Ionis Pharmaceuticals, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Ionis Pharmaceuticals, Inc. reported unaudited consolidated results for the three months ended March 31, 2019, including its approximately 76%-owned affiliate, Akcea Therapeutics. Ionis develops RNA-targeted therapeutics and generates revenue from commercial royalties, product sales, licensing, milestones and collaborative research and development. The filing describes three approved medicines: SPINRAZA, TEGSEDI and WAYLIVRA.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $297.2 million | $144.4 million | +106% |
| Commercial revenue | $68.1 million | $42.0 million | +62% |
| SPINRAZA royalties | $59.7 million | $41.1 million | +45% |
| TEGSEDI product sales, net | $6.8 million | — | New revenue stream |
| R&D collaboration revenue | $229.1 million | $102.4 million | +124% |
| Operating expenses | $175.7 million | $147.7 million | +19% |
| Income (loss) from operations | $121.5 million | $(3.3) million | Improved |
| Net income (loss) | $90.9 million | $(10.8) million | Improved |
| Net income attributable to Ionis stockholders | $84.4 million | $(1.4) million | Improved |
| Diluted earnings (loss) per share | $0.62 | $(0.01) | Improved |
| Net cash provided by operating activities | $107.7 million | $13.2 million | +718% |
Calculated margins were approximately 40.9% for operating income, 30.6% for consolidated net income and 28.4% for net income attributable to Ionis stockholders. Results benefited materially from collaboration-related license and milestone revenue.
Revenue drivers and material changes
- Ionis recognized a $150 million license fee from Novartis for AKCEA-APO(a)-LRx.
- Ionis recognized a $35 million Roche milestone when the first patient was dosed in a Phase 3 study of IONIS-HTTRx.
- R&D revenue also included $40.0 million of milestone payments, $35.9 million of amortization from upfront payments and $3.3 million of other services.
- SPINRAZA royalties increased to $59.7 million, consistent with reported SPINRAZA sales of $518 million by Biogen in the quarter.
- TEGSEDI generated $6.8 million of net product sales in its first full quarter on the market. The global launch increased selling, general and administrative costs and other operating expenses.
- Operating expenses increased primarily because of TEGSEDI commercialization activities and higher stock-based compensation. Total stock-based compensation was $45.5 million versus $28.5 million in the prior-year quarter.
- Akcea paid Ionis a $75 million sublicense fee in 2.8 million Akcea shares in connection with the Novartis license, increasing Ionis’s ownership of Akcea to approximately 76%.
- Income tax expense increased to $31.0 million from $15,000, primarily because management expected U.S. federal and state taxable income in 2019. A substantial portion of the federal tax expense was non-cash and related to use of deferred tax assets.
Cash, liquidity and debt
- Cash and cash equivalents were $375.8 million and short-term investments were $1.878 billion at March 31, 2019, for total cash, cash equivalents and short-term investments of approximately $2.254 billion, compared with approximately $2.084 billion at December 31, 2018.
- Working capital was approximately $2.1 billion, compared with $1.9 billion at year-end 2018.
- Operating cash flow was $107.7 million. Investing cash flow was $(70.2) million, principally reflecting purchases of short-term investments, while financing cash flow was $59.5 million, principally from employee equity awards.
- Carrying value of the 1% convertible senior notes was $577.4 million; principal outstanding was $685.5 million, with maturity in November 2021 and a conversion price of $66.81 per share. The notes had a reported fair value of $928.4 million.
- Long-term mortgage debt was $59.9 million, and $12.5 million was outstanding under a revolving credit facility maturing in September 2019. The company stated that it was in compliance with the facility’s covenants.
- Total debt and other obligations were $776.1 million. Adoption of the new lease standard added approximately $18.5 million of operating lease liabilities at January 1, 2019.
Guidance, outlook, commentary and risks
- Management stated that its strong financial position should support execution of corporate objectives through 2019 and beyond. The filing does not provide formal revenue, earnings or cash-flow guidance.
- Ionis described a pipeline of more than 40 medicines, with IONIS-HTTRx and tofersen in Phase 3 studies, potential for two additional Phase 3 starts during 2019 and a goal of up to 10 Phase 3 medicines by the end of 2020.
- WAYLIVRA received conditional European marketing authorization in May 2019, after the quarter end. Akcea planned a German launch in the third quarter of 2019 and additional European launches in 2020. The filing also notes regulatory discussions in the United States and Canada.
- In the second quarter of 2019, Alnylam announced a license of Ionis technology to Regeneron; Ionis expected to earn $20 million in sublicensing revenue once the transaction closed.
- Key risks include dependence on Biogen for SPINRAZA development, manufacturing and commercialization; uncertainty regarding market acceptance, reimbursement and pricing; competition; product safety and monitoring requirements; regulatory approval and post-approval obligations; clinical trial failures or delays; reliance on third-party manufacturers and clinical research organizations; intellectual-property disputes; and dependence on future collaboration revenue and milestone payments.
- TEGSEDI carries a boxed warning and REMS requirements in the United States. WAYLIVRA requires monitoring for platelet-related risks and a post-authorization safety study in Europe.
- Revenue is substantially dependent on licensing and collaboration activity. The quarter’s results included $185 million from the Novartis license and Roche milestone, which may not recur at the same level.
- The company adopted lease accounting guidance on January 1, 2019 and recorded right-of-use assets of approximately $13.5 million and operating lease liabilities of approximately $18.5 million. Disclosure controls and procedures were considered effective as of March 31, 2019.
Important facts for investors to verify
- Whether SPINRAZA royalties continue to grow and remain dependent on Biogen’s sales, manufacturing and regulatory execution.
- TEGSEDI launch momentum, reimbursement, patient retention, safety monitoring and the effect of commercialization costs on Akcea and consolidated profitability.
- WAYLIVRA’s European launch, post-authorization safety requirements and outstanding U.S. and Canadian regulatory matters.
- The sustainability of profitability after excluding the nonrecurring $150 million Novartis license fee and the $35 million Roche milestone.
- Future milestone, license and sublicensing receipts, including the expected $20 million Regeneron-related payment and the timing of additional Biogen and Roche milestones.
- Convertible note maturity and potential dilution of approximately 10.3 million shares, together with the September 2019 maturity of the $12.5 million revolving credit borrowing.
- Clinical, regulatory, manufacturing, reimbursement, competitive and intellectual-property developments across the pipeline.