we have taken might not prevent misappropriation, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States.

We note that there has been increasing litigation in the biopharmaceutical industry with respect to the manufacture and sale of new therapeutic products. The validity and breadth of claims in biotechnology patents may involve complex factual and legal issues, for which no consistent policy exists. In particular, the patent protection available for protein-based products, such as rhIGF-I/rhIGFBP-3 and rhIGFBP-3, is highly uncertain and involves issues relating to the scope of protection of claims to gene sequences and the production of their corresponding proteins.

In some cases, litigation or other proceedings may be necessary to enforce our patents or protect our know-how or other intellectual property rights. Any potential litigation could result in a substantial cost to us and a diversion of our resources. We cannot be sure that any of our patents will ultimately be held valid. An adverse outcome in any litigation or proceeding could subject us to significant liability.

Third-Party Patents

Third parties, including Genentech Inc. and Chiron Corporation hold United States and/or foreign patents possibly directed to the composition, production and/or use of rhIGF-I, rhIGFBP-3, rhIGF-I/rhIGFBP-3 and/or recombinant proteins in general. After examining these patents, we do not believe they present an obstacle to our plans to commercialize rhIGF-I/rhIGFBP-3 and rhIGFBP-3.

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We can provide no assurance, however, that one of these third parties will not assert a contrary position in the future, for instance in the context of an infringement action. Likewise, we cannot predict with certainty the outcome of such a proceeding. We note, however, that an adverse ruling could impact our ability to make, use or sell our products. In any event, in some cases, litigation or other proceedings may be necessary to defend Insmed against claims of patent infringement.

In this regard, we note that on December 20, 2004, Tercica, Inc. and Genentech Inc. filed a complaint against Avecia Limited and Insmed, Inc. in the United Kingdom at the High Court of Justice, Chancery Division, Patents Court alleging infringement of EP patent No. 571,417 (“the 417 patent”). The ‘417 patent has claims directed to particular uses of a combination of IGFBP-3 and IGF-I. In the complaint, Tercica, Inc. asked the court for an injunction to restrain allegedly infringing activity, for a declaration that the ‘417 patent is valid and infringed, for an order requiring the delivery or destruction of allegedly infringing articles and materials and for an inquiry into possible economic damages.

On February 11, 2005, Avecia and Insmed filed a Defense and Counterclaim to Tercica Inc.’s suit. In its Defense, Avecia and Insmed asserted, among other things, that the ‘417 patent is invalid and that the Claimant failed to properly register its license. In its Counterclaim, Avecia and Insmed also asked the court to revoke the ‘417 patent.

Insmed cannot predict with certainty the outcome of this proceeding. We note, however, that an adverse ruling could impact our ability to make, use or sell our products and would have a material adverse effect on our business, financial condition and results of operations.

In addition, Tercica, Inc. filed, on December 23, 2004, a complaint against Insmed in the United States District Court for the Northern District of California alleging infringement of U.S. patent Nos. 5,187,151 and 6,331,414. These patents are directed to certain methods of using IGF-I/IGFBP-3 and methods of producing human IGF-I, respectively. On February 16, 2005, Tercica, Inc. and Genentech, Inc. filed an Amended Complaint, adding allegations of infringement of U.S. patent No. 5,258,287 (“the ‘287 patent”). The claims of the ‘287 patent are directed to DNA encoding BP53 (i.e. IGFBP-3) and recombinant constructs, transformed host cells and methods for using same.

On February 18, 2005, Insmed filed a motion to dismiss the Amended Complaint. In the motion, Insmed asserted that all alleged activities fall within the statutory safe-harbor provided by 35 U.S.C. § 271(e)(1), commonly called the clinical trial exemption. This exemption prevents patent infringement actions from being filed against activities reasonably related to obtaining FDA approval of a product, such as when the product is still being tested in clinical trials. Insmed further asserted, among other things, that Plaintiffs have failed to state a claim for the requested relief, have not sued the proper party, have failed to name all the proper plaintiffs and have failed to establish the existence of a sufficiently real and substantial controversy between the parties. Insmed requested immediate dismissal or Summary Judgment against the plaintiff’s allegation on these grounds.

Insmed cannot predict with certainty the outcome of this proceeding. We note, however, that an adverse ruling could impact our ability to make, use or sell our products and would have a material adverse effect on our business, financial condition and results of operations.

