Isis Pharmaceuticals, Inc. — Q2 2012 Form 10-Q Summary
Reporting period: Quarterly period ended June 30, 2012; financial statements are unaudited and presented for the three and six months ended June 30, 2012, with comparable 2011 periods. The company operates as a single drug discovery and development segment focused on antisense therapeutics.
Business Context and Key Developments
- KYNAMRO remained the lead program. The FDA accepted Genzyme’s NDA for homozygous familial hypercholesterolemia, generating a $25 million milestone payment in Q2 2012. Genzyme was preparing for potential commercialization, subject to approval.
- Isis entered a Biogen Idec collaboration for ISIS-SMN Rx for spinal muscular atrophy, receiving a $29 million upfront payment in January 2012.
- Isis entered a separate Biogen Idec collaboration for a DMPK-targeting drug for myotonic dystrophy. The $12 million upfront payment was received in July 2012 and therefore was not included in June 30 cash balances or Q2 revenue.
- Xenon selected XEN701 as a development candidate; Isis may receive up to $296 million in future substantive milestones, subject to achievement of specified events.
Financial Performance
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Total revenue | $47.3 million | $24.8 million | $70.6 million | $46.0 million |
| R&D revenue under collaborations | $47.1 million | $24.3 million | $69.0 million | $44.3 million |
| Licensing and royalty revenue | $0.2 million | $0.5 million | $1.6 million | $1.7 million |
| Research and development expense | $40.4 million | $36.0 million | $79.1 million | $70.3 million |
| General and administrative expense | $3.2 million | $2.9 million | $6.2 million | $5.9 million |
| Operating income (loss) | $3.7 million | $(14.1) million | $(14.8) million | $(30.2) million |
| Net loss | $(1.2) million | $(17.9) million | $(25.2) million | $(37.9) million |
| Net loss per share | $(0.01) | $(0.18) | $(0.25) | $(0.38) |
| Operating cash flow | Not separately provided | Not separately provided | $(9.3) million | $(66.0) million |
Q2 revenue increased primarily because of the $25 million Genzyme milestone, Genzyme drug-substance sales, and recognition of Biogen Idec collaboration revenue. The company recognized $42.8 million of Genzyme-related revenue in Q2, representing 90% of total revenue. The Q2 operating profit did not translate into net profit because of $5.2 million of interest expense and other non-operating items.
Six-month R&D expense increased as the pipeline matured and clinical development costs rose, partially offset by lower KYNAMRO development costs because Genzyme and Isis were sharing those costs. Stock-based compensation included in operating expenses was $2.5 million for Q2 and $4.7 million for the six-month period.
Liquidity, Capital Resources and Debt
| Balance-sheet metric | June 30, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $85.6 million | $65.5 million |
| Short-term investments | $250.4 million | $278.2 million |
| Cash, cash equivalents and short-term investments | $336.0 million | $343.7 million |
| Working capital | $295.4 million | $284.0 million |
| Total assets | $472.4 million | $484.9 million |
| Stockholders’ equity | $154.3 million | $171.4 million |
| Accumulated deficit | $(866.7) million | $(841.5) million |
- Net cash used in operating activities was $9.3 million in the first six months, compared with $66.0 million in the prior-year period. Investing activities provided $23.6 million, largely because proceeds from short-term investment sales exceeded purchases.
- Total debt and other obligations were $231.1 million at June 30, 2012, compared with $218.8 million at year-end 2011.
- The company carried $146.0 million of 2 5/8% convertible subordinated notes. The notes mature in 2027, are convertible into approximately 11.1 million shares at $14.63 per share, and may be subject to holder repurchase rights beginning February 2014.
- Isis drew $9.1 million under equipment financing in June 2012. The equipment financing carrying balance was $12.6 million, with up to $6.0 million of additional borrowing capacity through April 2014.
- Contractual obligations totaled $359.1 million, including $168.9 million for convertible notes, $146.7 million for the new facility lease, and $28.2 million for operating leases.
Material Changes Versus the Prior Comparable Period
- Q2 revenue rose 91% year over year, while the six-month increase was 54%, principally due to the Genzyme milestone and collaboration-related revenue.
- Q2 operating results improved from a $14.1 million loss to $3.7 million of operating income; the six-month operating loss narrowed by approximately $15.4 million.
- Q2 net loss narrowed by approximately $16.7 million, and the six-month net loss narrowed by approximately $12.7 million.
- Six-month operating cash burn decreased by approximately $56.7 million, helped by collaboration receipts and milestone payments.
- Interest expense increased to $10.4 million for the first six months from $6.9 million, primarily because of additional non-cash interest expense associated with the new facility liability.
- Genzyme-related amortization of upfront payments ended in May 2012; management stated that $27.7 million of this amortization had been recognized and would not recur in the second half of 2012.
- Revenue concentration increased: one partner represented 90% of Q2 revenue and 84% of six-month revenue. One partner represented approximately 78% of contract receivables at June 30, 2012.
Outlook, Risks and Unusual Items
Management expected to use existing cash, cash equivalents and short-term investments to fund operations, while retaining the option to pursue equity, debt, refinancing or credit facilities. The filing does not provide a specific earnings or revenue guidance range. Results are expected to fluctuate materially based on collaboration payments, milestones, licensing activity and clinical development timing.
- KYNAMRO approval and commercialization remained uncertain. Genzyme could terminate the collaboration, and regulatory agencies could require additional studies, impose labeling restrictions or decline approval.
- The company had incurred substantial historical losses and stated that it could incur additional operating losses for several years. Future funding needs depend on KYNAMRO commercialization, partnering activity, clinical progress, regulatory costs and competitive developments.
- Drug development, clinical-trial execution, manufacturing, product liability, reimbursement, market acceptance and intellectual-property litigation remained significant risks.
- Isis was pursuing patent litigation against Santaris Pharma and was joined as a co-plaintiff in Alnylam’s patent litigation against Tekmira. The filing does not provide a clear estimate of potential financial outcomes.
- Isis suspended recognition of $1.1 million of Regulus-related losses because its share of Regulus losses exceeded the amount covered by its guarantee.
- The filing identified no material changes to critical accounting policies and concluded that disclosure controls and procedures were effective as of June 30, 2012.
Investor Verification Checklist
- Verify the regulatory outcome and commercial launch status of KYNAMRO, including subsequent milestone receipts and Genzyme’s continuing commitment.
- Reconcile collaboration revenue to milestone payments, upfront-payment amortization, drug-substance sales and deferred revenue, particularly after the Genzyme amortization ended.
- Assess revenue concentration and counterparty exposure, given that one partner generated 90% of Q2 revenue and approximately 78% of contract receivables.
- Review cash burn, remaining cash and investments, contractual obligations, convertible-note repurchase dates and equipment-financing maturities.
- Track clinical, regulatory and partnering milestones for ISIS-SMN Rx, the DMPK program, ISIS-TTR Rx, ISIS-APOCIII Rx and other pipeline programs.
- Monitor the Santaris and Alnylam/Tekmira patent proceedings and any resulting costs, injunctions, licenses or damages.
- Confirm that the July 2012 $12 million Biogen Idec DMPK upfront payment is reflected in the subsequent-period financial statements rather than June 30, 2012 balances.