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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

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. [    ]

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 28, 2002 was $46,392,779 (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 28, 2003, there were 33,186,336 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, 2002, and to be delivered to shareholders in connection with the 2003 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

ITEM 1.    BUSINESS

Introduction

Insmed Incorporated is a biopharmaceutical company focused on the discovery and development of drug candidates for the treatment of metabolic diseases and endocrine disorders. Our approach is to correct metabolic defects in the human body, by replacing key regulatory molecules in a physiologically relevant fashion. We believe this approach will translate into an intrinsic safety advantage for our products in the marketplace. We currently have two lead drug candidates, recombinant human (rh) IGF-I/rhIGFBP-3 (also known as SomatoKine^®) and rhIGFBP-3 and are actively developing these drugs to treat indications in the metabolic and oncology fields.

On September 10, 2002, we announced that we would immediately discontinue the internal development of one of our investigational drug candidates, INS-1, based on the results of recently completed Phase II clinical trials. Similarly, our Japanese partner to develop INS-1 in Japan and Asia, Taisho Pharmaceuticals, Co., Ltd., also indicated its intention to discontinue its involvement in any future development in INS-1, and terminated the joint development agreement in accordance with the terms of the agreement.

Following our announcement on September 10, 2002, we reorganized our business by realigning our staff and resources around our more promising clinical candidates to support our long term success and preserve our capital.

Medical Background

One of the main factors in maintaining normal healthy growth and metabolism is the equilibrium of the triumvirate of insulin, growth hormone and insulin-like growth factor I (IGF-I). Any imbalance in the various levels of these key components will result in multiple endocrine and metabolic conditions such as Growth Hormone Deficiency and Diabetes. It is believed that the administration of IGF-I, bound together with its most common binding protein IGFBP-3 addresses certain deficiencies and instabilities caused by an imbalance in this key axis.

Growth Disorders

Growth hormone insensitivity syndrome (GHIS) is a syndrome whereby the body does not have, or has lost, its ability to recognize human growth hormone and therefore fails to respond in the normal manner. This results in defective cell and tissue growth. There are two main types of GHIS, primary GHIS where an individual is born with a growth hormone receptor (GHR) defect, and secondary GHIS, where an individual acquires the GHR defect sometime during their life.

A subset of primary GHIS is Laron syndrome (LS), a rare genetic condition. LS patients are differentiated by molecular defects of the GHR. Although LS patients may normally produce growth hormone (GH), the defects in the extra-cellular part of the GHR prevent IGF-I production. There are over 250 LS patients worldwide. These patients are characterized by severe dwarfism and metabolic dysfunction. LS patients have normal to high levels of human GH and low levels of IGF-I and IGFBP-3. Most LS patients are diagnosed around the age of two and if untreated often grow to adult heights of less than four feet. As adults, LS patients experience progressive obesity, insulin resistance, and a predisposition towards high total cholesterol and diabetes.

We plan on initiating a pivotal clinical trial in the pre-pubertal LS population, utilizing our  rhIGF-I/rhIGFBP-3 complex. This trial is expected to begin in the first half of 2003. We believe this limited population could obtain a great deal of therapeutic benefit as the patients have yet to enter their normal key growth phase.

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We also believe the commercial opportunities for rhIGFI/rhIGFBP-3 reach far beyond the indication for the treatment of LS. We believe that if we receive initial approval of our rhIGF-I/rhIGFBP-3 complex for GHIS it may become a platform to enter other potentially very large markets which could include diabetes, severe burns and hip fracture.

Oncology

Cancer is a term applied to a variety of diseases, all of which are characterized by abnormal and unregulated cell growth. The World Health Organization estimates that by 2020, the number of annual worldwide cancer related deaths is expected to reach 10 million. Although there are several drugs available to treat cancer, their use often produces significant side effects and decreases the quality of life of the patient.

Clearly there are a number of factors that can contribute to the development and progression of malignancies. Scientific research over the past two decades has brought about the identification of key cellular pathways that regulate tumor growth. As a result, novel agents that target these growth-promoting pathways are emerging as promising new treatments for cancer.

Our oncology program focuses on IGFBP-3 as a naturally occurring anti-tumor agent. This proprietary product is normally found in the human bloodstream, and several clinical studies have demonstrated that cancer risk increases with decreasing blood levels of IGFBP-3.

rhIGF-I/rhIGFBP-3

Our lead product candidate, rhIGF-I/rhIGFBP-3, is the recombinant protein complex of IGF-I and its most abundant binding protein, IGFBP-3. In animal studies, rhIGF-I/rhIGFBP-3 displays metabolic and anabolic activities similar to those observed with rhIGF-I. Of most importance, rhIGF-I/rhIGFBP-3 has a longer half life than, and may have an improved safety and efficacy profile compared to, rhIGF-I.

rhIGF-I/rhIGFBP-3 is IGF-I derived from E. coli containing a gene encoding human IGF-I, bound to IGFBP-3 derived from E. coli containing a gene encoding human IGFBP-3. When injected into animals and humans, rhIGF-I/rhIGFBP-3 mimics the physiological effects of IGF-I and offers certain benefits over the administration of rhIGF-I, including:

Several short and long-term (greater than five years) studies to evaluate the effects of rhIGF-I in children with GHIS, such as LS, have demonstrated the effectiveness of rhIGF-I to significantly increase growth velocity.

In 2002, the FDA granted us Orphan Drug Status for rhIGF-I/rhIGFBP-3 for the treatment of GHIS, thus allowing an extended period of exclusivity. We are also in the process of applying for Orphan Drug Status in Europe through the European Medical Evaluation Agency (EMEA). We plan on initiating a pivotal trial for rhIGF-I/rhIGFBP-3 in GHIS in Europe during the first half of 2003. Commercial approval of rhIGF-I/rhIGFBP-3 for the treatment of GHIS is one of our main priorities. We intend to use the small LS indication to support the efficacy and safety of rhIGF-I/rhIGFBP-3 for the treatment of GHIS and fast-track the product for approval in the US and Europe for the treatment of GHIS, during the second half of 2004.

We have also previously conducted clinical trials with rhIGF-I/rhIGFBP-3 for the treatment of diabetes.

In April 2000, the Journal of Clinical Endocrinology & Metabolism published the results of our first completed Phase II clinical trial with rhIGF-I/rhIGFBP-3 for type 1 diabetes. This trial demonstrated that rhIGF-I/rhIGFBP-3 significantly improves insulin sensitivity and lowers glucose in patients with type 1 diabetes with no clinically relevant adverse side effects. This data was based on a double-blind, placebo-controlled study

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involving 12 patients with type 1 diabetes. Specifically, data from this study revealed that when compared to placebo, average daily insulin requirements were significantly reduced (p<0.01), average daily blood glucose levels declined (p<0.02) and cholesterol levels declined (p<0.05). Published results of previous studies by other companies of rhIGF-I administered alone without rhIGFBP-3 indicate that patients frequently reported jaw pain, muscular pain, headache and tissue swelling. There were no reports of clinically relevant side effects in this Phase II trial of rhIGF-I/rhIGFBP-3.

