Ionis Pharmaceuticals, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. The filing covers Ionis Pharmaceuticals and wholly owned subsidiary Akcea Therapeutics. Interim financial statements are unaudited. Ionis develops RNA-targeted therapeutics and funds development through pharmaceutical collaborations, licensing, milestones, royalties and research funding.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $110.9 million | $49.1 million | $186.3 million | $232.1 million |
| Operating expenses | $94.8 million | $97.3 million | $273.7 million | $245.0 million |
| Income (loss) from operations | $16.1 million | ($48.1 million) | ($87.5 million) | ($12.8 million) |
| Net income (loss) | $7.4 million | ($35.8 million) | ($112.4 million) | ($16.8 million) |
| Diluted earnings (loss) per share | $0.06 | ($0.30) | ($0.93) | ($0.14) |
- Approximate operating margin was 14.5% in Q3 2016 and negative 46.9% for the first nine months; approximate net margin was 6.6% and negative 60.4%, respectively.
- Q3 revenue included an $75 million Biogen license fee for SPINRAZA and a $10 million Janssen license fee. Nine-month revenue also included $15 million from Kastle for Kynamro rights, $45.9 million of amortized upfront payments, and $40.4 million from partnered-program progress payments.
- Research, development and patent expense was $84.6 million in Q3 and $243.2 million for nine months. General and administrative expense was $10.2 million and $30.6 million, respectively.
- Non-cash stock-based compensation was $17.6 million in Q3 and $57.0 million for nine months, up from $41.9 million in the comparable nine-month period.
- Net cash used in operating activities was $86.1 million for the first nine months of 2016, compared with $58.6 million of operating cash flow provided in the prior-year period. Investing activities provided $35.8 million, primarily from net sales of short-term investments.
- Cash and cash equivalents were $84.3 million at September 30, 2016. Short-term investments were $603.6 million, producing total cash, cash equivalents and short-term investments of $687.8 million, down from $779.2 million at December 31, 2015.
- Working capital was $623.4 million, compared with $688.1 million at year-end 2015. Total debt and other obligations were $648.5 million.
- Stockholders’ equity was $139.6 million, compared with $200.8 million at December 31, 2015. Accumulated deficit was $1.21 billion.
Material Changes Versus Prior Comparable Period
- Q3 2016 revenue more than doubled year over year because of the Biogen and Janssen license fees, while nine-month revenue declined 20% because the prior-year period included the $91.2 million Bayer license-related revenue and higher milestone revenue.
- Ionis moved from a Q3 2015 operating loss of $48.1 million to Q3 2016 operating income of $16.1 million, but the nine-month operating loss widened to $87.5 million as development and Akcea expenses increased.
- Nine-month research and development and patent expense increased approximately 10%, reflecting five Phase 3 studies, three open-label extension studies and advancement of SPINRAZA, IONIS-TTR Rx and volanesorsen.
- Akcea operating expenses increased to $51.1 million for nine months from $29.1 million, as Akcea advanced volanesorsen and built commercial infrastructure.
- Biogen represented 81% of Q3 revenue and 65% of nine-month revenue, compared with 37% and 32%, respectively, in the prior-year periods. One significant partner represented approximately 95% of contracts receivable at September 30, 2016.
- Regulus investment value declined to $9.4 million from $24.8 million at year-end 2015. Ionis recorded a $0.5 million other-than-temporary impairment related to Regulus stock.
Liquidity, Debt and Contractual Obligations
- Ionis believes it is in a strong financial position and stated that it was on track to meet its year-end pro forma net operating loss and cash-balance projections.
- The company expects to use existing cash, cash equivalents and short-term investments to fund operations, while retaining the option to raise equity or debt, refinance obligations, obtain additional credit or enter into additional collaborations.
- Convertible debt included $500.0 million of 1% notes due November 2021 and $61.2 million of 2¾% notes due October 2019. Carrying values were $356.4 million and $51.6 million, respectively.
- The company had $12.5 million outstanding under its revolving credit facility, converted in September 2016 into a fixed-rate note bearing 2.31% interest and maturing in September 2019. Ionis reported compliance with all covenants.
- Total disclosed contractual obligations were $752.1 million, including convertible debt, facility rent, financing arrangements, other obligations and operating leases.
Guidance, Outlook, Commentary and Risks
- Management expected fourth-quarter 2016 expenses to be modestly higher than Q3 2016, primarily as Akcea continued commercial preparations for volanesorsen. Management also noted continued elevation in non-cash compensation expense.
- Biogen exercised its SPINRAZA option in July 2016, paid a $75 million license fee and assumed future development, regulatory and commercialization responsibilities and costs. SPINRAZA was under FDA Priority Review and EMA Accelerated Assessment; subsequent filing information reported positive interim Phase 3 results and transition of studies to Biogen.
- Ionis expected IONIS-TTR Rx Phase 3 data in the first half of 2017. Akcea was advancing two Phase 3 registrational studies of volanesorsen and preparing for potential commercialization.
- Future revenue is highly variable because it depends on the timing and achievement of licensing, milestone and collaboration events. Deferred contract revenue was $158.4 million at September 30, 2016, including $73.1 million related to Biogen and $21.6 million related to Janssen.
- Key risks include failure to obtain regulatory approvals, clinical-trial delays or failures, adverse safety findings, manufacturing constraints, pricing and reimbursement pressure, dependence on partners, partner termination or reduced funding, intellectual-property challenges and the need for additional capital.
- The Gilead patent litigation remains on appeal. A jury upheld the asserted patents and awarded Ionis and Merck an amount based on 4% of $5 billion in past sofosbuvir sales, but the trial judge found the patents unenforceable under the unclean-hands doctrine. The appeal was pending before the Federal Circuit, and the ultimate outcome was uncertain.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether SPINRAZA receives U.S. and European marketing authorization and the timing and economics of subsequent commercial royalties and milestones.
- Clinical and regulatory outcomes for IONIS-TTR Rx and volanesorsen, including the timing of Phase 3 data and potential filings.
- The sustainability of revenue after the nonrecurring Q3 Biogen and Janssen license fees, given the company’s dependence on collaboration payments.
- Cash burn, fourth-quarter spending, Akcea’s commercialization investment and the company’s need for additional financing.
- Terms and maturity risks associated with the convertible notes, including potential share dilution or cash settlement.
- Resolution of the Gilead litigation and any related proceeds, costs or intellectual-property effects.
- Partner concentration, particularly Biogen’s role in SPINRAZA development and the concentration of contracts receivable.