ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Statements contained herein, including without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain certain projections, estimates and other forward-looking statements. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995, are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends," "potential," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Forward-looking statements include, but are not limited to: our plans to develop and market new products and the timing of these development programs; our clinical development of product candidates, clinical trials and our ability to obtain and maintain regulatory approval for our product candidates; our estimates regarding our existing supply of IPLEX™; our estimates regarding our capital requirements and our needs for additional financing; our estimates of expenses and future revenues and profitability; our estimates of the size of the potential markets for our product candidates; our selection and licensing of product candidates; our ability to attract collaborators with acceptable development, regulatory and commercialization expertise; the benefits to be derived from corporate collaborations, license agreements and other collaborative efforts, including those relating to the development and commercialization of our product candidates; sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of products; our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly; the rate and degree of market acceptance of our product candidates; the timing and amount of reimbursement for our product candidates; the success of other competing therapies that may become available; and the manufacturing capacity for our product candidates.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Any forward-looking statement should be considered in light of factors discussed in Part II, Item 1A "Risk Factors" and elsewhere in this report. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K, for the year ended December 31, 2008.

Overview

We are a biopharmaceutical company with expertise in recombinant protein drug development. Our corporate office is located in Richmond, Virginia.

On February 12, 2009 we announced that we had entered into a definitive agreement with Merck & Co., Inc. ("Merck") whereby Merck, through an affiliate, would purchase all assets related to our follow-on biologics ("FOB") platform. On March 31, 2009, we completed the sale of these assets for an aggregate purchase price of $130 million. After fees related to the transaction, we have received to date net proceeds of $127.8 million as a result of this transaction. Income taxes due on the sale will be paid by instalment during the balance of the year resulting in total expected net proceeds of approximately $125 million.

As part of this transaction, Merck assumed the lease of our Boulder, Colorado-based manufacturing facility and acquired ownership of all the equipment in the building. In addition, upon closing of the transaction, Merck offered positions to employees of the Boulder facility. We retain our Richmond, VA corporate office, which houses our Clinical, Regulatory, Finance, and Administrative functions, in support of the continuing IPLEX™ program.

On July 27, 2009 we announced that effective immediately we will cease the supply of IPLEX™ to any new patients. In addition, we will not initiate further clinical trials with IPLEX™ at this time. We have determined that our limited inventory on hand must be conserved for the treatment of existing patients. Following the tranfer of our Boulder, Colorado manufacturing facility to Merck, we no longer have the capability to manufacture IPLEX™, an extremely complicated drug to produce. Moreover, any agreement with a third party to undertake the manufacture of IPLEX™, if it was economically feasible and could be arranged, would not result in production of additional quantities of IPLEX™ for at least 12 to 18 months.

At present there are approximately 70 patients who currently receive IPLEX™, 12 in the U.S. and the remainder around the rest of the world. Most of the patients receive IPLEX™ pursuant to a court-ordered Extended Access Program (EAP) for Amyotrophic Lateral Sclerosis (ALS) in Italy. The 12 U.S. patients are being treated for ALS under single patient Investigational New Drug applications approved by the U.S. Food and Drug Administration. We believe that we have sufficient IPLEX™ inventory to supply these patients for no more than 24 months.

We intend to analyze the on-going data collected for various indications, including myotonic muscular dystrophy and ALS, and assess the overall IPLEX™ development program, including possible IPLEX™ manufacturing options with third parties and possible future clinical trials. Initiation of the Phase II clinical trial for ALS patients in the U.S. that had been discussed with FDA earlier this year has been postponed while we perform this assessment.

Until the sale of our follow-on biologics platform, we pursued a dual path strategy involving entry into the follow-on biologics arena (also known as biosimilars, biogenerics and biologics) and advancing our proprietary protein platform into niche markets with unmet needs. Following the sale of our follow-on biologics assets, we plan to continue to support our proprietary protein platform and our product, the FDA-approved IPLEX™, which is in various stages of development for a number of serious medical conditions including MMD,ALS, also known as Lou Gehrig's disease, and Retinopathy of Prematurity ("ROP").