In addition, Novartis AG and Chiron Corporation have rights to United States and foreign patents relating to the use of IGF-1 for the treatment of type 1 diabetes, and Novartis owns United States and foreign patents relating to the treatment of osteoporosis with IGF-1. Genentech, Inc. owns U.S. and foreign patents directed to using IGF-1 to increase the growth rate of certain patients with non-GH-deficient short stature and patients having partial growth hormone insensitivity syndrome. We do not expect that we will infringe these patents. We can give no assurances, however, that such patents can be avoided, invalidated or licensed. Thus, the patents could potentially have an adverse effect on our ability to make, use or sell rhIGF-I/rhIGFBP-3 for certain indications.

Manufacturing

We currently rely on our wholly owned subsidiary, Insmed Therapeutic Proteins, as well as contract manufacturers to produce rhIGF-I/rhIGFBP-3 and rhIGFBP-3. If we are unable to establish our own capacity and

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maintain relationships with third parties for manufacturing sufficient quantities of our product candidates and their components which meet our planned time and cost parameters, the development and timing of our clinical trials and/or product commercialization may be adversely affected.

Our product candidates must be manufactured in a facility by processes that comply with current good manufacturing practices (cGMP) and other similar regulations. Prior to receiving marketing approval from the FDA, it is likely that the FDA will inspect our manufacturing facilities to ensure that our contract manufacturers and/or Insmed Therapeutic Proteins are in compliance with cGMP. If we are not in compliance with cGMP, the FDA may make us halt manufacturing until we can bring the facilities into compliance. This could take a substantial period of time and could adversely affect the development and timing of our clinical trials and/or product commercialization.

rhIGF-I/rhIGFBP-3 is a complex of two proteins, rhIGF-I and its binding protein rhIGFBP-3, and is manufactured using recombinant DNA technology. The manufacturing process is complicated and involves expression of the two proteins by bacterial fermentation followed by purification and combination of the two proteins. During the manufacturing process, rhIGF-I and rhIGFBP-3 are produced separately and then combined to make rhIGF-I/rhIGFBP-3. The rhIGFBP-3 can either be utilized to make rhIGF-I/rhIGFBP-3 or kept separate as its own distinct product.

To date, we have supplied all of our pre-clinical and clinical study requirements with rhIGF-I/rhIGFBP-3 previously produced by our subsidiary, Celtrix Pharmaceuticals Inc. or Avecia Limited, a contract manufacturer in Billingham, England.

In July 2002, we entered into an agreement with Avecia Limited, Europe’s largest privately held specialty chemical company, for the process development and manufacture of rhIGF-I/rhIGFBP-3. In consideration for the work performed under this agreement, we have paid process development and manufacturing costs associated with the production of rhIGF-I/rhIGFBP-3.

We are currently manufacturing rhIGF-I/rhIGFBP-3 at Insmed Therapeutic Proteins in Boulder, Colorado. Celtrix Pharmaceuticals Inc. no longer produces rhIGF-I/rhIGFBP-3. We cannot guarantee that Insmed Therapeutic Proteins and Avecia will be able to produce the rhIGF-I/rhIGFBP-3 or rhIGFBP-3 necessary for future pre-clinical and clinical trials or commercialization.

Marketing and Sales

We currently have no sales, marketing or distribution capability. However, we intend to develop a sales and marketing force to target the approximately 400 active U.S.-based pediatric endocrinologists who treat children with growth disturbance. Because these pediatric endocrinologists are primarily hospital-based and concentrated in major metropolitan areas, we believe that a focused marketing organization and specialized sales force can effectively serve them. In addition, we intend to conduct continuing medical education programs, medical symposia, and regional speaker programs aimed at establishing awareness of rhIGF-I/rhIGFBP-3 in the physician community. We also intend to conduct post-marketing studies and establish a patient registry to provide further data on the safety and efficacy of rhIGF-I/rhIGFBP-3.

We are exploring several opportunities for sales and marketing in Europe including the establishment of our own sales and marketing organization, acquisition of an existing sales and marketing organization and partnering with an established sales and marketing organization.

Our goal is to retain marketing, sales and distribution rights to our product candidates for certain niche markets and find commercial partners to develop and market our products in markets outside of our core focus.

Competition

We are engaged in an industry that is intensely competitive and characterized by rapid technological progress. In each of our potential product areas, we face significant competition from large pharmaceutical, biotechnology and other companies, as well as universities and research institutions. Most of these companies

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and institutions have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals. In addition, many of these companies have greater experience and expertise in manufacturing and marketing pharmaceutical products.

