Ionis Pharmaceuticals, Inc. 2017 Form 10-K Summary
Business context and reporting period
Ionis Pharmaceuticals is an RNA-targeted therapeutics company focused on antisense oligonucleotide drugs. The filing covers the fiscal year ended December 31, 2017, with quarterly information including the fourth quarter. The company reports two segments: Ionis Core and majority-owned Akcea Therapeutics, which completed its IPO in July 2017. Ionis owned approximately 68% of Akcea after the IPO.
SPINRAZA, commercialized globally by Biogen for spinal muscular atrophy, was Ionis’s principal commercial product. Inotersen for hereditary transthyretin amyloidosis and volanesorsen for familial chylomicronemia syndrome and familial partial lipodystrophy were under regulatory review at year-end.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $507.7 million | $346.6 million | Up 46% |
| Commercial revenue | $122.1 million | $20.7 million | Up $101.3 million |
| SPINRAZA royalties | $112.5 million | $0.9 million | Significant new revenue stream |
| R&D revenue under collaborations | $385.6 million | $325.9 million | Up 18% |
| Operating expenses | $483.1 million | $392.9 million | Up 23% |
| Income from operations | $24.5 million | $(46.3) million | Improved by $70.9 million |
| Net loss attributable to Ionis stockholders | $(6.0) million | $(86.6) million | Improved by $80.6 million |
| Basic and diluted EPS | $0.08 | $(0.72) | Improved |
| Cash flow from operations | $174.1 million | $(112.1) million | Improved by $286.3 million |
| Cash, equivalents and short-term investments | $1.023 billion | $665.2 million | Up $357.5 million |
| Working capital | $943.2 million | $664.1 million | Up $279.1 million |
Operating margin was approximately 4.8% in 2017, compared with negative 13.4% in 2016. Net margin attributable to Ionis stockholders was approximately negative 1.2%.
Research, development and patent expense was $374.6 million, including $310.1 million excluding non-cash equity compensation. SG&A expense was $108.5 million, including $87.0 million excluding non-cash equity compensation, reflecting preparation for potential launches of inotersen and volanesorsen. Total stock-based compensation was $86.0 million.
Debt and other obligations totaled approximately $759.8 million at year-end, including $685.5 million principal amount of 1% convertible senior notes due 2021, $12.5 million outstanding under a revolving credit facility, and $60.4 million of mortgage debt for purchased facilities. Contractual obligations totaled $812.3 million, including $712.9 million of convertible-note principal and interest.
Cash flow from investing activities was negative $358.3 million, primarily reflecting purchases of short-term investments and capital expenditures. Financing activities provided $229.1 million, including Akcea IPO proceeds, the Novartis investment, mortgage proceeds and equity issuance.
Material changes versus the prior comparable period
- Revenue increased primarily because 2017 was the first full year of SPINRAZA royalty revenue and because collaboration revenue rose through milestone, license and upfront-fee activity.
- 2017 collaboration revenue included $118 million of Biogen milestones, $65 million from Bayer for the IONIS-FXI-LRx license, $48 million from Roche primarily for IONIS-HTTRx, $10 million from Janssen, $115 million of upfront-fee amortization and $29.6 million primarily for partner services.
- Operating expenses increased substantially because Ionis and Akcea expanded commercial, medical-affairs, manufacturing and launch infrastructure for potential 2018 launches of inotersen and volanesorsen.
- Akcea’s IPO and concurrent Novartis investment raised more than $180 million of net proceeds for Akcea. Ionis continued to consolidate Akcea but recorded a 32% noncontrolling interest.
- Ionis purchased its primary research and development and manufacturing facilities for approximately $93.4 million, financed in part with $60.4 million of mortgage debt. The transaction generated a non-cash $7.7 million loss on extinguishment of the prior facility financing liability.
- Ionis adopted the new revenue-recognition standard beginning January 1, 2018 on a full-retrospective basis. Management estimated that adoption would increase reported 2017 revenue by approximately $17 million, increase deferred revenue by approximately $39 million at December 31, 2017 and adjust accumulated deficit by the corresponding amount.
Guidance, outlook, risks and unusual items
- Management projected higher 2018 operating expenses, principally because of launch preparation for inotersen and volanesorsen.
- Inotersen received FDA Priority Review with a PDUFA date of July 6, 2018; the company planned a potential mid-2018 launch and intended to commercialize in North America itself while seeking partners elsewhere.
- Volanesorsen had a U.S. PDUFA date of August 30, 2018, with an FDA advisory committee scheduled for May 10, 2018. Akcea planned a potential mid-2018 launch if approved and intended to commercialize globally.
- Inotersen’s Phase 3 study demonstrated statistically significant benefits on quality-of-life and disease-control endpoints, but thrombocytopenia and renal-function safety signals required enhanced monitoring. Volanesorsen studies also showed platelet declines and some discontinuations, creating potential commercial-label and adoption risks.
- Management planned five Phase 2 studies, six Phase 2 data readouts and three to five new drugs entering development during 2018. These are forward-looking plans and may not be achieved.
- Revenue is highly dependent on partners and milestone timing. Biogen represented 51% of 2017 revenue; Bayer, Novartis and Roche each represented at least 10%. Collaboration agreements may be terminated or reprioritized by partners.
- The company remains exposed to clinical-development failure, regulatory delay or rejection, reimbursement and pricing pressure, competition, manufacturing and supply-chain constraints, intellectual-property disputes, product liability and the need to build commercial infrastructure for inotersen.
- The Gilead patent litigation remained pending on appeal. A jury had upheld asserted claims and awarded Ionis and Merck a share of past sofosbuvir sales, but the district court ruled the patents unenforceable under the doctrine of unclean hands. Oral arguments on appeal occurred in February 2018; the outcome and any recovery were uncertain.
- Ionis recorded a $6.0 million income-tax benefit in 2017, including a $7.7 million benefit related to refundable alternative minimum tax credits. It retained a full valuation allowance against remaining deferred tax assets.
Most important facts for an investor to verify
- Whether SPINRAZA sales and royalty revenue continue to grow and how Biogen’s commercialization and supply responsibilities are performing.
- FDA and international decisions for inotersen and volanesorsen, including final labels, monitoring requirements, reimbursement, pricing and launch timing.
- The frequency and severity of platelet and renal adverse events and their impact on treatment persistence and commercial adoption.
- The sustainability and composition of collaboration revenue, including the timing of milestones, license fees, upfront-fee amortization and the 2018 retrospective revenue-recognition effects.
- Akcea’s cash resources, operating losses, commercial execution and Ionis’s continuing economic ownership after the IPO.
- Future cash requirements relative to approximately $1.0 billion of liquidity, $759.8 million of debt and other obligations, and the 2021 maturity of the convertible notes.
- The resolution and potential economic impact of the Gilead litigation and the status of related intellectual-property rights.