At the 2001 American Diabetes Association meeting, we reported results from our clinical study of  rhIGF-I/rhIGFBP-3 in type 2 diabetes patients. Data from this randomized, double-blind study demonstrated that the drug reduced insulin consumption by 51% to 83% and fasting blood glucose levels by 29% to 31%.

In January 2002, we announced positive results from a Phase II dose-ranging trial of rhIGF-I/rhIGFBP-3 in patients with type 2 diabetes. This study was placebo-controlled and double-blinded with eight-day treatment duration to determine the efficacy, safety and pharmacokinetics of rhIGF-I/rhIGFBP-3 in subjects with type 2 diabetes. Thirty-seven subjects were randomized to receive either placebo or rhIGF-I/rhIGFBP-3 at dose levels between 0.125 mg/kg and 2 mg/kg once daily in the evening. All subjects were on insulin therapy prior to enrollment and continued to receive appropriate insulin doses during a four-day run-in period as well as during the treatment period. The data demonstrated that statistically significant improvements in insulin sensitivity and fasting blood glucose occurred with the administration of rhIGF-I/rhIGFBP-3, with the most pronounced changes achieved with a dose of 2 mg/kg. At this dose a significant decrease in average daily insulin requirement from 70.8 units at baseline to 56.5 units (-20.2%) at the end of the treatment period was observed. Other outcome measurements included the change in fasting blood glucose, which was decreased from 171.5mg/dL at baseline to 102.2mg/dL on treatment day eight (-40.4%) for the patient group receiving 2mg/kg of rhIGF-I/rhIGFBP-3 versus a decrease from 151.5mg/dL to 134.8mg/dL (-11%) for the patient group receiving placebo. The study further revealed a dose-dependent occurrence of mild hypoglycemia, which suggests that patients on rhIGF-I/rhIGFBP-3 therapy could have further lowered their daily insulin dose to achieve a desirable fasting blood glucose concentration. We believe the results demonstrated that a single daily dose of rhIGF-I/rhIGFBP-3 can be an effective adjunct to insulin in patients with type 2 diabetes whose blood glucose is poorly controlled by standard insulin regimens.

In January 2003, we announced positive results from a dose-ranging trial of rhIGF-I/rhIGFBP-3 in adolescent patients with type 1 diabetes. The double-blind placebo controlled dose-range finding study was designed to investigate the effects of the addition of a single daily dose of rhIGF-I/rhIGFBP-3 on insulin sensitivity, growth hormone and IGF-I levels in adolescent subjects with type 1 diabetes. The study was conducted at the University of Cambridge in Cambridge, England. All subjects were on insulin therapy prior to enrollment and continued to receive appropriate insulin doses during the study. The study revealed that following the administration of rhIGF-I/rhIGFBP-3, IGF-I blood levels were restored and increases in insulin sensitivity occurred in a dose-dependent manner.

rhIGFBP-3

Our second product candidate, rhIGFBP-3 is currently in preclinical development to evaluate its potential as a novel anti-tumor agent to treat human cancers. In January 2003 we announced the results of studies conducted by our collaborators at McGill University in Montreal, Canada and the Bristol Royal Infirmary in Bristol, England. These studies demonstrated that rhIGFBP-3 caused a significant reduction in cancer cell growth and a marked inhibition of tumor growth in animals with no adverse side effects. Ongoing preclinical work is directed toward defining the optimal clinical protocol in which to translate the promising observations.

This program is very focused and is moving forward at a rapid pace. Toxicology studies in support of the Phase I clinical program are set to begin in the first half of 2003 and we plan to file an IND application in the second half of 2003. In addition, we are actively seeking strategic partnerships to expedite the clinical development of this compound.

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Business Strategy

We are a company focused on product development and commercialization, whose goal is to become a leading biopharmaceutical company treating metabolic and endocrine diseases. The key elements of our strategy are listed below.

Focus on products to treat metabolic and endocrine diseases.    Our approach is to correct metabolic defects in the human body by replacing key regulatory molecules in a physiologically relevant fashion. We will work to complete the development and approval of our products to treat indications with unmet medical needs. We will initially focus on diseases characterized by abnormalities in the growth hormone/insulin-like growth factor axis. We believe these are largely underserved, niche markets. Our management team has significant experience in drug development and we will use this expertise to complete our clinical development programs and, if successful, file for regulatory approval in the U.S. and Europe.

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

Establish corporate partnerships in certain markets.    We plan to establish corporate partnerships and other relationships to develop, market and commercialize our products that are not within our core focus.

Outsource manufacturing to deploy resources efficiently.    Our management team has significant experience in negotiating and supervising contractual arrangements with third parties for the manufacture of drug products on a cost effective basis. To deploy our resources efficiently, we currently plan to continue to outsource the manufacture of rhIGF-I/rhIGFBP-3 and rhIGFBP-3.

Acquire and in-license additional products and technologies.    We intend to acquire additional products and technologies that complement our activities within the field of metabolic and endocrine diseases. We believe such acquisitions in fields where we have expertise can be rapidly integrated into our development and commercialization programs.

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 research and development expenses were approximately $18.1 million in 2002, $35.5 million in 2001 and $21.6 million in 2000.

Strategic Licensing Agreements

Avecia Limited

In May 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 this process development and manufacturing agreement, we are obligated to pay success fees for process development milestones and manufacturing costs associated with ongoing production of rhIGF-I/rhIGFBP-3 and rhIGFBP-3.

Pharmacia, Inc.

Pharmacia, Inc. was granted marketing approval in several European and Scandinavian countries for  rhIGF-I for the treatment of GHIS. Pharmacia is no longer producing rhIGF-I. In October 2002, we entered into an agreement with Pharmacia that grants us an exclusive license to Pharmacia’s portfolio of regulatory filings pertaining to rhIGF-I for the treatment of GHIS. We have made a commitment to make rhIGF-I/rhIGFBP-3 available on a compassionate named patient basis to GHIS subjects that were previously being treated with rhIGF-I supplied by Pharmacia.

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University of Virginia Alumni Patents Foundation

We have a license agreement with the University of Virginia Alumni Patents Foundation that grants a worldwide, exclusive license, including the right to grant sublicenses, to use and practice certain patents related to INS-1 for the treatment of diabetes. The license extends for the full term of the patents. The Foundation may terminate the license upon untimely payment of royalties or our bankruptcy or insolvency. We may terminate the license upon 90 days notice to the Foundation. Either party may terminate upon a material breach by the other party.

In consideration for the license agreement, we are obligated to pay minimum annual licensing fees of $100,000, as well as patent costs through the expiration of the patent rights. We may also have to pay a royalty on net sales of any therapeutic drugs covered by the agreement. Royalties earned by the Foundation will reduce licensing fees and, in the case of patent infringement, we may use up to 50% of royalties otherwise payable to the Foundation to pay expenses we incur to defend the patents.

Following the discontinuation of our INS-1 program we are currently evaluating this agreement.

