IONIS PHARMACEUTICALS INC quarterly report, Q2 FY2016

Ionis Pharmaceuticals, Inc. Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2016; unaudited. Ionis Pharmaceuticals consolidates its wholly owned subsidiary, Akcea Therapeutics. The company develops RNA-targeted therapeutics and relies substantially on collaboration, licensing, milestone and royalty revenue.

Financial performance and liquidity

MetricThree months ended June 30, 2016Three months ended June 30, 2015Six months ended June 30, 2016Six months ended June 30, 2015
Total revenue$38.5 million$120.4 million$75.3 million$183.0 million
Operating expenses$87.4 million$75.8 million$178.9 million$147.7 million
Income (loss) from operations$(48.9) million$44.6 million$(103.6) million$35.3 million
Net income (loss)$(56.9) million$35.6 million$(119.8) million$18.9 million
Basic and diluted EPS$(0.47)$0.30 basic; $0.29 diluted$(0.99)$0.16 basic; $0.15 diluted

Calculated margins: Operating margin was approximately negative 127% in the quarter and negative 138% for the first six months. Net margin was approximately negative 148% and negative 159%, respectively.

  • Research and development revenue was $22.5 million in the second quarter and $57.7 million year to date, compared with $119.7 million and $181.6 million in the prior-year periods.
  • Licensing and royalty revenue increased to $16.0 million in the quarter and $17.7 million year to date, primarily from the $15 million Kynamro upfront payment from Kastle.
  • Research, development and patent expense was $77.6 million in the quarter and $158.5 million year to date. Excluding non-cash stock compensation, these expenses were $63.1 million and $129.3 million.
  • Non-cash stock-based compensation was $19.3 million in the quarter and $39.4 million year to date, up from $13.6 million and $26.9 million, respectively, in 2015.
  • Net cash used in operating activities was $109.6 million for the first six months, compared with $22.4 million of cash provided in the prior-year period.
  • Investing activities provided $92.9 million, principally from net sales of short-term investments. Financing activities provided $0.4 million.
  • Cash and cash equivalents declined to $112.5 million from $128.8 million at December 31, 2015. Cash, cash equivalents and short-term investments totaled $664.1 million, compared with $779.2 million at year-end.
  • Working capital was $586.9 million, down from $688.1 million. Stockholders’ equity was $111.2 million, down from $200.8 million, and accumulated deficit was $1.215 billion.

Debt and obligations

  • Debt and other obligations totaled $644.6 million at June 30, 2016.
  • Convertible debt principal consisted of $500 million of 1% notes due November 2021 and $61.2 million of 2¾% notes due October 2019. The carrying amounts were $350.8 million and $50.9 million, respectively, reflecting debt discounts.
  • The company had $8.5 million outstanding under a $30 million revolving credit facility, at a weighted-average interest rate of 1.72%. Ionis was in compliance with its covenants.
  • Total contractual obligations were $750.5 million, including $527.5 million for the 1% notes, $67.1 million for the 2¾% notes and $122.3 million of facility rent payments.
  • Interest expense was $9.6 million for the quarter and $19.1 million year to date, including substantial non-cash amortization of debt discounts and issuance costs.

Material changes versus the prior comparable periods

  • Revenue fell 68% in the quarter and 59% year to date, largely because the second quarter of 2015 included $91.2 million of revenue from Bayer’s IONIS-FXI Rx license and significant milestone revenue.
  • The company shifted from operating income to operating losses as revenue declined while clinical development expenses increased.
  • Operating expenses increased 15% in the quarter and 21% year to date, driven by five Phase 3 studies, three open-label extension studies, growing Akcea expenses and higher stock-based compensation.
  • Akcea’s operating loss increased to $14.8 million in the quarter and $30.8 million year to date, versus $8.9 million and $16.0 million, respectively, in 2015. Akcea had no revenue.
  • Revenue concentration remained high. Biogen represented 25% of second-quarter revenue and 41% of year-to-date revenue; Kastle represented 39% and 20%, respectively.
  • Unrealized investment losses of $13.3 million year to date reduced accumulated other comprehensive income, including a decline in the Regulus investment. The Regulus position was valued at $8.2 million at June 30, 2016 versus $24.8 million at year-end.

Guidance, outlook and unusual items

  • Management expected second-half 2016 revenue to be significantly higher than first-half revenue. Subsequent to quarter-end, Ionis earned $75 million from Biogen for the nusinersen license and $10 million from Janssen for an IONIS-JBI1-2.5 Rx license; these amounts were not included in second-quarter revenue or June 30 cash.
  • Management reported positive interim Phase 3 ENDEAR results for nusinersen in infantile-onset spinal muscular atrophy. Biogen assumed global development, regulatory and commercialization responsibilities and planned U.S. and E.U. filings in the following months.
  • Ionis expected development costs to increase modestly as late-stage programs progressed. Akcea expenses were expected to rise as it built commercialization infrastructure for volanesorsen.
  • Management expected data from Phase 3 programs for IONIS-TTR Rx and volanesorsen in the first half of 2017. Four of five Phase 3 studies had completed target enrollment and were entering their most expensive stage.
  • In May 2016, Kastle acquired global rights to Kynamro for a $15 million upfront payment, potential additional payments of up to $80 million and future tiered royalties. Ionis also received a 10% Kastle equity position, which was fully reserved because realization was uncertain.
  • In the Gilead patent litigation, a jury upheld the asserted patents and awarded Ionis and Merck 4% of $5 billion in past sofosbuvir sales, but the judge subsequently ruled the patents unenforceable under the doctrine of unclean hands. Ionis and Merck intended to appeal; the filing does not establish a recoverable amount.

Principal risks and contingencies

  • Revenue is volatile and dependent on a limited number of partners, milestone achievements, license transactions and collaboration funding.
  • The company has a substantial accumulated deficit, negative operating cash flow and may require additional financing if commercialization or partnering objectives are not achieved.
  • Clinical, regulatory and commercialization success is uncertain for nusinersen, IONIS-TTR Rx, volanesorsen, Kynamro and other pipeline products.
  • Risks include clinical trial failure or delay, regulatory restrictions, adverse safety findings, manufacturing constraints, third-party clinical service failures, competition, reimbursement limitations and intellectual-property disputes.
  • Convertible notes could result in cash repayment or dilution of existing holders; approximately 11.2 million shares could be issuable upon conversion of the notes.
  • Management stated that disclosure controls and procedures were effective as of June 30, 2016, with no material changes to internal control over financial reporting.

Facts investors should verify

  • Whether Biogen’s nusinersen regulatory filings and subsequent approval milestones occurred as planned and the resulting license, milestone and royalty economics.
  • Actual second-half 2016 revenue, including recognition of the $75 million Biogen and $10 million Janssen license fees.
  • Progress, results and regulatory timelines for the Phase 3 programs for IONIS-TTR Rx and volanesorsen.
  • Operating cash burn, Akcea spending and the timing of potential additional financing.
  • Resolution and collectability of the Gilead litigation award after appeal.
  • Changes in the value and accounting treatment of the Regulus and Kastle investments and other equity holdings.