Ionis Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
Ionis is an RNA-targeted therapeutics company with two consolidated operating segments: Ionis Core and majority-owned Akcea Therapeutics. The filing covers the three and nine months ended September 30, 2018; comparative 2017 amounts were retrospectively revised for adoption of ASC Topic 606 revenue recognition. Ionis owned approximately 75% of Akcea at September 30, 2018 and approximately 76% after receiving additional shares in October 2018.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $145.4 million vs. $118.3 million | $407.6 million vs. $346.4 million |
| Commercial revenue | $82.8 million vs. $34.6 million | $182.0 million vs. $66.1 million |
| SPINRAZA royalties | $70.0 million vs. $32.9 million | $167.7 million vs. $60.5 million |
| R&D collaboration revenue | $62.6 million vs. $83.7 million | $225.6 million vs. $280.3 million |
| Operating expenses | $164.0 million vs. $107.0 million | $479.7 million vs. $309.1 million |
| Income (loss) from operations | $(18.6) million vs. $11.3 million | $(72.2) million vs. $37.2 million |
| Net loss | $(20.4) million vs. $(7.5) million | $(87.7) million vs. $(1.6) million |
| Ionis stockholder income (loss) | $(4.6) million vs. $(2.6) million | $(46.3) million vs. $3.3 million |
| Basic and diluted EPS | $(0.03) vs. $(0.02) | $(0.33) vs. $0.13 |
Approximate operating margins were negative 12.8% for the quarter and negative 17.7% for the nine-month period, compared with positive 9.6% and 10.8%, respectively, in the revised 2017 periods. Approximate net margins were negative 14.0% and negative 21.5%, compared with negative 6.3% and negative 0.5%.
- Cash and cash equivalents were $479.9 million at September 30, 2018, compared with $129.6 million at December 31, 2017.
- Short-term investments were $1.479 billion, producing cash, cash equivalents and short-term investments of approximately $2.0 billion.
- Net cash provided by operating activities was $487.4 million for the first nine months, compared with $153.7 million in the revised 2017 period. The increase was driven substantially by $447.2 million of deferred contract revenue and other working-capital changes.
- Net cash used in investing activities was $603.4 million, primarily reflecting purchases of short-term investments. Net cash provided by financing activities was $466.2 million, including $448.0 million from issuance of common stock to Biogen.
- Deferred contract revenue totaled $680.5 million, including $157.1 million current and $523.4 million long-term, compared with $233.4 million at December 31, 2017 as revised.
- Total debt and other obligations were reported at approximately $764.9 million. The balance sheet included $559.2 million of carrying value for 1% convertible senior notes and $59.8 million of mortgage debt. The notes had $685.5 million principal outstanding, mature in November 2021, and had a $66.81 conversion price.
- Ionis had $12.5 million outstanding under a $30 million revolving credit facility, maturing in September 2019, and was in compliance with its covenants.
Material changes versus the prior comparable period
- Total revenue increased 23% for the quarter and 18% for the first nine months, primarily because SPINRAZA royalties increased 113% and 177%, respectively.
- R&D collaboration revenue declined 25% for the quarter and 20% year to date. The 2017 comparison included $90 million of SPINRAZA approval milestones, while 2018 included two $10 million third-quarter milestones from Biogen and AstraZeneca.
- Operating expenses increased 53% for the quarter and 55% year to date. Selling, general and administrative expense rose principally because of commercialization preparation for TEGSEDI and WAYLIVRA and higher SPINRAZA-related in-licensing fees. Research and development expense also increased as Akcea advanced its pipeline.
- Non-cash stock-based compensation was $97.2 million for the first nine months, compared with $63.6 million in 2017.
- Akcea’s larger operating losses were partly allocated to outside shareholders through noncontrolling interest: $15.8 million for the quarter and $41.4 million year to date.
- Ionis adopted Topic 606 retrospectively on January 1, 2018. The adoption reduced cumulative revenue recognized through December 31, 2017 by $53.6 million and increased revised deferred revenue at that date by $54.2 million.
Guidance, outlook, commentary and unusual items
- TEGSEDI was approved in the United States, European Union and Canada, and Akcea began launch activities. Management expected to add TEGSEDI product revenue beginning in the fourth quarter of 2018.
- Management expected fourth-quarter operating expenses to continue increasing, primarily because of TEGSEDI commercialization.
- WAYLIVRA remained under regulatory review. The FDA issued a complete response letter in August 2018; the filing also describes subsequent Health Canada action and ongoing efforts to establish a regulatory path forward. Approval and commercial revenue were therefore uncertain.
- In April 2018, Biogen provided $1.0 billion under a strategic neurology collaboration, comprising a $375 million upfront payment and $625 million for Ionis stock purchased at a 25% cash premium. Ionis recognized $552 million as the transaction price for its R&D performance obligation and expects to perform that obligation through June 2028.
- In October 2018, Ionis and Roche entered a collaboration for IONIS-FB-L Rx and received a $75 million upfront payment; this occurred after the reporting date and was not included in September 30, 2018 revenue.
- Akcea received a $12 million license fee from PTC Therapeutics for Latin American commercialization rights to TEGSEDI and WAYLIVRA in the third quarter.
- Management identified significant judgment in revenue recognition, including estimating progress toward R&D obligations, allocating transaction prices, valuing collaboration premiums and assessing milestone probabilities.
- The Gilead patent litigation remained active. After an appellate court affirmed unenforceability based on unclean hands, Ionis and Merck requested Supreme Court review in September 2018. The potential recovery described in the filing was not recognized as an asset.
Key risks and contingencies
- Revenue remains concentrated: Biogen-related revenue represented 72% of third-quarter revenue and 58% of nine-month revenue; two partners represented approximately 84% of contracts receivable.
- The company has an accumulated deficit of approximately $1.3 billion and may continue to incur losses while commercial infrastructure and pipeline investments expand.
- Commercial performance depends on SPINRAZA growth, TEGSEDI market acceptance and reimbursement, and potential approval and launch of WAYLIVRA.
- TEGSEDI carries U.S. boxed warnings for thrombocytopenia and glomerulonephritis, requires monitoring and is subject to a REMS program. WAYLIVRA development also involved platelet-related safety concerns.
- Clinical, regulatory, manufacturing, reimbursement, product liability, intellectual property, partner-performance and foreign-exchange risks could materially affect future results.
- The filing states that internal controls and disclosure controls were effective as of September 30, 2018.
Important facts for investors to verify
- Reconcile reported cash generation with the substantial increase in deferred contract revenue and assess how much operating cash flow is recurring.
- Monitor SPINRAZA sales and royalty trends, including dependence on Biogen and the applicable royalty rates.
- Track TEGSEDI launch volumes, reimbursement, safety monitoring requirements and Akcea’s commercialization spending.
- Verify the regulatory resolution and timing for WAYLIVRA in the United States, Europe and Canada.
- Review the accounting and remaining performance obligations associated with the Biogen collaboration and the $680.5 million deferred revenue balance.
- Assess future dilution and refinancing exposure from the $685.5 million principal amount of convertible notes, including approximately 10.3 million potential conversion shares.
- Follow the Gilead litigation, pipeline milestones, partner decisions and any changes to collaboration revenue concentration.