Patents and Proprietary Rights

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 issue in the United States or in foreign countries. There also can be no assurance that United States or foreign patents issuing from any of these applications will not later be held invalid or unenforceable.

rhIGF-I/rhIGFBP-3

We hold 25 United States issued or allowed patents related to the composition, production, antibodies and methods of use for rhIGF-I/rhIGFBP-3 and rhIGFBP-3, including:

Many of the above patents have been issued or are pending issue in the major pharmaceutical markets including Canada, Japan and Europe.

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.

As part of our development and manufacturing agreement with Avecia Limited, we have also obtained certain nonexclusive rights to Avecia’s proprietary manufacturing technology.

In 1998 Genentech requested a hearing with the European Patent Office to oppose the validity of one of our European patents with claims to rhIGFBP-3, uses of rhIGFBP-3 and uses of rhIGF-I/rhIGFBP-3. As of yet, no hearing date has been set by the European Patent Office. Should the opposition hearing be held and should Genentech prevail, some or all of the claims of this patent may be revoked. This result could lessen our ability to exclude others, but would not affect our own ability to practice these claims.

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Third parties, including Genentech, Chiron, Amgen, Novartis AG, Fujisawa, Beth Israel Hospital and Robert Rieveley 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. However, we can provide no assurance that any one of these third parties will not assert in the future a contrary position, for instance in the context of an infringement action. Moreover, while we cannot predict with certainty the outcome of such a proceeding, an adverse ruling could impact our ability to make, use or sell our products.

INS-1

We currently possess the rights through ownership or license to ten issued United States patents related to our INS-1 technology, including seven issued patents that we have exclusively licensed from the University of Virginia Patent Foundation. We also own two pending patent applications claiming new medical uses of INS-1 and improved methods to manufacture INS-1.

The various issued patents cover use of compounds to treat insulin resistance related diseases, methods for production of INS-1, purified insulin mediators and purification processes. The initial terms of these patents expire at various times between May 2009 and January 2018.

Waxman-Hatch Act

The United States Drug Price Competition and Patent Term Restoration Act of 1984, known as the Waxman-Hatch Act, provides for the return of up to five years of patent term for a patent that covers a new product or its use to compensate for time lost during the regulatory review process. This period is generally one-half the time between the effective date of an investigational new drug application and the submission date of a new drug application (NDA), plus the time between the submission date of a NDA and the approval of that application, subject to a maximum extension of five years. The application for patent term extension is subject to approval by the U.S. Patent and Trademark Office (USPTO), in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension, and there can be no guarantee that the application will be granted. Similar patent term extensions are available under European laws. We intend to apply for such patent term extension(s), where appropriate. However, we cannot provide any assurance that we will receive such patent term extension(s).

The Waxman-Hatch Act also establishes a five-year period of marketing exclusivity from the date of NDA approval for new chemical entities approved after September 24, 1984. In order to obtain this exclusivity, the NDA applicant must submit to the FDA, at the appropriate time, the number and expiration date of any patent which claims the drug that is the subject of the NDA, or which claims a method of using the drug that is the subject of the NDA. Failure to submit this patent information at the appropriate time to the FDA may result in loss of the right to this marketing exclusivity.

During this Waxman-Hatch marketing exclusivity period, no third-party may submit an “abbreviated” NDA or “paper” NDA to the FDA for the same product, using data generated by the NDA holder.

Finally, any abbreviated NDA or paper NDA applicant will be subject to the notification provisions of the Waxman-Hatch Act, which should facilitate our notification about potential infringement of our patent rights. The abbreviated or paper NDA applicant must notify the NDA holder and the owner of any patent applicable to the abbreviated NDA or paper NDA product, of the application and intent to market the drug that is the subject of the NDA.

We intend to apply for such exclusivity, where appropriate. However, we cannot provide any assurance that we will receive such exclusivity for any of our products.

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Manufacturing

We currently rely, and plan to continue to rely, on contract manufacturers to produce rhIGF-I/rhIGFBP-3 and rhIGFBP-3. Our product candidates will need to be manufactured in a facility by processes that comply with the FDA’s good manufacturing practices and other similar regulations. It may take a substantial period of time to begin manufacturing our products in compliance with such regulations. If we are unable to establish and maintain relationships with third parties for manufacturing sufficient quantities of our product candidates and their components that meet our planned time and cost parameters, the development and timing of our clinical trials and/or product commercialization may be adversely affected.

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 Phase II study requirements with rhIGF-I/rhIGFBP-3 previously produced by our subsidiary, Celtrix. Since Celtrix no longer produces rhIGF-I/rhIGFBP-3, we have identified a new source for this compound for clinical trial and commercial use. We have an agreement with Avecia Limited to manufacture rhIGF-I/rhIGFBP-3 and rhIGFBP-3 at Avecia’s site at Billingham, England. We cannot guarantee that Avecia will be able to produce the rhIGF-I/rhIGFBP-3 and rhIGFBP-3 necessary for future clinical trials and commercialization.

Marketing and Sales

We currently have no sales, marketing or distribution capability. In order to commercialize any of our product candidates, we must either internally develop sales, marketing and distribution capabilities or make arrangements with a third party to perform these services.

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 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:

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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 United States Food and Drug Administration (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. Once the submission has been accepted for filing, the FDA has 180 days to review the application and respond to the applicant. 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 its 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.

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 similar risks as those associated with FDA approval as described above.

Employees

As of December 31, 2002, we had 23 full-time employees. Of these employees, 13 were engaged in research and development and 10 were engaged in general management, finance and administration. None of our employees is covered by any collective bargaining agreement. We consider relations with our employees to be good.

Risk Factors Related to Our Business

Except for the historical information contained in this annual report or incorporated in this annual report by reference, this annual report on Form 10-K and the information incorporated by reference contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed in Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this annual report and in any other documents incorporated by reference into this annual report. 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.

Because our products are in an early stage of development, we have not received regulatory approval for any of our products or released any products for commercial sale; therefore we can give you no assurances that we will succeed in commercializing our products.

Our long-term viability and growth will depend on the successful commercialization of products resulting from our development activities, including rhIGF-I/rhIGFBP-3 and rhIGFBP-3. All of our potential products and production technologies are in the research or development stages, and we have generated no revenues from product sales. We need to conduct significant additional development, laboratory and clinical testing and invest significant additional amounts of capital before we can commercialize our products. We can give you no assurances that we will identify, develop or produce products with commercial potential or that we will secure market acceptance for our products. The failure to commercialize our potential products will adversely affect our business, financial condition and results of operations. In addition, the research, development, testing, clinical trials and acquisition of the necessary regulatory approvals with respect to any given product will take many years and thus delay our receipt of revenues, if any, from any such products. 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:

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Our products may also fail to receive regulatory approval. In addition, even after regulatory authorities approve our products, the products may fail to achieve market acceptance or the proprietary rights of third parties may prevent their commercialization.

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 we currently have no 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 activity. 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, 2002, our accumulated deficit was $176.2 million. For the year ended December 31, 2002, our consolidated net loss was $36.4 million.

We will need additional funds in the future to continue our operations, but we face uncertainties with respect to our access to capital that could adversely impact our business, financial condition and results of operations.

