Business Context and Reporting Period
Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company operated as a single drug discovery and development segment, focused on antisense therapeutics, partnered research and development, licensing, and commercialization of KYNAMRO.
The pipeline included 34 drugs in development. KYNAMRO was marketed in the United States for homozygous familial hypercholesterolemia, while ISIS-TTR Rx, ISIS-SMN Rx, and ISIS-APOCIII Rx were key late-stage programs.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $44.1 million | $23.6 million | $129.3 million | $105.0 million |
| Operating expenses | $65.6 million | $49.1 million | $187.1 million | $136.8 million |
| Loss from operations | $(21.5) million | $(25.5) million | $(57.8) million | $(31.8) million |
| Net loss | $(26.7) million | $(24.6) million | $(70.0) million | $(36.4) million |
| Basic and diluted loss per share | $(0.23) | $(0.21) | $(0.60) | $(0.33) |
| Net cash from operating activities | Not separately provided | Not separately provided | $(64.4) million | $78.0 million |
- Revenue mix: Nine-month research and development revenue was $120.0 million, including $66.5 million of milestone revenue and $46.0 million of amortized upfront payments. Licensing and royalty revenue was $9.3 million, including $7.7 million from Alnylam sublicensing activity.
- Margins: Approximate operating margins were negative 48.8% in Q3 and negative 44.7% for the first nine months. Approximate net margins were negative 60.5% and negative 54.2%, respectively.
- Research and development: Excluding non-cash stock compensation, research, development and patent expense was $54.5 million in Q3 and $154.9 million for nine months, compared with $43.3 million and $119.4 million in the comparable periods. Higher costs reflected advancing programs into larger and later-stage clinical trials.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $592.0 million at September 30, 2014, versus $656.8 million at December 31, 2013. Working capital was $573.8 million, compared with $637.7 million at year-end.
- Balance sheet: Total assets were $793.8 million and stockholders’ equity was $344.8 million. Accumulated deficit was approximately $1.04 billion.
- Debt and obligations: Debt and other obligations totaled $280.6 million. The company carried $155.4 million of 2¾% convertible senior notes, maturing in 2019; the notes had an estimated fair value of $490.0 million. Total contractual obligations, including debt, facility rent, leases, and other commitments, were $396.4 million.
- Concentration: Biogen Idec represented 72% of Q3 revenue and 59% of nine-month revenue. Two significant partners represented approximately 94% of contract receivables at September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 87% year over year, and nine-month revenue increased 23%, driven primarily by milestone payments and amortization of the $100 million Biogen Idec strategic neurology upfront payment.
- Operating expenses increased 34% for the quarter and 37% for nine months, primarily because ISIS-TTR Rx, ISIS-SMN Rx, and ISIS-APOCIII Rx advanced in clinical development.
- Nine-month net loss nearly doubled year over year because increased operating expenses more than offset higher revenue. The comparison was also affected by a $6.4 million tax benefit in 2013 versus approximately no tax benefit in 2014.
- Operating cash flow changed from $78.0 million provided in the first nine months of 2013 to $64.4 million used in the first nine months of 2014. The change reflected the net loss and a $28.6 million reduction in deferred contract revenue, compared with a $104.4 million increase in 2013.
- Non-cash stock-based compensation rose to $22.9 million for nine months from $8.3 million, primarily due to the increase in the company’s stock price.
- During the quarter, the company initiated Phase 3 programs for ISIS-SMN Rx in spinal muscular atrophy and ISIS-APOCIII Rx in familial chylomicronemia syndrome. Achaogen also initiated a Phase 3 study of plazomicin.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Outlook: Management did not provide formal revenue, earnings, or cash-burn guidance. It expected to continue using cash, cash equivalents, and short-term investments to fund operations and stated that additional equity, debt, refinancing, or credit facilities could be pursued if needed.
- Development outlook: Management described ISIS-APOCIII Rx as being in a Phase 3 program supporting a potential 2016 regulatory filing. ISIS-TTR Rx and ISIS-SMN Rx were also in Phase 3 development and were described as potential commercial opportunities over the following several years.
- Near-term events: The company reported that, in the fourth quarter, it earned $23.0 million of GSK milestones, a $10.0 million Biogen Idec milestone, and a $7.5 million AstraZeneca milestone. These were expected to be recognized as fourth-quarter 2014 revenue.
- Subsequent investment gain: In November 2014, the company sold 1,279,411 Regulus shares for $20.4 million, generating a $17.8 million gain expected to be recognized in Q4 2014.
- Key risks: Results depended heavily on milestone timing, partner performance and continued collaboration funding; clinical and regulatory failure; market acceptance and safety of KYNAMRO; manufacturing and supply reliability; intellectual-property litigation; concentration of receivables and revenue; and the need to fund continuing losses and late-stage trials.
- Legal matters: Patent litigation with Santaris was continuing, with certain claims dismissed in June 2014. Gilead was also contesting the validity and infringement of patents jointly owned by Merck and Isis; Merck was responsible for litigation costs under the applicable agreement.
- Controls: Management concluded that disclosure controls and procedures were effective as of September 30, 2014, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Confirm the sustainability and timing of partner milestone revenue, particularly the high concentration in Biogen Idec and other strategic collaborators.
- Reconcile the decline in cash and the shift to negative operating cash flow while multiple Phase 3 programs continue to expand spending.
- Assess the commercial performance, regulatory restrictions, and safety profile of KYNAMRO, including its boxed warning and REMS requirements.
- Track clinical, regulatory, and financing milestones for ISIS-SMN Rx, ISIS-APOCIII Rx, and ISIS-TTR Rx, including the potential 2016 filing referenced by management.
- Review the $201.3 million convertible notes, potential issuance of approximately 12.1 million shares upon conversion, and total contractual obligations of $396.4 million.
- Monitor partner termination rights, deferred revenue recognition, litigation outcomes, and the effect of the subsequent $17.8 million Regulus gain.