Ionis Pharmaceuticals, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, filed March 1, 2019. Ionis develops RNA-targeted antisense therapeutics and consolidates its approximately 75%-owned affiliate, Akcea Therapeutics. Commercial products were SPINRAZA, marketed by Biogen, and TEGSEDI, launched by Akcea in late 2018. The pipeline exceeded 40 medicines across neurological, severe and rare, cardiometabolic, renal, oncology and other indications.
The filing also provides fourth-quarter information. Q4 revenue was $192.1 million, operating income was $10.8 million, net income was $302.7 million and net income attributable to Ionis common stockholders was $320.1 million.
Financial performance and liquidity
| Metric | 2018 | 2017, as revised |
|---|---|---|
| Total revenue | $599.7 million | $514.2 million |
| Commercial revenue | $254.9 million | $120.0 million |
| SPINRAZA royalties | $237.9 million | $112.5 million |
| TEGSEDI product sales | $2.2 million | None reported |
| R&D revenue under collaborations | $344.8 million | $394.2 million |
| Total operating expenses | $661.0 million | $483.1 million |
| Income from operations | $(61.4) million | $31.0 million |
| Net income | $215.0 million | $(10.8) million |
| Net income attributable to Ionis common stockholders | $273.7 million | $0.3 million |
| Diluted EPS | $2.07 | $0.15 |
| Net cash provided by operating activities | $602.9 million | $174.1 million |
| Cash, cash equivalents and short-term investments | $2.084 billion | $1.023 billion |
| Working capital | $1.928 billion | $925.1 million |
| Total stockholders’ equity | $1.187 billion | $365.3 million |
Revenue increased approximately 16.6% year over year. Commercial revenue more than doubled, primarily because SPINRAZA royalties increased by $125.4 million. Operating margin was approximately negative 10.2%; reported net margin was approximately 35.8%, but was heavily affected by a one-time, non-cash income tax benefit.
R&D and patent expense was $414.6 million, including $131.3 million of non-cash stock-based compensation across operating expenses. SG&A was $244.6 million, up from $108.5 million, reflecting preparation for TEGSEDI and WAYLIVRA commercialization and higher SPINRAZA-related in-licensing fees.
Operating cash flow included a $494.3 million increase in deferred contract revenue and a $290.5 million deferred tax adjustment. Investing cash flow was $(929.6) million, primarily reflecting purchases of short-term investments. Financing cash flow was $475.9 million, including $448.0 million from the Biogen stock purchase.
Debt and other obligations totaled approximately $764.0 million at year end. The company had $685.5 million principal amount of 1% convertible senior notes due November 2021, convertible into approximately 10.3 million shares at $66.81 per share, $12.5 million outstanding under a credit facility due September 2019, and approximately $60.4 million of mortgage debt maturing in 2027. Management stated that it was in compliance with debt covenants.
Material changes versus the prior comparable period
- SPINRAZA royalty revenue rose from $112.5 million to $237.9 million as Biogen reported 2018 SPINRAZA sales exceeding $1.7 billion.
- TEGSEDI generated $2.2 million of net product sales in its initial commercial quarter following approvals in the United States, European Union and Canada.
- Biogen paid $1.0 billion in connection with the 2018 strategic neurology collaboration, consisting of a $375 million upfront payment and a $625 million stock purchase at a premium. Ionis recognized $552 million as the collaboration transaction price for revenue recognition purposes, with the remainder reflected as equity issuance proceeds.
- Ionis recognized $40 million from Biogen in Q4 for advancing and licensing IONIS-SOD1Rx, including a $35 million license fee and a $5 million milestone.
- Roche paid a $75 million upfront payment for the IONIS-FB-LRx collaboration; the amount was recorded as deferred revenue and is being recognized as research and development services are performed.
- Akcea’s operating expenses increased substantially as it built commercial infrastructure. Akcea remained loss-making, with 2018 operating expenses of $295.7 million including stock-based compensation.
- The company adopted ASC Topic 606 retrospectively, reducing cumulative revenue recognized for prior periods by $86.1 million and revising 2017 and 2016 results.
- Ionis reversed a large portion of its federal deferred-tax valuation allowance, producing a $332.1 million one-time non-cash tax benefit. The company continued to maintain a $234.2 million valuation allowance against Akcea and certain state deferred tax assets.
Guidance, outlook, risks and unusual items
- Management expected at least four medicines to enter pivotal studies in 2019: AKCEA-APO(a)-LRx, AKCEA-TTR-LRx, IONIS-HTTRx and IONIS-SOD1Rx. At least six additional medicines could enter pivotal studies in 2020.
- In February 2019, Novartis exercised its option for AKCEA-APO(a)-LRx, generating a $150 million license fee. This event occurred after year end and was not included in 2018 revenue.
- Roche initiated the Phase 3 IONIS-HTTRx study, generating a $35 million milestone in January 2019 that was not recognized in 2018.
- WAYLIVRA received a positive CHMP opinion recommending conditional EU authorization, subject to European Commission action. The FDA had issued a complete response letter in August 2018, and U.S. regulatory discussions continued.
- TEGSEDI carries U.S. boxed warnings for thrombocytopenia and glomerulonephritis, requires blood and urine monitoring, and is subject to a REMS program. WAYLIVRA development also involved platelet declines and potential monitoring requirements.
- Revenue and cash generation remain concentrated among collaboration partners, particularly Biogen. Biogen-related revenue represented 63% of total 2018 revenue, and approximately 99% of contracts receivable came from four significant partners.
- Key risks include clinical-trial failure, regulatory delays or non-approval, product safety signals, competition, reimbursement pressure, reliance on partners and contract manufacturers, intellectual-property challenges, commercialization execution at Akcea, and volatility in milestone and license revenue.
- The Gilead patent litigation was unsuccessful: the Federal Circuit affirmed unenforceability of the patents, and the Supreme Court denied Ionis and Merck’s petition in January 2019. Merck was responsible for litigation costs.
- Management announced a planned January 2020 transition under which Stanley Crooke would become Executive Chairman and Brett Monia would become Chief Executive Officer.
Most important facts for investors to verify
- Whether SPINRAZA royalties continue to grow and how competitive products affect Biogen’s sales.
- TEGSEDI prescription volume, net pricing, patient persistence, reimbursement and the effect of safety-monitoring requirements.
- Regulatory outcomes and commercial prospects for WAYLIVRA, including U.S. FDA actions and final EU authorization.
- Progress, safety and efficacy data for the pivotal programs planned for 2019 and 2020.
- The sustainability of operating cash flow after excluding the Biogen upfront payment, deferred-revenue movements and tax-related benefits.
- The timing and probability of future milestone and license payments, which are not guaranteed and may be recognized over multiple periods.
- Akcea’s cash needs, operating losses, commercialization execution and the economic impact of Ionis’s approximately 75% ownership.
- The potential dilution from approximately 10.3 million shares issuable under the convertible notes and outstanding equity awards.