We will require substantial future capital in order to continue to conduct the time-consuming research and development, clinical studies and regulatory activities necessary to bring our therapeutic products to market and to establish production, marketing and sales capabilities. There can be no assurance that our cash reserves together with any subsequent funding will satisfy our capital requirements. The failure to satisfy our capital requirements will adversely affect our business, financial condition and results of operations. Our future capital requirements will depend on many factors, including the progress of pre-clinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing and prosecuting patent applications and enforcing patent claims and the establishment of strategic alliances and activities required for product commercialization. We believe that existing cash reserves will sufficiently fund our activities through 2004.

We may seek additional funding through strategic alliances, private or public sales of our securities or licensing all or a portion of our technology. Such funding may significantly dilute existing shareholders or may limit our rights to our currently developing technology. There can be no assurance, however, that we can obtain additional funding on reasonable terms, or at all. If we cannot obtain adequate funds, we may need to significantly curtail our product development programs and/or relinquish rights to our technologies or product candidates.

If our products fail in clinical trials or if we cannot enroll enough patients to complete our clinical trials, there may be an adverse effect on our business, financial condition and results of operations.

In order to sell our products, we must receive regulatory approval for our products. Before obtaining regulatory approvals for the commercial sale of any of our products under development, we must demonstrate through pre-clinical studies and clinical trials that the product is safe and effective for use in each target indication. Therefore, if our products fail in clinical trials, there will be an adverse effect on our business, financial condition and results of operations. In addition, the results from pre-clinical testing and early clinical trials may not be predictive of results obtained in later clinical trials. There can be no assurance that our clinical trials will demonstrate sufficient safety and effectiveness to obtain regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in late stage clinical trials even after promising results in early stage development.

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The completion rate of our clinical trials is dependent on, among other factors, the patient enrollment rate. Patient enrollment is a function of many factors, including:

We believe our planned procedures for enrolling patients are appropriate; however, delays in patient enrollment would increase costs and delay ultimate sales, if any, of our products. Such delays could materially adversely affect our business, financial condition and results of operations.

If we fail to obtain regulatory approvals for our products under development, such failure may adversely affect our business, financial condition and results of operations.

Because our products are in an early stage of development, none has received regulatory approval or been released for commercial sale. The pre-clinical testing and clinical trials of any compounds we develop and the manufacturing and marketing of any drugs produced from such compounds must comply with regulation by numerous federal, state and local governmental authorities in the United States, principally the FDA, and by similar agencies in other countries. No product can receive FDA approval unless human clinical trials show its safety and effectiveness. There can be no assurance that clinical testing will provide evidence of safety and effectiveness in humans or that regulatory agencies will grant approvals for any of our products.

The regulatory process takes many years and requires the expenditure of substantial resources. Data obtained from pre-clinical and clinical activities are subject to varying interpretations that could delay, limit or prevent regulatory agency approval. We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a drug and/or the period required for review of any application for regulatory agency approval of a particular compound. Delays in obtaining regulatory agency approvals could adversely affect the marketing of any drugs that our collaborative partners or we develop. Such delays could impose costly procedures on our collaborative partners’ or our activities, diminish any competitive advantages that our collaborative partners or we may attain and adversely affect our ability to receive royalties, any of which could materially adversely affect our business, financial condition and results of operations.

If the FDA grants approval for a drug, such approval may limit the indicated uses for which we may market the drug, and this could limit the potential market for such drug. Furthermore, if we obtain approval for any of our products, the marketing and manufacture of such products remain subject to extensive regulatory requirements. Even if the FDA grants approval, such approval would be subject to continual review, and later discovery of unknown problems could restrict the products future use or cause their withdrawal from the market. Failure to comply with regulatory requirements could, among other things, result in fines, suspension of regulatory approvals, operating restrictions and criminal prosecution. In addition, many countries require regulatory agency approval of pricing and may also require approval for the marketing in such countries of any drug that our collaborative partners or we develop.

We cannot be certain that we will obtain any regulatory approvals in other countries, and the failure to obtain such approvals may materially adversely affect our business, financial condition and results of operations. In order to market our products outside of the United States, our corporate partners and we must comply with numerous and varying regulatory requirements of other countries. The approval procedures vary among countries and can involve additional product testing and administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries includes all of the risks associated with obtaining FDA approval detailed above. Approval by the FDA does not ensure approval by the regulatory authorities of other countries.

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If our products fail to achieve market acceptance for any reason, such failure may adversely affect our business, financial condition and results of operations.

There can be no assurance that any of our product candidates, if approved for marketing, will achieve market acceptance. If our products do not receive market acceptance for any reason, it will adversely affect our business, financial condition and results of operations. The degree of market acceptance of any products we develop will depend on a number of factors, including:

For example, even if we obtain regulatory approval to sell our products, physicians and healthcare payers could conclude that our products are not safe and effective and physicians could choose not to use them to treat patients. Our competitors may also develop new technologies or products which are more effective or less costly, or that seem more cost-effective than our products. We can give no assurance that physicians, patients, third-party payers or the medical community in general will accept and use any products that we may develop.

We currently have no internal manufacturing and limited marketing capability, which may make commercializing our products difficult.

We have no internal manufacturing and limited marketing capability. Failure to successfully manufacture and market our products could materially adversely affect our business, financial condition and results of operations. We intend to enter strategic alliances with other parties that have established commercial scale manufacturing capabilities. There can be no assurance that we will enter such strategic alliances on terms favorable to us, or at all. If we are unable to establish and maintain relationships with third parties for manufacturing sufficient quantities of our product candidates and their components that meet our planned time and cost parameters, the development and timing of our clinical trials may be adversely affected. In addition, there can be no assurance that an adverse FDA inspection of a contractor’s manufacturing facilities would not impede our commercial supply capability. As an alternative, we may choose to commercialize such products on our own, which would require substantial additional funds.

If the FDA or any other regulatory agency permits us to commence commercial sales of products, we will face competition with respect to commercial sales, marketing and distribution. These are areas in which we have no experience. To market any of our products directly, we must develop a marketing and sales force with technical expertise and with supporting distribution capability. Alternatively, we may engage a pharmaceutical company with a large distribution system and a large direct sales force to assist us. There can be no assurance that we will successfully establish sales and distribution capabilities or gain market acceptance for our proprietary products. To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and there can be no assurance that our efforts will succeed.

Manufacturing capacity necessary to supply rhIGF-I/rhIGFBP-3 and rhIGFBP-3 may not be available, which may adversely affect our business, financial condition and results of operations.

The available capacity for the manufacture of recombinant proteins that comprise rhIGF-I/rhIGFBP-3 is limited. A shutdown or disruption in any of these facilities due to technical, regulatory or other problems, resulting in an interruption in supply of these materials, could delay our development activities and adversely impact our business, financial condition and results of operations.

Process improvements in the manufacture of rhIGF-I/rhIGFBP-3 and rhIGFBP-3 will be necessary to conduct Phase III clinical trials and produce commercial scale quantities.