We plan to use the net proceeds from the sale of our follow-on biologics platform to continue to support the development of IPLEX™ and our proprietary protein platform. We have also engaged the services of RBC to act as financial advisor in evaluating other options for use of these proceeds which could include acquisitions of complimentary businesses or technologies, product licensing or mergers, and could also include share repurchase or the distribution of a portion of the proceeds to shareholders if we do not find attractive acquisition or licensing opportunities.

We have not been profitable and have accumulated deficits of approximately $350 million through June 30, 2009. Following the sale of our FOB assets to Merck, we believe that our ongoing operations will be cash neutral for the balance of 2009 as a result of anticipated revenues on our Expanded Access Program and interest on the net proceeds of the sale of our FOB assets offsetting our ongoing base costs. However, we expect to incur significant additional losses for at least the next several years until such time as sufficient commercial revenues are generated to offset expenses. Moving forward our major source of income is expected to be the cost recovery charges for our Expanded Access Program and our major expenses will be related to research and development. In general, our expenditures may increase as 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.

Research and Development Activities

Since we began operations in late 1999, we have devoted substantially all of our resources to the research and development of a number of product candidates for metabolic and endocrine diseases. Until the sale of our FOB assets on March 31, 2009, our research and development efforts were principally focused on pursuing a dual path strategy involving entry into the follow-on biologics arena (also known as biosimilars, biogenerics and biologics) and advancing our proprietary protein platform into niche markets with unmet needs. Our focus is now principally on our proprietary protein platform. Our lead proprietary protein product, the FDA-approved IPLEX™, is being studied as a treatment for several serious medical conditions including MMD and ALS. We conduct very little of our own preclinical laboratory research. We have outsourced several Phase II clinical studies with IPLEX™ and our other anti-cancer product candidates, INSM-18 and rhIGFBP-3.

All of our research and development expenditures, whether conducted by our own staff or by external scientists on our behalf and at our expense, are recorded as expenses as incurred and amounted to approximately $190 million for the period since inception, in November 1999, through December 31, 2008. Research and development expenses consist primarily of salaries and related expenses, costs to develop and manufacture products and amounts paid to contract research organizations, hospitals and laboratories for the provision of services and materials for drug development and clinical trials.

All of our research and development expenditures related to our proprietary protein platform are interrelated as they are all associated with drugs that modulate IGF-I activity in the human body. A significant finding in any one drug for a particular indication may provide benefits to our efforts across all of these products. All of these products also share a substantial amount of our common fixed costs such as salaries, facility costs, utilities and maintenance. Given the small portion of research and development expenses that are related to products other than IPLEX™ we have determined that very limited benefits would be obtained from implementing cost tracking systems that would be necessary to allow for cost information on a product-by-product basis.

External clinical research of IPLEX™ in the MMD indication is expected to represent our main research and development focus for 2009.

Our clinical trials with our product candidates are subject to numerous risks and uncertainties that are outside of our control, including the possibility that necessary regulatory approvals may not be obtained. For example, the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

· the number of patients that ultimately participate in the trial;

· the duration of patient follow-up that is determined to be appropriate in view of results;

· the number of clinical sites included in the trials;

· the length of time required to enroll suitable patient subjects; and

· the efficacy and safety profile of the product candidate.

Our clinical trials may also be subject to delays or rejections based on our inability to enroll patients at the rate that we expect or our inability to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials.

Moreover, all of our product candidates and particularly those that are in the preclinical or early clinical trial stage must overcome significant regulatory, technological, manufacturing and marketing challenges before they can be successfully commercialized. Some of these product candidates may never reach the clinical trial stage of research and development. As preclinical studies and clinical trials progress, we may determine that collaborative relationships will be necessary to help us further develop or to commercialize our product candidates, but such relationships may be difficult or impossible to arrange. Our projects or intended projects may also be subject to change from time to time as we evaluate our research and development priorities and available resources.

Any significant delays that occur or additional expenses that we incur may have a material adverse affect on our financial position and require us to raise additional capital sooner or in larger amounts than is presently expected. In addition, as a result of the risks and uncertainties related to the development and approval of our product candidates and the additional uncertainties related to our ability to market and sell these products once approved for commercial sale, we are unable to provide a meaningful prediction regarding the period in which material net cash inflows from any of these projects is expected to become available.