Since all of our products are under development, we cannot predict the relative competitive position of our products if they are approved for use. However, we expect that the following factors will determine our ability to compete effectively:

Currently, no drug in the United States and Europe is approved and marketed as replacement therapy for the treatment of GHIS. We are aware of only one other company, Tercica, Inc., that is pursuing development of a product for this indication. On February 28, 2005 Tercica announced that it had submitted a new drug application (NDA) for the use of rhIGF-I in the long term treatment of growth failure in children with a severe form of primary IGF deficiency. We believe this indication would include patients with GHIS. We believe Tercica may also be planning to develop rhIGF-I for some of the same indications that we plan to pursue with rhIGF-I/rhIGFBP-3.

GH may also be a competitive product for the treatment of some patients with growth disorders associated with IGF-I deficiency. The major suppliers of commercially available GH are Genentech, Eli Lilly, Novo Nordisk, Pfizer and Serono.

In addition, we believe that Genentech, Merck, Novo Nordisk and Pfizer have previously conducted research and development of orally available small molecules that cause the release of GH, known as GH secretagogues. We are not aware of any continued clinical development of these molecules by these companies. We believe that Rejuvenon Corporation may have licensed certain rights to Novo Nordisk’s GH secretagogues, which are in pre-clinical development. We are also aware that Theratechnologies is developing various peptides that stimulate the release of hormones that could be used in the treatment of some of the indications we plan to pursue with rhIGF-I/rhIGFBP-3.

Many companies are seeking to develop products and therapies for the treatment of diabetes. Our competitors include multinational pharmaceutical companies, specialized biotechnology firms, and universities and other research institutions. Our largest competitors include Bristol-Myers Squibb Company, Eli Lilly, GlaxoSmithKline, Merck, Novartis, Novo Nordisk, Takeda Chemical Industries and Amylin Pharmaceuticals. Various products are currently available to treat type 2 diabetes, such as insulin and oral hypoglycemic drugs.

In addition, several companies are developing various new approaches to improve the treatments of type 1 and type 2 diabetes. Amylin Pharmaceuticals has conducted and is continuing to conduct clinical trials for two products, Symlin and Exenatide, for the treatment of type 2 diabetes. Tercica has indicated that it plans to pursue the development of rhIGF-I in the treatment of severe forms of diabetes.

Many companies are pursuing the development of products for the treatment of cancer. Our competitors include multinational pharmaceutical companies, specialized biotechnology firms, and universities and other research institutions. Although we are unaware of any companies developing rhIGFBP-3 for cancer, we are aware of companies who are developing products that are intended to target the same pathway that we are targeting with rhIGFBP-3.

It is possible that there are other companies with products currently in development or that exist on the market that may compete directly with rhIGF-I/rhIGFBP-3 or rhIGFBP-3.

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Government Regulation

Government authorities in the United States and other countries extensively regulate the research, development, testing, manufacture, promotion, marketing and distribution of drug products. Drugs are subject to rigorous regulation by the FDA and similar regulatory bodies in other countries. The steps ordinarily required before a new drug may be marketed in the United States are similar to steps required in most other countries and include:

Pre-clinical tests include laboratory evaluation of product chemistry and stability, as well as animal studies to evaluate toxicity. The results of pre-clinical testing are submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of each IND before beginning clinical tests in humans. At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials until the FDA authorizes trials under specified terms. The IND process may become extremely costly and substantially delay development of our products. Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in clinical trials.

Clinical trials to support NDAs are typically conducted in three sequential phases, but the phases may overlap. During Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess pharmacokinetics and safety.

Phase II usually involves studies in a limited patient population to:

If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials, also called pivotal studies, are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites.

After completion of the required clinical testing, a NDA is submitted. The FDA may request additional information before accepting a NDA for filing, in which case the application must be resubmitted with the additional information. The performance goals and procedures of the FDA Center for Drug Evaluation and Research (CDER) and the Center for Biologics Evaluation and Research (CBER), as agreed to under the reauthorization of the prescription drug user fee program in the “Food and Drug Administration Modernization Act of 1997,” indicate the FDA is striving to review and act on 90% of standard NDA submissions filed during years 2003 through 2007 within 10 months of receipt and priority NDA submissions within 6 months of submission. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an appropriate advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.

If FDA evaluations of the NDA and related manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter. An approvable letter will usually contain a number of conditions that must be met in order to secure final approval of the NDA and authorization of commercial marketing of the drug. The FDA may refuse to approve the NDA or issue a not approvable letter, outlining the deficiencies in the submission or the manufacturing site(s) and often requiring additional testing or information.