We have signed an agreement with Avecia Limited to manufacture rhIGF-I/rhIGFBP-3 and rhIGFBP-3 at Avecia’s site at Billingham, England. At present, rhIGF-I/rhIGFBP-3 and rhIGFBP-3 have never been

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manufactured by Avecia; we cannot guarantee that they will be able to produce rhIGF-I/rhIGFBP-3 and rhIGFBP-3 at scales necessary for Phase III and commercialization. If process improvements are not successful, our costs will increase and the manufacture of rhIGF-I/rhIGFBP-3 and rhIGFBP-3 for Phase II and Phase III studies will be delayed. Such delay could materially adversely affect our business, financial condition and results of operations.

We need collaborative relationships for success.

We currently rely and may in the future rely on a number of significant collaborative relationships for research funding, clinical development and/or sales and marketing. Reliance on collaborative relationships poses a number of risks, including the following:

Given these risks, a great deal of uncertainty exists regarding the success of our current and future collaborative efforts. Failure of these efforts could delay our product development or impair commercialization of our products.

Uncertainty regarding third-party reimbursement and healthcare cost containment initiatives may negatively affect our business, financial condition and results of operations.

If we succeed in bringing any of our proposed products to the market, we cannot assure you that third parties will consider the products cost-effective or provide reimbursement in whole or in part for their use. Our commercial success will depend in part on third-party payers agreeing to reimburse patients for the costs of products. Government health administration authorities, private health insurers and other organizations generally provide reimbursement. Third-party payers frequently challenge the pricing of new drugs. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Therefore, third-party payers may not approve our products for reimbursement.

If third-party payers do not approve our products for reimbursement, sales will suffer, as some patients will opt for a competing product that is approved for reimbursement. Even if third-party payers make reimbursement available, these payer’s reimbursement policies may adversely affect our corporate partners and our ability to sell such products on a profitable basis.

Moreover, the trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reducing demand for our products which could adversely affect our business, financial condition and results of operations.

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In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us before or after the FDA or other regulatory agencies approve any of our proposed products for marketing. While we cannot predict the likelihood of any such legislative or regulatory proposals, if the government or an agency adopts such proposals, they could materially adversely affect our business, financial condition and results of operations.

Our growth strategy includes acquiring complementary businesses or technologies that may not be available or, if available and purchased or licensed, might not improve our business, financial condition or results of operations.

As part of our business strategy, we expect to pursue acquisitions and in-license new products and technologies. Nonetheless, we cannot assure you that we will identify suitable acquisitions or products or that we can make such acquisitions or enter into such license agreements on acceptable terms. If we acquire businesses, those businesses may require substantial capital, and we cannot assure you that such capital will be available in sufficient amounts or that financing will be available in amounts and on terms that we deem acceptable. Furthermore, the integration of acquired businesses may result in unforeseen difficulties that require a disproportionate amount of management’s attention and our other resources. Finally, we cannot assure you that we will achieve productive synergies and efficiencies from these acquisitions.

We intend to conduct proprietary development programs with collaborators, and any conflicts with them could harm our business, financial condition and results of operations.

We intend to enter into collaborative relationships which will involve our collaborator conducting proprietary development programs. Any conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively influence our relationship with existing collaborators, which could reduce our revenues and have an adverse effect on our business, financial condition and results of operations. Moreover, disagreements with our collaborators could develop over rights to our intellectual property.

Certain of our collaborators could also be or become competitors. Our collaborators could harm our product development efforts by:

We face uncertainties related to patents and proprietary technology that may adversely affect our business, financial condition and results of operations.

Our success will depend in part on our ability to:

Our patent positions are highly uncertain, and any future patents we receive for our potential products will be subject to this uncertainty, which may adversely affect our business, financial condition and results of operations. We intend to actively pursue patent protection for products arising from our research and development activities that have significant potential commercial value. Nevertheless, it is possible that, in the patent application process, certain claims may be rejected or achieve such limited allowance that the value of the

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patents would be diminished. Further, there can be no assurance that any patents obtained will afford us adequate protection. In addition, any patents we procure may require cooperation with companies holding related patents. We may have difficulty forming a successful relationship with these other companies.

We can give no assurance that a third party will not claim (with or without merit) that we have infringed or misappropriated their proprietary rights. A variety of third parties have obtained, and are attempting to obtain, patent protection relating to the production and use of rhIGF-I and/or rhIGFBP-3. We can give no assurances as to whether any issued patents, or patents that may later issue to third parties, would affect our contemplated commercialization of rhIGF-I/rhIGFBP-3 or rhIGFBP-3. We can give no assurances that such patent(s) can be avoided, invalidated or licensed. If any third party were to assert a claim for infringement, we can give no assurances that we would be successful in the litigation or that such litigation would not have a material adverse effect on our business, financial condition and results of operation. Furthermore, we may not be able to afford the expense of defending against such a claim.

Third parties, including Genentech, Chiron, Amgen, Novartis AG, Fujisawa, Beth Israel Hospital and Robert Rieveley 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. However, we can provide no assurance that any one of these third parties will not assert in the future a contrary position, for instance in the context of an infringement action. Moreover, while we cannot predict with certainty the outcome of such a proceeding, an adverse ruling could impact our ability to make, use or sell our products.

We may have to undertake costly litigation to enforce any patents issued or licensed to us or to determine the scope and validity of another party’s proprietary rights. We cannot assure that a court of competent jurisdiction would validate our issued or licensed patents. An adverse outcome in litigation or an interference or other proceeding in a court or patent office could subject us to significant liabilities to other parties, require us to license disputed rights from other parties or require us to cease using such technology, any of which could materially adversely affect our business, financial condition and results of operations.

In 1998 Genentech requested a hearing with the European Patent Office to oppose the validity of one of our European patents with claims to rhIGFBP-3, uses of rhIGFBP-3 and uses of rhIGF-I/rhIGFBP-3. As of yet, no hearing date has been set by the European Patent Office. Should the opposition hearing be held and should Genentech prevail, some or all of the claims of this patent may be revoked. This result could lessen our ability to exclude others, but would not affect our own ability, to practice these claims.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Third-party claims that our products infringe on their proprietary rights may adversely affect our business, financial condition and results of operations.

We have entered into license agreements, and may enter into future license agreements, with various licensees to develop and market our products, and we cannot assure that third parties will not claim that we and/or our licensees, by practicing our technology, are infringing on their proprietary rights. If other companies

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successfully bring legal actions against us or our licensees claiming patent or other intellectual property infringements, in addition to any potential liability for damages, a court could require us and/or our licensees to obtain a license in order to continue to use the affected processes or to manufacture or use the affected products, or alternatively, require us and/or our licensees to cease using such products or processes. Such a result may have an adverse effect on our business, financial condition and results of operations. Any such claim, with or without merit, could result in costly litigation or might require us and/or our licensees to enter into royalty or licensing agreements, all of which could delay or otherwise adversely impact the development of our potential products for commercial use. If a court requires us to obtain licenses, there can be no assurance that we and/or our licensees will be able to obtain them on commercially favorable terms, if at all. Without such licenses, we and/or our licensees may be unable to develop certain products. Our breach of an existing license or our failure to obtain, or our delay in obtaining, a license to any technology that we require to commercialize our products may materially adversely impact our business, financial condition and results of operations.

An inability to compete successfully would harm our business, financial condition and results of operations.

