Isis Pharmaceuticals, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014, with fourth-quarter data included. Isis was an RNA-targeted drug discovery and development company with 38 drugs in development, one marketed product, KYNAMRO, and a partnership-driven business model. The company formed wholly owned Akcea Therapeutics in late 2014 to develop and commercialize its lipid franchise.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $214.2 million | $147.3 million | 45% increase |
| Research and development revenue | $202.5 million | $144.2 million | 40% increase |
| Licensing and royalty revenue | $11.6 million | $3.1 million | Increase primarily from Alnylam |
| Operating expenses | $261.9 million | $199.0 million | 32% increase |
| Loss from operations | $47.7 million loss | $51.7 million loss | Improved |
| Net loss | $39.0 million | $60.6 million | Loss narrowed |
| Basic and diluted loss per share | $0.33 loss | $0.55 loss | Improved |
| Operating cash flow | $6.3 million | $63.5 million | Declined |
| Cash, cash equivalents and short-term investments | $728.8 million | $656.8 million | 11% increase |
| Working capital | $721.3 million | $637.7 million | 13% increase |
| Total debt and other obligations | $643.5 million | $283.5 million | Significant increase |
Annual operating margin was approximately negative 22.3% and net margin was approximately negative 18.2%. Revenue was heavily dependent on collaboration payments rather than recurring product sales; approximately two-thirds of 2014 revenue came from milestone payments.
Fourth-quarter revenue was $84.9 million, operating expenses were $74.8 million, operating income was $10.1 million, and net income was $31.1 million, or $0.26 basic and $0.25 diluted earnings per share. The fourth quarter benefited from milestone revenue, investment gains and a tax benefit.
Material changes versus the prior comparable period
- Revenue increased by $66.9 million, primarily due to higher milestone payments from Biogen Idec, GSK, AstraZeneca and Achaogen.
- Milestone revenue increased to $135.0 million from $82.8 million. Biogen Idec contributed $80.0 million, GSK $28.5 million, AstraZeneca $22.1 million and Achaogen $4.0 million.
- Research, development and patent expense increased to $241.8 million from $184.0 million as ISIS-TTR Rx, ISIS-SMN Rx and ISIS-APOCIII Rx advanced into larger or later-stage trials. Reported 2014 stock-based compensation was $31.4 million, compared with $11.4 million in 2013.
- The company initiated Phase 3 studies for ISIS-SMN Rx in infants and children and for ISIS-APOCIII Rx in familial chylomicronemia syndrome.
- Isis received more than $250 million in partner payments during 2014, including $118 million from Biogen Idec, $36 million from GSK, $35 million from Janssen, $23 million from AstraZeneca, $10 million from Alnylam and $4 million from Achaogen.
- Isis issued $500 million of 1% convertible senior notes due 2021 and used a substantial portion of the proceeds to repurchase $140 million principal amount of its 2.75% convertible senior notes due 2019. The transaction generated a $8.3 million non-cash loss on early debt retirement.
- The company sold 1.5 million Regulus shares for $22.9 million of proceeds and recognized a $19.9 million gain, while retaining an approximately 11% Regulus interest carried at $81.9 million.
- Deferred contract revenue remained substantial at $179.5 million, including $118.1 million associated with Biogen Idec, $30.0 million with Janssen, $17.0 million with Roche and $10.0 million with GSK.
Guidance, outlook, risks and unusual items
Management expected continued investment in the clinical pipeline, including Phase 3 programs for ISIS-TTR Rx, ISIS-SMN Rx and ISIS-APOCIII Rx. Data from key programs were expected in the 2016–2017 timeframe, including ISIS-SMN Rx and ISIS-APOCIII Rx, while ISIS-TTR Rx data were expected in 2017. Management also planned additional Phase 2 studies for programs including ISIS-APO(a) Rx, ISIS-FXI Rx, ISIS-GCCR Rx, ISIS-FGFR4 Rx and ISIS-PKK Rx.
- Revenue and cash generation are volatile because they depend on the timing and achievement of partner milestones, licensing events and research funding.
- Partner concentration is material: Biogen Idec represented 58% of 2014 revenue, GSK 17% and AstraZeneca 13%. Partners generally have termination and option rights, and may discontinue programs or reduce funding.
- KYNAMRO remains subject to a boxed warning for hepatic toxicity and a U.S. REMS program. Genzyme is responsible for commercialization and long-term supply, and the European Medicines Agency maintained a negative opinion on KYNAMRO in 2013.
- The company has incurred losses since inception, with an accumulated deficit of approximately $1.0 billion at year-end. Management stated that additional funding could be required if commercialization, licensing or partnership proceeds do not meet expectations.
- Clinical candidates remain subject to substantial regulatory, safety, efficacy, enrollment, manufacturing and reimbursement risks. Positive early-stage results may not predict Phase 3 or commercial success.
- Patent litigation with Santaris and Gilead was ongoing. The company reported no accrued liability because it did not believe a loss was both probable and estimable.
- The $15.4 million income tax benefit included a $12.8 million intraperiod allocation benefit and a $4.3 million expected California tax refund; it was not indicative of recurring operating profitability.
- More than 86% of available-for-sale securities matured within two years, supporting liquidity, but the Regulus investment was subject to market volatility and trading restrictions at year-end.
Most important facts for investors to verify
- Whether Phase 3 results and regulatory filings for ISIS-SMN Rx, ISIS-APOCIII Rx and ISIS-TTR Rx meet stated timelines and endpoints.
- The sustainability and mix of collaboration revenue, including the extent to which future results depend on Biogen Idec, GSK and AstraZeneca milestones.
- Akcea’s funding needs, operating structure and progress toward commercializing the lipid franchise.
- KYNAMRO sales, profitability, safety monitoring, reimbursement and additional international approvals.
- Cash burn after the 2014 decline in operating cash flow and the effect of $500 million of new convertible debt and potential conversion dilution.
- The valuation and liquidity of the Regulus investment and the effect of future equity-market changes on comprehensive income and stockholders’ equity.
- The status and potential financial impact of the Santaris and Gilead patent litigation.
- The extent of non-cash items, including stock compensation, debt discount amortization, investment gains and tax benefits, when assessing underlying operating performance.