Results of Operations

Revenues for the second quarter ended June 30, 2009 were $3.0 million, up from $2.7 million for the corresponding period in 2008. The increase was primarily attributable to $272,000 of grant revenue related to the IPLEX™ myotonic muscular dystrophy ("MMD") clinical trial recorded in the most recent second quarter.

The net loss for the second quarter of 2009 was $1.6 million, or $0.01 per share, compared with a net loss of $4.7 million, or $0.04 per share, in the second quarter of 2008. This $3.1 million decrease was primarily attributable to a $2.8 million decrease in total expenses, in addition to the $0.3 million increase in total revenues.

The $2.8 million total decrease in expenses was due primarily to a $4.1 million decrease in research and development expenses ("R&D Expenses"), which was partially offset by a $1.4 million increase in selling, general and administrative expenses ("SG&A Expenses").

The lower R&D expenses reflected the elimination of manufacturing expenses following the sale of our follow-on biologics ("FOB") assets in March 2009. The increase in SG&A expenses was due to a combination of external finance and consulting advisory services associated with the ongoing strategic review, increased personnel costs, primarily related to the separation agreement with Geoffrey Allan, Ph.D., and license fees relating to the March 2007 patent settlement agreement with Genentech Inc. and Tercica Inc.

For the six months ended June 30, 2009, revenues totaled $5.4 million, up from $5.1 million in the first six months of 2008. Consistent with second quarter results, the increase was primarily attributable to $544,000 of grant revenue related to the IPLEX™ MMD clinical trial recorded during the most recent six-month period. This was partially offset by a decrease of $262,000 in cost recovery from the various Expanded Access and Named Patient Programs to treat patients with Amyotrophic Lateral Sclerosis ("ALS"), also known as Lou Gehrig's Disease, in Europe.

Net income for the six months ended June 30, 2009 was $116.2 million, or $0.93 per share, compared to a net loss of $9.5 million, or $0.08 per share, for first six months of 2008. This $125.7 million improvement was primarily due to the $127.8 million before tax gain on sale of our FOB assets to Merck, and a $3.6 million decrease in R&D expenses and the $0.3 million rise in total revenues, which were partially offset by a $3.3 million increase in SG&A expenses and $2.8 million in income tax expense on the sale of our FOB assets. Year-over-year, R&D expenses fell to $7.3 million for the first half of 2009 from $10.9 million, reflecting a decrease in manufacturing expenses following the sale of our FOB assets in March 2009. SG&A expenses increased to $6.3 million for the first half of 2009 from $3.0 million a year earlier, due largely to the recognition of stock compensation expense for the restricted stock and restricted stock units that vested on March 31, 2009, and the award of bonuses, together with the increased consulting, personnel and license fees previously mentioned.

Interest income for the first half of 2009 was $135,000 and was a reduction from the $375,000 earned in the same period of 2008 due primarily to lower interest rates.

Liquidity and Capital Resources

As of June 30, 2009, Insmed had total cash, cash equivalents, short-term investments, and certificate of deposits on hand totaling $124.9 million, consisting of $122.8 million in cash and short term investments and $2.1 million in a certificate of deposit, as compared to $2.4 million of cash on hand as of December 31, 2008. The $122.5 million increase in total cash was due to the $127.8 million in net proceeds from the sale of Insmed's FOB assets to Merck, $4.1 million from the conversion of warrants and options into common stock and the release of a $2.1 million previously restricted certificate of deposit, which was partially offset by $10.6 million utilized to fund operations and $0.8 million for the partial repayment of the Company's 2005 convertible notes.

At June 30, 2009, our cash, cash equivalents and short-term investments of $122.8 million were invested in investment grade, interest-bearing securities. Even though we currently have sufficient funds to meet our financial needs for the upcoming year, our business strategy also contemplates raising additional capital through debt or equity sales. We also plan to enter into agreements with corporate partners in order to fund operations through milestone payments, license fees and equity investments.