We engage in a business characterized by extensive research efforts, rapid developments and intense competition. We cannot assure that our products will compete successfully or that research and development by others will not render our products obsolete or uneconomical. Our failure to compete effectively would materially adversely affect our business, financial condition and results of operations. We expect that successful competition will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. Specifically, we expect crucial factors will include the relative speed with which we can develop products, complete the clinical testing and regulatory approval processes and supply commercial quantities of the product to the market. We expect competition to increase as technological advances are made and commercial applications broaden. In each of our potential product areas, we face substantial competition from large pharmaceutical, biotechnology and other companies, as well as universities and research institutions. Relative to us, most of these entities have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we will. Furthermore, we believe that our competitors have used, and may continue to use, litigation to gain a competitive advantage. Finally, our competitors may use different technologies or approaches to the development of products similar to the products we are seeking to develop.

Rapid technological change could make our products obsolete, which could materially adversely affect our business, financial condition and results of operations.

Biotechnology and related pharmaceutical technology have undergone and should continue to experience rapid and significant change. We expect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete, which could materially adversely affect our business, financial condition and results of operations.

We are dependent upon retaining and attracting key personnel and others, the loss of which could materially adversely affect our business, financial condition and results of operations.

We highly depend on the principal members of our scientific and management staff, the loss of whose services might significantly delay or prevent the achievement of research, development or business objectives and would materially adversely affect our business, financial condition and results of operations. Our success depends, in large part, on our ability to attract and retain qualified management, scientific and medical personnel,

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and on our ability to develop and maintain important relationships with commercial partners, leading research institutions and key distributors. We face intense competition for such personnel and relationships. We cannot assure that we will attract and retain such persons or maintain such relationships.

We expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, contract manufacturing and marketing, will place additional requirements on our management, operational and financial resources. We expect these demands will require an increase in management and scientific personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could materially adversely affect prospects for our success.

Our research and development activities involve the use of hazardous materials, which could expose us to damages that could materially adversely affect our business, financial condition and results of operations.

Our research and development activities involve the controlled use of hazardous materials, including hazardous chemicals and radioactive materials. We believe that our procedures for handling hazardous materials comply with federal and state regulations; however, there can be no assurance that accidental injury or contamination from these materials will not occur. In the event of an accident, we could be held liable for any damages, which could exceed our available financial resources, including our insurance coverage. This liability could materially adversely affect our business, financial condition and results of operations.

We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. These laws and regulations may require us to incur significant costs to comply with environmental laws and regulations in the future that could materially adversely affect our business, financial condition and results of operations.

We may be subject to product liability claims if our products harm people, and we have only limited product liability insurance.

The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims and associated adverse publicity. We currently have only limited product liability insurance for clinical trials and no commercial product liability insurance. We do not know if we will be able to maintain existing or obtain additional product liability insurance on acceptable terms or with adequate coverage against potential liabilities. This type of insurance is expensive and may not be available on acceptable terms. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products. A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts. This could have a material adverse effect our business, financial condition and results of operations.

The market price of our stock may continue to be highly volatile.

Our common stock is listed on the Nasdaq National Market under the ticker symbol “INSM.” The market price of our stock has been and may continue to be highly volatile, and announcements by us or by third parties may have a significant impact on our stock price. These announcements may include:

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In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging biotechnology and biopharmaceutical companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.

Future sales by existing shareholders may lower the price of our common stock, which could result in losses to our shareholders.

Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities. Substantially all of our common stock is freely tradable in the public market without restriction under the Securities Act of 1933, unless these shares are held by “affiliates” of our company, as that term is defined in Rule 144 under the Securities Act.

We have never paid dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.

We have not thus far paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to fund the development and growth of our businesses and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.

Certain provisions of Virginia law, our articles of incorporation and our amended and restated bylaws, and our Shareholder Rights Plan make a hostile takeover by a third party difficult.

Certain provisions of Virginia law and our articles of incorporation and amended and restated bylaws could hamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of us. The conditions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. These provisions include:

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In addition, in May 2001 our board of directors approved the adoption of a Shareholder Rights Plan under which shareholders received rights to purchase new shares of preferred stock if a person or group acquires 15% or more of our common stock. These provisions are intended to discourage acquisitions of 15% or more of our common stock without negotiations with the board. The rights trade with our common stock, unless and until they are separated upon the occurrence of certain future events. Our board of directors may redeem the rights at a price of $0.01 per right prior to the time a person acquires 15% or more of our common stock.

Available Information

Our Internet website address is: www.Insmed.com. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.

ITEM 2.    PROPERTIES

We occupy 46,000 square feet of office and laboratory space in Glen Allen, Virginia. Our annual cash cost for the space including utilities and services in 2003 is approximately $1.1 million under an operating lease that contains annual escalations of 1.75% and expires in October 2006. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternate space will be available on commercially reasonable terms when our lease expires or when we need additional space.

ITEM 3.    LEGAL PROCEEDINGS

We are not involved in any legal proceedings that, in our opinion, could have a material adverse effect on our business or financial condition.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our shareholders during the quarter ended December 31, 2002.

PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our common stock began trading on The Nasdaq SmallCap Market on June 1, 2000. We moved from The Nasdaq SmallCap Market to the Nasdaq National Market on August 8, 2000. On January 22, 2003, Insmed received a NASDAQ Staff Determination indicating that the Company has failed to comply with NASDAQ’s minimum bid price requirement of $1.00 per share for continued listing of the Company’s common stock on the NASDAQ National Market as set forth in Marketplace Rule 4450(a)(5). As a result, the Company’s common stock was subject to delisting from the NASDAQ National Market on January 31, 2003. Following procedures set forth in the NASDAQ Marketplace Rule 4800 series, the Company requested a hearing before a NASDAQ Listing Qualifications Panel (the Panel) to review the Staff Determination. The hearing occurred on March 6, 2003 and the delisting action has been stayed pending the Panel’s decision. The Panel has 30 days from the hearing date to render a decision. At the time of filing of this annual report on Form 10-K with the SEC, no decision had been received from the Panel.

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In the event the Panel denies the Company’s request for continued listing on the NASDAQ National Market, the Company intends to apply for its common stock to be listed on the NASDAQ SmallCap Market. The Company believes that its common stock will likely be listed on the NASDAQ SmallCap Market if it is delisted from the NASDAQ National Market.

If, at some future date, the Company’s common stock should cease to be listed on the NASDAQ National Market and the NASDAQ SmallCap Market, the common stock could publicly trade over-the-counter. In such an event, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. In addition, if the Company’s common stock were to be delisted from trading on the NASDAQ National Market and from the NASDAQ SmallCap Market and the trading price of the common stock were to remain below $5.00 per share, trading in our common stock could also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a “penny stock” (generally, any non-NASDAQ and non-national exchange equity security that has a market price of less than $5.00 per share, subject to certain exceptions). The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of our common stock and the ability of investors to trade our common stock. Many brokerage firms are reluctant to recommend lower price stocks for their clients, and the policies and practices of a number of brokerage houses tend to discourage individual brokers within those firms from dealing in lower price stocks. Also, the brokerage commission on the purchase or sale of a stock with a relatively low per share price generally tends to represent a higher percentage of the sales price than the brokerage commission charged on a stock with a relatively higher per share price, to the detriment of our shareholders and the market for our common stock.