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The manufacturers of approved products and their manufacturing facilities will be subject to continual review and periodic inspections. Because we intend to contract with third parties for manufacturing of these products, our control of compliance with FDA requirements may be incomplete. In addition, identification of certain side effects or the occurrence of manufacturing problems after any of our drugs are on the market could cause subsequent withdrawal of approval, reformulation of the drug, additional pre-clinical testing or clinical trials and changes in labeling of the product.

The FDA’s policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our products. We cannot predict the likelihood, nature or extent of adverse governmental regulation which might arise from future legislative or administrative action, either in the United States or abroad.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States Orphan drug designation must be requested before submitting a NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same disease, except in very limited circumstances, for seven years. This exclusivity, however, also could block the approval of our products for seven years if a competitor is granted orphan designation and receives NDA approval of the same drug for the same indication or disease before we do. We have received orphan designation for the treatment of severe burn injury, growth disturbances due to GHIS, and extreme insulin resistance. We also intend to file for orphan drug designation for other indications which meet the criteria for orphan exclusivity. Obtaining FDA approval to market a product with orphan drug exclusivity may not provide us with a material commercial advantage.

The FDA Modernization Act of 1997 included a pediatric exclusivity provision that was extended by the Best Pharmaceuticals for Children Act of 2003. Pediatric exclusivity is designed to provide an incentive to manufacturers for conducting research about the safety of their products in children. Pediatric exclusivity, if granted, provides an additional six months of market exclusivity in the United States for new or currently marketed drugs, if certain pediatric studies requested by FDA are completed by the applicant. We believe our current plans to study rhIGF-I/rhIGFBP-3 in children may qualify rhIGF-I/rhIGFBP-3 for the additional six months of pediatric exclusivity, although there can be no assurances that FDA will grant such additional exclusivity. The current pediatric exclusivity provision is scheduled to end on October 1, 2007 and there can be no assurances that it will be reauthorized.

Outside the United States, our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. The foreign regulatory approval process includes risks similar to those associated with FDA approval as described above.

Employees

As of December 31, 2004, we had 55 full-time employees. Of these employees, 14 were engaged in research and development, 29 were engaged in manufacturing and 12 were engaged in general management, finance and administration. None of our employees are covered by any collective bargaining agreement. We consider relations with our employees to be good.

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Risk Factors Related to Our Business

You should consider carefully the following risk factors, together with all of the other information included in this Annual Report on Form 10–K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.

Since we have a limited operating history, a history of operating losses and an expectation that we will generate operating losses for the foreseeable future, we may not achieve profitability for some time, if at all.

We are focused on product development and currently have no commercial sales. We have incurred losses each year of operation and we expect to continue incurring operating losses for the foreseeable future. The process of developing our products requires significant pre-clinical testing and clinical trials as well as regulatory approvals for commercialization and marketing before we can begin to generate any revenue from product sales. In addition, commercialization of our drug candidates will require us to establish a sales and marketing organization and contractual relationships to enable product manufacturing and other related activities. We expect that these activities, together with our general and administrative expenses, will result in substantial operating losses for the foreseeable future. As of December 31, 2004, our accumulated deficit was $213.7 million. For the year ended December 31, 2004, our consolidated net loss was $27.2 million.

We currently have two lead product candidates, rhIGF-I/rhIGFBP-3 (also known as SomatoKine^®) and rhIGFBP-3. rhIGF-I/rhIGFBP-3 is currently in development for a number of metabolic and endocrine indications. The most advanced indication in development is the treatment of severe growth disturbance due to growth hormone insensitivity syndrome (GHIS). Our second compound, rhIGFBP-3, is currently in pre-clinical development for a variety of cancers including breast, lung, colon and prostate.

All of our products are currently in the research and development stage and if we are unable to commercialize them it will materially adversely affect our business, financial condition and results of operations.

All of our potential products are in the research and development stage. Our long-term viability and growth depend on the successful commercialization of products which lead to revenue and profits. In order to commercialize any of our products they must first be successfully developed. Pharmaceutical product development is an expensive, high risk, lengthy, complicated, resource intensive process. In order to succeed, among other things, we must be able to:

The development program with respect to any given product will take many years and thus delay our ability to generate profit. In addition, potential products that appear promising at early stages of development may fail for a number of reasons, including the possibility that the products may require significant additional testing or turn out to be:

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