Business Context and Reporting Period
Isis Pharmaceuticals, Inc. reported unaudited results for the three months ended March 31, 2011. The company develops antisense therapeutics, funds its pipeline through collaborations, and earns research and development revenue, licensing fees, milestones and royalties. Regulus Therapeutics was accounted for under the equity method and was no longer treated as an operating segment beginning in the first quarter of 2011.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $21.1 million | $29.9 million | Down 29% |
| Research and development revenue | $20.0 million | $28.6 million | Down 30% |
| Licensing and royalty revenue | $1.1 million | $1.4 million | Down 17% |
| Operating expenses | $37.3 million | $34.8 million | Up 7% |
| Loss from operations | $(16.1) million | $(4.9) million | Loss increased |
| Net loss | $(20.0) million | $(9.7) million | Loss increased 107% |
| Net loss per share | $(0.20) | $(0.10) | Loss doubled |
| Operating margin | (76.2%) | (16.3%) | Down approximately 60 percentage points |
| Net margin | (94.5%) | (32.3%) | Down approximately 62 percentage points |
| Net cash used in operating activities | $(39.8) million | $(21.7) million | Cash use increased 84% |
Balance Sheet and Liquidity
- Cash and cash equivalents were $86.2 million and short-term investments were $340.6 million at March 31, 2011, for total cash, cash equivalents and short-term investments of $426.8 million.
- Working capital was $343.0 million, compared with $377.2 million at December 31, 2010. The implied current ratio was approximately 4.6 times.
- Total assets were $505.9 million and stockholders’ equity was $227.7 million. The accumulated deficit was $776.7 million.
- Debt and other obligations totaled approximately $145.0 million. The principal debt was the 2 5/8 percent convertible subordinated notes, with a carrying value of $135.0 million and a stated maturity in 2027.
- Total contractual obligations were $217.7 million, including $175.3 million of principal and interest on the convertible notes, $8.5 million of equipment financing obligations, and $31.5 million of operating lease obligations.
- The company estimated maximum potential future payments of $154.8 million over the 20-year term of its new research-facility lease; the filing notes that the amount was difficult to calculate because construction was incomplete.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Q1 2011 included a $750,000 OncoGenex milestone for initiation of a Phase 2 trial, compared with a $6.0 million Bristol-Myers Squibb milestone in Q1 2010. Amortization of upfront fees from the Bristol-Myers Squibb and Alnylam collaborations had also ended.
- Operating expenses increased as the pipeline matured, clinical development costs rose, and the company manufactured drug supplies for upcoming clinical studies.
- Research and development expense increased to $34.2 million from $32.0 million. Excluding stock-based compensation, research and development costs increased to $32.0 million from $29.2 million.
- Development spending excluding stock-based compensation increased, particularly for products other than mipomersen. Mipomersen spending decreased to $3.5 million from $6.5 million.
- Operating cash use increased materially to $39.8 million from $21.7 million, although investment activity generated $56.7 million of net cash primarily through sales and purchases of short-term investments.
- Investment income decreased to $705,000 from $955,000, while interest expense increased slightly to $3.4 million from $3.2 million.
- Loss on investments improved to $318,000 from $1.0 million. The 2011 loss primarily reflected a $359,000 valuation allowance for the Excaliard investment.
- Equity in Regulus’s net loss decreased to $856,000 from $1.5 million, reflecting additional collaboration revenue earned by Regulus.
Guidance, Outlook, Commentary and Risks
- Management expected 2011 antisense drug discovery costs to be comparable to 2010, while development and manufacturing spending was expected to remain affected by the advancing pipeline.
- Genzyme and Isis had completed four Phase 3 studies for mipomersen and planned initial regulatory filings for homozygous familial hypercholesterolemia in the United States and Europe. The filing stated that Genzyme planned a European filing in early the third quarter of 2011 and a U.S. filing during 2011.
- Isis expected to reach its $125 million mipomersen development funding commitment in the second half of 2011, after which it and Genzyme would share development costs equally until the program became profitable.
- Recent development events included initiation of a Phase 1 study for ISIS-FXI Rx, Orphan Drug Status for ISIS-SMN Rx, and positive Phase 1 data for ISIS-CRP Rx.
- Revenue was highly concentrated: one partner accounted for 79% of Q1 2011 revenue, compared with 56% in Q1 2010. The filing does not identify the partner in the concentration table; management discussion indicates that GSK and Genzyme were significant ongoing sources of collaboration revenue.
- Major risks included failure or delay in regulatory approval of mipomersen and other drugs, clinical-trial failures, manufacturing constraints, dependence on Genzyme and other partners, partner termination rights, continued operating losses, and the need for future financing if milestones or collaborations do not develop as expected.
- Management stated that existing cash, cash equivalents and short-term investments were intended to fund operations, but the company could pursue equity, debt, refinancing or credit facilities depending on business performance and capital-market conditions.
- In April 2011, the company, Bruker and Ibis Biosciences executed a mutual release resolving litigation related to the T5000 System. No payment was expected by either party.
- Disclosure controls and procedures were concluded to be effective as of March 31, 2011, with no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Regulatory filing status, review outcomes and commercialization prospects for mipomersen.
- Actual timing and amount of future collaboration milestones, upfront-fee amortization and royalty revenue.
- Cash burn, remaining liquidity and the effect of the $125 million mipomersen funding commitment and subsequent cost sharing.
- Partner concentration and the financial impact if GSK, Genzyme or another major collaborator reduces or terminates funding.
- Clinical safety, efficacy and enrollment results for mipomersen and the broader antisense pipeline.
- Potential dilution or refinancing associated with the convertible notes, including approximately 11.1 million shares issuable upon conversion.
- Final construction cost and rent obligations for the new research facility, including the estimated maximum future lease payments.