Our trading symbol is “INSM.” The following table lists, for the periods indicated, the high and low sale prices per share for our common stock as reported on The Nasdaq National Market.

On February 28, 2003, the last reported sale price for our common stock on the Nasdaq National Market was $0.49 per share. As of February 28, 2003, there were 521 holders of record of our common stock.

We have never declared or paid dividends on our common stock. We anticipate that we will retain all earnings, if any, to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination as to the payment of dividends will be at the sole discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors our board of directors deems relevant.

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ITEM 6.    SELECTED FINANCIAL DATA

In the table below, we provide you with selected consolidated financial data. We have prepared this information using the consolidated financial statements of Insmed for the five years ended December 31, 2002. The acquisition of Celtrix closed on May 31, 2000. The purchase method of accounting was used to account for the transaction. Accordingly, the results of operations for Celtrix are included in the historical financial information commencing June 1, 2000. The financial statements for each of the five fiscal years ended December 31, 2002 have been audited by Ernst & Young LLP, our independent auditors.

When you read this selected historical financial data, it is important that you also read the historical financial statements and related notes, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 23 to 27.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion also should be read in conjunction with the Consolidated Financial Statements and notes thereto.

Overview

We discover and develop pharmaceutical products for the treatment of metabolic and endocrine disorders. We have two lead drug candidates — rhIGF-I/rhIGFBP-3 and rhIGFBP-3.

We have not been profitable and have accumulated deficits of approximately $176.2 million through December 31, 2002. We expect to incur significant additional losses for at least the next several years until such time as sufficient revenues are generated to offset expenses. In general, our expenditures may increase as

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development of our product candidates progresses. However, there will be fluctuations from period to period caused by differences in project costs incurred at each stage of development.

The full cost and completion dates, through commercialization, of our current research and development projects, rhIGF-I/rhIGFBP-3 and rhIGFBP-3, are entirely dependent on the results of our current Phase II and potential Phase III clinical trials for rhIGF-I/rhIGFBP-3, together with the subsequent review of these Phase III results with the FDA, and our pre-clinical trials with rhIGFBP-3. Therefore, the estimated full cost of completion and the final completion dates for our current research and development projects are unknown at this time.

On September 10, 2002, we announced that we would immediately discontinue the internal development of one of our investigational drug candidates, INS-1, based on the results of recently completed Phase II clinical trials. Similarly, our Japanese partner to develop INS-1 in Japan and Asia, Taisho Pharmaceuticals, Co., Ltd., also indicated its intention to discontinue its involvement in any future development in INS-1, and terminated the joint development agreement in accordance with the terms of the agreement.

As a result of the decision to discontinue the INS-1 development program and Taisho’s notice to terminate our joint development agreement, we approved a restructuring plan to focus on our remaining drug candidates. In the third quarter of 2002, we recorded a restructuring charge of $2.5 million. The components of the restructuring charge included expenses of $1.2 million related to the anticipated payouts under lease agreements for laboratory space no longer utilized at our headquarters, $0.7 million related to the impairment of idle laboratory equipment at our headquarters, and $0.6 million related to the cost of severance benefits after the termination of 32 employees, or 55% of the workforce, at our headquarters and laboratory in Glen Allen, Virginia. Prior to the end of the third quarter of 2002, all of the affected employees had been terminated. At December 31, 2002, approximately $0.3 million and $1.0 million of these costs remain accrued in the current and long-term portions of the restructuring reserve, respectively. These balances are expected to closely approximate the remaining costs to be incurred by us for lease obligations. As of December 31, 2002, substantially all severance had been paid to all 32 terminated employees. Lease termination costs are anticipated to extend through 2006.

As a result of Taisho’s decision to terminate the joint development agreement, we also recognized revenue from the Taisho agreement totaling $1.7 million. This item represents revenues previously deferred from a cash payment made by Taisho at inception of the joint development agreement that was being recognized as revenue over the estimated life of the corresponding agreement. Due to the termination of the agreement, the balance of the unrecognized revenue was reported in 2002.

Results of Operations

Year Ended December 31, 2002 compared to Year Ended December 31, 2001

For the year ended December 31, 2002, we recorded a net loss of $36.4 million. Research and development expenses (which consist primarily of costs associated with clinical trials of our product candidates, including the costs of manufacturing, compensation and other expenses related to research and development personnel and facilities expenses) decreased $17.4 million from $35.5 million in 2001 to $18.1 million in 2002 as a result of decreased clinical trial activity. INS-1 expenses decreased $15.1 million during 2002, compared to 2001, as follows:

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Clinical and contract manufacturing costs related to the development of rhIGF-I/rhIGFBP-3 decreased approximately $6.2 million, to $3.8 million in 2002 as we completed the development phase and began to scale up our production process for rhIGF-I/rhIGFBP-3 and rhIGFBP-3 with our contract manufacturer, Avecia.

General and administrative expenses decreased $1.9 million from $4.9 million for 2001 to $3.0 million for 2002. The decrease although seen across all support services, is primarily due to lower shareholder expenses, legal fees and accounting services.

In the third quarter 2002, we recorded a restructuring charge of $2.5 million related to the previously announced discontinuation of its INS-1 development program. The components of this charge include expenses of $1.2 million related to the anticipated payouts under lease agreements for laboratory space no longer utilized at our headquarters, $0.7 million related to the impairment of idle laboratory equipment at our headquarters, and $0.6 million related to the cost of severance benefits following the termination of approximately 55% of our workforce.

We also recorded a $15.4 million goodwill write off in the fourth quarter 2002 relating to the Celtrix acquisition in 2000. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, we tested the goodwill being carried on our balance sheet relating to the Celtrix acquisition for impairment by comparing the carrying amount of the goodwill to its fair value. In accordance with Generally Accepted Accounting Principles (GAAP), we adopted the current market value of our stock as the basis for supporting the fair value of our goodwill. Since the announcement of our decision to discontinue the development of INS-1, our stock price has traded at a level which does not reflect the value of goodwill carried on our balance sheet. As a result, under GAAP, there had been impairment to the goodwill and the entire remaining amount of unamortized goodwill of $15.4 million was written off.

The increase in revenues as compared with 2001 is due to the recognition of approximately $1.7 million of revenue from Taisho Pharmaceutical Co., Ltd. This represents revenues, previously deferred, from a cash payment made by Taisho at the inception of the Joint Development Agreement with us in 2000, which were being recognized as revenue over the life of the corresponding patent. As Taisho announced the termination of this agreement, the balance of the unrecognized revenue was recorded in the third quarter of 2002.

As of December 31, 2002, cash and cash equivalents decreased to $27.3 million from $51.3 million at December 31, 2001. As a result of a decreased average cash balance in 2002 compared to 2001, net interest income decreased $2.4 million to $0.6 million. Net receivables from Taisho for its portion of certain INS-1 development activities decreased $3.3 million to $0.2 million.

