Business Context and Reporting Period
Isis Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company developed antisense therapeutics and generated revenue primarily from research collaborations, licensing, royalties, milestones and partner funding. Its principal segments were Drug Discovery and Development and Regulus Therapeutics.
During the first quarter of 2010, Isis deconsolidated Regulus after adopting a new variable-interest-entity accounting standard and began accounting for its 51% ownership using the equity method. Prior-period amounts were not reclassified, limiting direct comparability.
Financial Performance and Position
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Total revenue | $23.5 million | $31.0 million | $53.4 million | $62.6 million |
| Operating expenses | $42.2 million | $35.8 million | $77.0 million | $68.0 million |
| Loss from operations | $(18.7) million | $(4.8) million | $(23.6) million | $(5.5) million |
| Net loss attributable to Isis | $(25.2) million | $(2.7) million | $(34.8) million | $183.5 million |
| Basic and diluted loss/(income) per share | $(0.25) | $(0.03) | $(0.35) | $1.88 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(16.7) million | $(44.8) million |
Approximate operating margins were negative 79% for the quarter and negative 44% for the six-month period. Approximate net margins were negative 107% and negative 65%, respectively. The filing does not present a non-GAAP adjusted margin.
- Research and development expense was $39.1 million for the quarter and $71.1 million for the six-month period, up from $32.1 million and $60.7 million, respectively. The increase primarily reflected expanded mipomersen development and broader pipeline activity.
- General and administrative expense declined to $3.1 million for the quarter and $5.9 million for the six-month period, compared with $3.7 million and $7.4 million in the prior-year periods.
- Equity in Regulus’s net loss was $3.9 million for the quarter and $5.4 million for the six-month period.
- Investment income declined to $0.9 million for the quarter and $1.8 million for the six-month period, reflecting lower yields and lower average invested balances.
- Six-month 2010 loss on investments was $1.1 million, including an $880,000 impairment of the company’s Antisense Therapeutics Limited investment and $349,000 of valuation allowances. The comparable 2009 period included a $2.7 million investment gain.
- Cash and cash equivalents were $46.0 million at June 30, 2010, compared with $105.3 million at December 31, 2009. Short-term investments were $476.0 million, producing total cash, cash equivalents and short-term investments of approximately $522.0 million.
- Working capital was $431.7 million at June 30, 2010, versus $484.7 million at year-end 2009. Stockholders’ equity was $262.2 million, compared with $302.1 million.
- Total assets were $606.4 million and total liabilities were $344.1 million at June 30, 2010. The accumulated deficit was $730.2 million.
- Debt and other obligations totaled approximately $139.5 million. The 2 5/8% convertible subordinated notes had principal and accrued interest of approximately $164.1 million, a carrying value of $128.9 million and a quoted fair value of $154.1 million.
Material Changes Versus the Prior Comparable Period
- First-half revenue declined 15% year over year, while operating expenses increased 13%. The revenue decline reflected the expiration of amortization from certain OMJP and BMS upfront payments and the exclusion of Regulus revenue after deconsolidation.
- Net income in the first half of 2009 was largely driven by the $187.1 million after-tax gain from the sale of Ibis Biosciences to Abbott Molecular. The 2010 period had no comparable discontinued-operations gain.
- GSK paid Isis a $35 million upfront amount in March 2010 for a new alliance covering up to six rare and serious disease programs. Isis recognized $1.8 million of related revenue in the first half and recorded $33.3 million of deferred revenue at June 30.
- Isis recognized a $6 million BMS milestone in the first quarter for initiation of Phase 1 studies on BMS-PCSK9 Rx. A further $5 million GSK milestone achieved in July 2010 was expected to be recognized in the third quarter.
- Regulus’s sanofi-aventis alliance included a $25 million upfront payment, a $10 million future equity investment, annual research support and up to $750 million of potential milestones. Isis received $1.9 million, representing its 7.5% share of the upfront payment.
- Regulus operating expenses increased substantially as it expanded its team, advanced programs and incurred $3.8 million of sublicense fees payable to Isis and Alnylam related to the sanofi-aventis alliance.
- Operating cash use improved to $16.7 million in the first half of 2010 from $44.8 million in the prior-year period, but investing activities used $45.0 million. Cash declined by $59.2 million, including a $16.2 million reduction associated with Regulus deconsolidation.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected to continue incurring operating losses over the next several years and planned to fund operations primarily with existing cash and investments, collaboration revenue and potential additional financing.
- Management reported 23 drugs in development, with partners developing 12 of them. Mipomersen remained the primary near-term development program, with initial regulatory filings anticipated in the first half of 2011. Isis was responsible for up to the first $125 million of mipomersen development funding, after which development costs would be shared with Genzyme until the program became profitable.
- Reported Phase 3 mipomersen studies showed LDL-C reductions of 36% and 37% versus placebo changes of a 13% increase and a 5% decrease, respectively. Frequently observed adverse events included injection-site reactions, flu-like symptoms and elevated liver transaminases.
- The company’s principal risks included clinical-trial failure or delay, inability to obtain regulatory approval, manufacturing constraints, dependence on partners, reliance on collaboration and milestone revenue, intellectual-property disputes, competition, additional funding requirements and continuing losses.
- Regulus expected its share of losses to exceed the $5 million guarantee associated with certain GSK convertible notes in the second half of 2010. Isis stated that it would then suspend recognition of additional Regulus losses under the equity method, subject to applicable accounting requirements.
- Isis entered into a 20-year lease for a planned 176,000-square-foot Carlsbad research facility. Estimated maximum future payments over the initial term were $172 million, although the final obligation was uncertain because rent depended on construction costs. Rent was scheduled to begin January 1, 2012.
- Total contractual obligations were estimated at $223.8 million, including $179.6 million for convertible notes, $11.0 million for equipment financing, $1.6 million for other obligations and $31.7 million for operating leases.
- A legal dispute with Bruker Daltonics concerning Ibis manufacturing and commercialization obligations remained unresolved. Discovery was in an early stage, and the company stated that it could not predict or record a loss as of June 30, 2010.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2010, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the effect of Regulus deconsolidation on revenue, expenses, assets, cash and the recognition or suspension of equity-method losses.
- Assess the timing, remaining deferred balance and performance obligations associated with the $35 million GSK upfront payment and other collaboration revenue.
- Verify the regulatory filing timetable, clinical results, safety profile and funding commitments for mipomersen.
- Evaluate liquidity after considering recurring operating losses, cash burn, debt maturities, convertible-note repurchase rights and the new long-term facility lease.
- Review dependence on a small number of partners; one partner represented 71% of second-quarter revenue and 62% of first-half revenue, while one partner represented 83% of contract receivables at June 30.
- Monitor the Bruker litigation, Regulus note guarantees, investment impairments and the company’s continuing need for collaboration revenue or future financing.