Business Context and Reporting Period
Isis Pharmaceuticals, Inc. (now known as Ionis Pharmaceuticals) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company develops RNA-targeted antisense medicines and funds its pipeline primarily through collaborations, milestone payments, licensing, royalties and equity or debt financing. Its wholly owned Akcea Therapeutics subsidiary focuses on lipid-related programs, including volanesorsen. The company reported 38 drugs in development, including Phase 3 programs for ISIS-TTR Rx, ISIS-SMN Rx and volanesorsen.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $120.4 million, versus $57.1 million in 2014 | $183.0 million, versus $85.2 million in 2014 |
| Operating expenses | $75.8 million, versus $63.7 million | $147.7 million, versus $121.6 million |
| Income (loss) from operations | $44.6 million, versus $(6.7) million | $35.3 million, versus $(36.3) million |
| Net income (loss) | $35.6 million, versus $(12.1) million | $18.9 million, versus $(43.4) million |
| Diluted EPS | $0.29, versus $(0.10) | $0.15, versus $(0.37) |
| Net cash from operating activities | Not separately provided for the quarter | $22.4 million, versus $(66.3) million |
- Revenue increased approximately 111% year over year in the quarter and 115% for the first half. The principal driver was recognition of $91.2 million for the Bayer ISIS-FXI Rx license.
- Operating margins were approximately 37.1% for the quarter and 19.3% for the first half; net margins were approximately 29.6% and 10.3%, respectively. These margins were substantially affected by collaboration and milestone revenue and are not necessarily indicative of recurring performance.
- Research, development and patent expense was $68.0 million in the quarter and $132.5 million for the first half, including non-cash stock compensation of $10.5 million and $21.0 million, respectively.
- Total stock-based compensation was $13.6 million for the quarter and $26.9 million for the first half, compared with $7.7 million and $14.8 million in the comparable periods.
- Cash, cash equivalents and short-term investments totaled $754.9 million at June 30, 2015, compared with $728.8 million at December 31, 2014. Working capital was $753.3 million, compared with $721.3 million.
- Cash and cash equivalents alone declined to $119.5 million from $143.0 million, while short-term investments increased to $635.4 million from $585.8 million.
- Total debt and other obligations were $641.8 million. Convertible debt included $500.0 million of 1% notes due 2021 and $61.2 million of 2¾% notes due 2019. The fair values of the notes were $538.4 million and $229.9 million, respectively.
- The company entered into a five-year, $20 million revolving credit facility in June 2015; no borrowings were outstanding and all covenants were satisfied at quarter-end.
- Accumulated deficit was approximately $987.7 million, although stockholders’ equity increased to $300.3 million from $257.8 million at year-end 2014.
Material Changes Versus the Prior Comparable Period
- The company moved from operating losses to profitability, primarily because of the Bayer license and higher partner milestone revenue.
- First-half milestone revenue totaled $56.8 million, including approximately $41 million from Biogen and $15 million from GSK. Revenue from Biogen increased to $57.0 million from $44.7 million in the prior-year period, while AstraZeneca revenue declined to $1.5 million from $19.1 million.
- Revenue concentration increased materially. Bayer represented 76% of second-quarter revenue and 50% of first-half revenue; Biogen represented 15% and 31%, respectively.
- Operating expenses increased approximately 19% in the quarter and 21% in the first half, reflecting more advanced clinical trials, higher Akcea spending and increased stock compensation.
- Interest expense increased to $9.1 million for the quarter and $18.1 million for the first half, primarily because of non-cash amortization and cash interest associated with the 1% convertible notes issued in November 2014.
- Unrealized investment losses reduced other comprehensive income by $28.7 million in the quarter and $21.3 million for the first half. The investment in Regulus declined in carrying value from $81.9 million at year-end to $60.6 million at June 30.
- Akcea generated no revenue and reported operating losses of $8.9 million in the quarter and $16.0 million in the first half. Management expected Akcea commercialization and pre-launch expenses to increase in the second half of 2015.
Guidance, Outlook, Commentary and Risks
- Excluding Bayer revenue, management expected second-half 2015 revenue to be comparable to first-half revenue. Management also disclosed approximately $33 million of third-quarter milestone revenue already earned as of the filing, including $22 million from Roche and $11 million from Biogen.
- Management expected clinical development costs to rise as Phase 3 programs progressed and Akcea built infrastructure for a potential volanesorsen launch within the next several years.
- Management expected Phase 3 data for ISIS-TTR Rx, ISIS-SMN Rx and volanesorsen in 2016 or 2017, potentially supporting regulatory filings.
- The July 2015 AstraZeneca cardiovascular, metabolic and renal collaboration provided for a $65 million upfront payment and potential future payments exceeding $4 billion, but was subject to Hart-Scott-Rodino clearance. The filing states that approximately $5 million of amortization was expected in the second half of 2015.
- Subsequent to quarter-end, the company sold approximately 2.7 million Regulus shares for $25.5 million, recognizing a $20.2 million gain in the third quarter.
- Major risks include dependence on collaboration partners, concentration of revenue among a small number of partners, failure of clinical trials or regulatory approvals, market acceptance and reimbursement of KYNAMRO and future products, manufacturing and supply constraints, intellectual-property disputes, product liability, and the need for future financing if milestones or commercialization plans do not materialize.
- The company is a party to patent litigation with Gilead concerning patents related to sofosbuvir. Merck is responsible for the litigation costs under the parties’ agreement.
- Revenue recognition for collaboration arrangements involves significant estimates regarding deliverables, selling prices and performance periods; changes in these estimates could materially affect the timing of future revenue.
Important Facts Investors Should Verify
- Whether Bayer’s ISIS-FXI Rx program advances sufficiently to trigger the next $55 million milestone and whether future royalty economics are realized.
- The timing, results and regulatory consequences of the Phase 3 programs for ISIS-TTR Rx, ISIS-SMN Rx and volanesorsen.
- The sustainability of profitability after the nonrecurring or milestone-driven Bayer revenue is excluded.
- Future spending by Akcea and the cash requirements associated with a potential volanesorsen launch.
- Revenue concentration and the risk that Biogen, AstraZeneca, Bayer, GSK, Roche or other partners terminate, delay or reduce funding of programs.
- The company’s ability to manage $641.8 million of debt and other obligations, including the 2021 and 2019 convertible notes.
- The outcome and potential economic impact of the Gilead patent litigation.
- The volatility of the Regulus investment and the treatment of the $20.2 million gain expected in the third quarter.