Business Context and Reporting Period
Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company operated as a single drug discovery and development segment focused on antisense therapeutics. Its business was funded primarily through collaborative agreements, milestone payments, licensing revenue, equity offerings and debt.
KYNAMRO was approved in the United States for homozygous familial hypercholesterolemia and commercialized by Genzyme. The company reported 28 drugs in development, with programs partnered with AstraZeneca, Biogen Idec, Genzyme, GSK, Roche and others.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $38.1 million | $47.3 million | $81.5 million | $70.6 million |
| Operating income (loss) | $(7.9) million | $3.7 million | $(6.3) million | $(14.8) million |
| Net income (loss) | $(10.1) million | $(1.2) million | $(11.8) million | $(25.2) million |
| Net loss per share | $(0.09) | $(0.01) | $(0.11) | $(0.25) |
| Operating margin | Approximately (20.8%) | Approximately 7.8% | Approximately (7.7%) | Approximately (20.9%) |
| Net margin | Approximately (26.6%) | Approximately (2.6%) | Approximately (14.5%) | Approximately (35.7%) |
- Research and development revenue was $37.6 million in the second quarter and $79.5 million in the first half. Licensing and royalty revenue was $0.5 million and $1.9 million, respectively.
- Total operating expenses were $46.0 million for the quarter and $87.8 million for the first half, including research and development expense of $42.6 million and $80.9 million, respectively.
- Operating cash flow was $12.2 million provided in the first half of 2013, compared with $9.3 million used in the first half of 2012.
- Cash, cash equivalents and short-term investments totaled $590.8 million at June 30, 2013, compared with $374.4 million at December 31, 2012. Working capital was $582.1 million.
- Total assets were $788.7 million and stockholders’ equity was $401.1 million at June 30, 2013. Accumulated deficit was $918.8 million.
- Debt and other obligations totaled approximately $284.4 million. The company reported $147.1 million carrying value of 2¾% convertible senior notes, which mature in 2019; their fair value was $357.2 million.
- Contractual obligations totaled $417.6 million, including $237.3 million of convertible-note principal and interest and $140.8 million of facility rent payments.
Material Changes Versus the Prior Comparable Period
- First-half revenue increased approximately 15% year over year, primarily because of higher milestone payments and revenue from newer AstraZeneca, Biogen Idec and Roche alliances. Second-quarter revenue declined approximately 20% because of lower Genzyme-related revenue and timing of collaboration payments.
- First-half net loss narrowed by $13.4 million, while the second-quarter loss increased by $8.9 million. The quarterly deterioration reflected lower revenue and slightly higher operating expenses.
- First-half revenue included approximately $49.5 million of milestone and licensing payments, including $25 million from Genzyme following FDA approval of KYNAMRO, $10 million from AstraZeneca, $7.5 million from GSK, $3.5 million from Biogen Idec and $3.5 million from Xenon.
- The company completed a public offering of 9.6 million shares at $19.00 per share, generating approximately $173.2 million of net proceeds. Shares outstanding increased to approximately 114.3 million at June 30, 2013 from 101.5 million at December 31, 2012.
- Roche paid a $30 million upfront amount for a Huntington’s disease collaboration. The company recognized $1.3 million of Roche-related revenue in the second quarter and carried $28.8 million of related deferred revenue at June 30.
- The carrying value of the Regulus investment increased to $62.2 million from $33.6 million, primarily from unrealized appreciation recorded in other comprehensive income. Comprehensive income was $2.7 million for the first half despite the reported net loss.
- Research and development spending excluding stock-based compensation increased modestly to $76.1 million in the first half from $75.1 million. Manufacturing expense declined as KYNAMRO production responsibility transitioned to Genzyme.
Guidance, Outlook, Commentary and Risks
- Management planned to use the equity-offering proceeds to advance selected programs, including ISIS-APOCIII Rx into Phase 3 development, and to retain additional products longer before partnering.
- Management expected investment income to increase in the second half of 2013 because of the larger cash and investment balance.
- The company reported positive Phase 2 data for ISIS-APOCIII Rx and planned a Phase 3 program early the following year. ISIS-CRP Rx produced substantial reductions in C-reactive protein but did not demonstrate sufficient improvement in rheumatoid arthritis symptoms to justify further development in that indication.
- Key potential milestones included up to $50 million from AstraZeneca based on ISIS-STAT3 Rx study criteria, $2 million from GSK for further ISIS-TTR Rx progress, $2 million from Biogen Idec for dosing the next SMA cohort, and additional milestone opportunities under the Roche, Genzyme and other collaborations. These payments were contingent and not assured.
- KYNAMRO carried a boxed warning for hepatic toxicity and was subject to a Risk Evaluation and Mitigation Strategy. The European Medicines Agency’s CHMP maintained a negative opinion on KYNAMRO for HoFH in March 2013.
- Revenue was concentrated among a small number of partners: four partners accounted for approximately 85% of second-quarter revenue and 91% of first-half revenue. Four significant partners represented approximately 89% of contract receivables.
- Material risks included clinical and regulatory failure, limited market acceptance of KYNAMRO, competition, dependence on partners for development and commercialization, partner termination or reduced funding, manufacturing and supply constraints, patent litigation, product liability and the need for future financing if programs do not generate sufficient revenue.
- The company was pursuing patent infringement litigation against Santaris Pharma. The complaint was amended in April 2013 to add claims involving an additional patent and alleged inducement of infringement. The filing does not provide a clear estimate of any potential loss or recovery.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2013, with no reported material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether KYNAMRO achieves meaningful commercial adoption and whether Genzyme obtains additional regulatory approvals, particularly after the European negative opinion.
- The timing, probability and accounting treatment of contingent milestones and license payments, which caused substantial period-to-period revenue volatility.
- Clinical results and development plans for ISIS-APOCIII Rx, ISIS-SMN Rx, ISIS-TTR Rx, ISIS-STAT3 Rx and other priority programs.
- The company’s dependence on a limited number of partners and the terms governing partner options, termination rights, funding obligations, royalties and future milestones.
- The fair value and liquidity risks associated with the $62.2 million Regulus investment and other biotechnology equity holdings.
- Future cash-burn requirements relative to the $590.8 million cash and investment balance, $284.4 million of debt and other obligations, and $417.6 million of disclosed contractual obligations.
- The status and potential financial impact of the Santaris patent litigation and other intellectual-property disputes.