Accounts payable and accrued project costs decreased $6.2 million from $9.4 million at December 31, 2001 to $3.2 million at December 31, 2002 as a result of decreased clinical and manufacturing activity. Stockholders’ equity decreased $36.3 as a result of the net loss in 2002, net of stock option exercises. The accumulated deficit at December 31, 2001 increased to approximately $176.2 million due to the Company’s 2002 net loss of $36.4 million.

Year Ended December 31, 2001 compared to Year Ended December 31, 2000

For the year ended December 31, 2001, we recorded a net loss of $37.2 million. Research and development expenses (which consist primarily of costs associated with clinical trials of our product candidates, including the costs of manufacturing, compensation and other expenses related to research and development personnel and facilities expenses) increased $13.9 million from $21.6 million in 2000 to $35.5 million in 2001 as a result of increased clinical trial activity. INS-1 expenses increased $9.4 million during 2001, compared to 2000, as follows:

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Clinical and contract manufacturing costs related to the development of rhIGF-I/rhIGFBP-3, the compound we acquired from Celtrix, increased approximately $5.0 million, to $10.0 million in 2001.

Prior to the fiscal year ended December 31, 2000, we generally did not track our historical research and development cost by project; rather, we tracked such costs by the type of costs incurred, such as clinical trial costs and manufacturing costs.

General and administrative expenses decreased $1.1 million from $6.0 million for 2000 to $4.9 million for 2001. The decrease is primarily due to higher legal, investor relations and other costs resulting from the acquisition of Celtrix in 2000. Legal fees were also incurred in 2000 to finalize the license agreement with Taisho, transition the rhIGF-I/rhIGFBP-3 patent estate and other general corporate matters, and we incurred fees in 2000 to develop our new web site and other investor materials.

As of December 31, 2001, cash, cash equivalents and marketable securities decreased to $51.3 million from $83.1 million at December 31, 2000. As a result of an increased average cash balance in 2001 compared to 2000, net interest income increased $1.1 million to $3.0 million. The issuance of equity securities produced net proceeds of approximately $0.3 million in 2001. Net receivables from Taisho for its portion of certain INS-1 development activities increased $2.3 million to $3.5 million.

Accounts payable and accrued project costs increased $6.0 million from $3.4 million at December 31, 2000 to $9.4 million at December 31, 2001 as a result of increased clinical and manufacturing activity. In addition, we deferred the $2.0 million initial licensing fee paid by Taisho in 2000 as part of the joint development agreement and are recognizing it as revenue over the life of the related INS-1 patents. Stockholders’ equity decreased $37.1 million as a result of the net loss in 2001, net of the issuance of equity securities and stock option exercises. The accumulated deficit at December 31, 2001 increased to approximately $139.8 million due to the Company’s 2001 net loss of $37.2 million.

Liquidity and Capital Resources

At December 31, 2002, our cash and cash investments were approximately $27.3 million and were invested in money market instruments. We believe that our current cash position will be sufficient to fund our operations through 2004.

Our business strategy contemplates selling additional equity and entering into agreements with corporate partners to fund research and development, and provide milestone payments, license fees and equity investments to fund operations. We will need to raise substantial additional funds to continue development and commercialization of our products. There can be no assurance that adequate funds will be available when we need them or on favorable terms. If at any time we are unable to obtain sufficient additional funds, we will be required to delay, restrict or eliminate some or all of our research or development programs, dispose of assets or technology or cease operations.

Critical Accounting Policies

In Management’s Discussion and Analysis, we discuss the results of operations and financial condition as reflected in the our consolidated financial statements, which have been prepared in accordance with GAAP. Preparation of financial statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We continually

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evaluate these estimates and assumptions. Note 1 to the Company’s consolidated financial statements include a discussion of our significant accounting policies. The accounting policies discussed below are those we consider critical to an understanding of our consolidated financial statements because their application places the most significant demands on our judgment. Our financial results might have been different if different assumptions had been used or other conditions had prevailed.

Stock-Based Compensation

We recognize expense for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost is recognized for the excess, if any, of the estimated fair value of the stock at the grant date over the exercise price. Disclosures regarding alternative fair value measurement and recognition methods prescribed by Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, are presented in Note 3. The fair value for these awards was estimated at the date of grant using the Black-Scholes pricing method assuming a weighted average volatility, a risk-free interest rate, no dividends, and a weighted-average expected life of the option.

Stock options granted to non-employees are accounted for in accordance with the Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments that are issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services. Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest excess cash in investment grade, interest-bearing securities and, at December 31, 2002, had $27.3 million invested in money market instruments. Such investments are subject to interest rate and credit risk. Our policy of investing in highly rated securities whose maturities at December 31, 2002, are all less than one year minimizes such risks. In addition, while a hypothetical 1.0% per annum decrease in market interest rates would reduce interest income in 2003, it would not result in a loss of the principal and the decline in interest income would be deemed immaterial.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is set forth on pages F-1 to F-13.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information presented under the caption “Nominees,” “Directors Whose Terms Expire at the 2004 Annual Meeting (Class I Directors),” “Directors Whose Terms Expire at the 2005 Annual Meeting (Class II Directors)” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive Proxy Statement for the 2003 Annual Meeting of Shareholders (the “2003 Proxy Statement”) is incorporated herein by reference. Such 2003 Proxy Statement will be filed with the Securities and Exchange Commission in April 2003.

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ITEM 11.    EXECUTIVE COMPENSATION

The information presented under the captions “Executive Officer Compensation” and “Director Compensation” of the 2003 Proxy Statement is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information presented under the caption “Stock Ownership” of the 2003 Proxy Statement is incorporated herein by reference.

Equity Compensation Plan Information

The following table presents information as of December 31, 2002, with respect to compensation plans under which shares of Insmed Common Stock are authorized for issuance.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information presented under the caption “Certain Relationships and Related Transactions” of the 2003 Proxy Statement is incorporated herein by reference.

ITEM 14.    CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chairman of the Board and Chief Executive Officer and Principal Financial Officer, Treasurer and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chairman of the Board and Chief Executive Officer and Principal Financial Officer, Treasurer and Controller concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8–K

None required.

The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index. Exhibits 10.1 and 10.2 constitute management contracts or compensatory plans or arrangements required to be filed as exhibits hereto.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Richmond, Commonwealth of Virginia, on the 28th day of March, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 28th day of March, 2003.

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Section 302 Certification

I, Geoffrey Allan, Chairman of the Board and Chief Executive Officer of Insmed Incorporated, certify that:

Date:    March 28, 2003

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Section 302 Certification

I, Kevin P. Tully, Principal Financial Officer, Treasurer and Controller of Insmed Incorporated, certify that:

Date:    March 28, 2003

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Insmed Incorporated

We have audited the accompanying consolidated balance sheets of Insmed Incorporated as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Insmed Incorporated at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, in 2002 the Company changed its method for accounting for goodwill and other intangible assets to comply with the accounting provisions of Statement of Financial Accounting Standards No. 142.

/s/ Ernst & Young LLP

McLean, Virginia

January 17, 2003

F-1

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INSMED INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes.

F-2

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INSMED INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

See accompanying notes.

F-3

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INSMED INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

(in thousands, except share amounts)