Ionis Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
Ionis Pharmaceuticals, Inc. filed its unaudited Form 10-Q for the three months ended March 31, 2018. The consolidated results include Ionis and its approximately 68%-owned subsidiary, Akcea Therapeutics. Ionis develops RNA-targeted therapeutics and generates revenue from commercial royalties, licensing and collaborative research and development agreements.
SPINRAZA royalties from Biogen were the principal commercial revenue driver. Akcea was preparing for potential 2018 launches of TEGSEDI and WAYLIVRA, subject to regulatory approval.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017, as revised |
|---|---|---|
| Total revenue | $144.4 million | $115.8 million |
| Commercial revenue | $42.0 million | $7.8 million |
| SPINRAZA royalties | $41.1 million | $5.2 million |
| Collaborative R&D revenue | $102.4 million | $108.0 million |
| Operating expenses | $147.7 million | $96.3 million |
| Loss from operations | $(3.3) million | Income of $19.5 million |
| Net income (loss) | $(10.8) million | $9.0 million |
| Net income (loss) attributable to Ionis shareholders | $(1.4) million | $9.0 million |
| Basic and diluted EPS | $(0.01) | $0.07 |
| Net cash from operating activities | $13.2 million | $122.7 million |
Revenue increased 24.7% year over year, while operating expenses increased 53.4%. The resulting operating margin was approximately negative 2.3%, compared with positive 16.8% in the prior-year quarter. The net margin was approximately negative 7.5%, compared with positive 7.7% in Q1 2017.
- Research, development and patent expense was $104.1 million, including $19.7 million of stock-based compensation.
- Selling, general and administrative expense was $43.7 million, including $8.8 million of stock-based compensation. Excluding stock-based compensation, SG&A rose to $34.9 million from $8.9 million, primarily due to pre-commercialization activities for TEGSEDI and WAYLIVRA and higher SPINRAZA-related in-licensing fees.
- Total stock-based compensation was $28.5 million, compared with $20.9 million in Q1 2017.
- Investment income was $3.6 million; interest expense was $10.9 million.
- Cash, cash equivalents and short-term investments totaled $1.035 billion at March 31, 2018, including $227.5 million of cash and cash equivalents and $807.8 million of short-term investments.
- Working capital was $930.6 million. Total debt and other obligations were $758.4 million.
- The company had $541.6 million carrying value of 1% convertible senior notes, $59.8 million of mortgage debt and $12.5 million drawn under a $30 million revolving credit facility. The convertible notes mature in 2021; the mortgages mature in August 2027.
Material changes versus the prior comparable period
- SPINRAZA royalties increased by $35.9 million, reflecting continued commercial growth.
- License-fee revenue was $62.3 million, primarily from two AstraZeneca licenses, versus $64.5 million from a Bayer license in Q1 2017. The composition of revenue therefore changed materially despite similar license-fee totals.
- Operating expenses increased by $51.4 million, driven primarily by commercial preparation for TEGSEDI and WAYLIVRA, pipeline investment, medical affairs, manufacturing and higher SPINRAZA-related fees.
- Akcea reported a $30.3 million operating loss, while the noncontrolling interest attributable to other Akcea shareholders reduced Ionis’s reported net loss by $9.4 million.
- Cash flow from operations declined by $109.5 million, primarily reflecting lower deferred contract revenue activity and the absence of comparable prior-year inflows.
- Ionis adopted ASC Topic 606 using the full retrospective method. Cumulative revenue recognized for 2016–2017 was reduced by $53.6 million, and Q1 2017 revenue was revised upward by $5.5 million to $115.8 million. Comparisons should use the revised figures.
- In April 2018, Ionis received 8 million Akcea shares for licensing TEGSEDI and AKCEA-TTR-L Rx and purchased an additional 10.7 million Akcea shares for $200 million, increasing ownership to approximately 75%. The ownership change will be reflected in Q2 2018.
Guidance, outlook, commentary and risks
- Management expected operating expenses to continue increasing during 2018 as Ionis and Akcea prepared for potential launches of TEGSEDI and WAYLIVRA.
- TEGSEDI was under regulatory review in the United States, European Union and Canada. The FDA extended its review, with a new PDUFA date of October 6, 2018.
- WAYLIVRA had an FDA PDUFA date of August 30, 2018, with an advisory committee scheduled for May 10, 2018.
- In April 2018, Ionis and Biogen expanded their neurology collaboration. Subject to Hart-Scott-Rodino clearance and other closing conditions, Ionis expected to receive $1 billion, including a $375 million upfront payment and $625 million for the purchase of Ionis shares at a 25% premium.
- The company stated that its existing liquidity was intended to fund operations, but it may pursue additional equity, debt, refinancing or credit facilities depending on business performance and capital-market conditions.
- Key operating risks include regulatory approval and commercialization of TEGSEDI and WAYLIVRA, safety concerns including thrombocytopenia and renal monitoring, reimbursement and market acceptance, manufacturing capacity, clinical-trial outcomes, dependence on collaborators, and continued reliance on SPINRAZA royalties.
- Revenue is concentrated among a small number of partners. In Q1 2018, AstraZeneca, Biogen and Novartis represented 47%, 36% and 12% of total revenue, respectively. One significant partner represented approximately 87% of contracts receivable at March 31, 2018.
- The Gilead patent litigation ended adversely in April 2018 when the Federal Circuit affirmed that the patents were unenforceable based on unclean hands; the court did not reach validity. The filing states that Merck was responsible for litigation costs.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2018, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the timing, conditions and accounting treatment of the expected $1 billion Biogen collaboration proceeds.
- Track FDA and international regulatory decisions for TEGSEDI and WAYLIVRA, including labeling, monitoring requirements and launch timing.
- Assess whether SPINRAZA royalty growth can offset rising commercialization, research and development and Akcea-related expenses.
- Review the impact of ASC 606 retrospective revisions on historical revenue, deferred revenue and future collaboration revenue timing.
- Evaluate liquidity after the $200 million Akcea share purchase and the company’s substantial convertible debt obligations.
- Monitor partner concentration, deferred contract revenue and the collectability of concentrated contracts receivable balances.
- Review clinical, manufacturing, reimbursement and competitive risks affecting SPINRAZA, TEGSEDI, WAYLIVRA and the broader pipeline.