IONIS Pharmaceuticals, Inc. (formerly Isis Pharmaceuticals, Inc.) — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine months ended September 30, 2015. The company develops RNA-targeted antisense medicines and funds its pipeline primarily through collaborations, licensing arrangements, milestone payments and royalties. In 2015, it began reporting two segments: Isis Core and wholly owned Akcea Therapeutics, which focuses on the lipid franchise.
The company reported 38 drugs in development, including Phase 3 programs for ISIS-TTR Rx, nusinersen and volanesorsen. KYNAMRO was marketed in the United States for homozygous familial hypercholesterolemia through Genzyme.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $49.1 million | $44.1 million | $232.1 million | $129.3 million |
| Research and development revenue | $48.9 million | $43.8 million | $230.5 million | $120.0 million |
| Licensing and royalty revenue | $0.2 million | $0.3 million | $1.7 million | $9.3 million |
| Operating expenses | $97.3 million | $65.6 million | $245.0 million | $187.1 million |
| Loss from operations | $(48.1) million | $(21.5) million | $(12.8) million | $(57.8) million |
| Net loss | $(35.8) million | $(26.7) million | $(16.8) million | $(70.0) million |
| Net loss per share | $(0.30) | $(0.23) | $(0.14) | $(0.60) |
- Q3 operating margin was approximately negative 98%; nine-month operating margin was approximately negative 5.5%.
- Q3 net margin was approximately negative 72.8%; nine-month net margin was approximately negative 7.3%.
- Interest expense increased to $9.2 million in Q3 and $27.4 million for the nine months, versus $5.0 million and $14.9 million, respectively, largely because of the 1% convertible notes issued in November 2014.
- Q3 included a $20.2 million gain from selling approximately 2.7 million Regulus shares. The company retained a significant Regulus investment.
- Non-cash stock-based compensation was $15.0 million in Q3 and $41.9 million for the nine months, compared with $8.1 million and $22.9 million in the prior-year periods.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $58.6 million for the first nine months of 2015, compared with $64.4 million used in the prior-year period. The improvement primarily reflected partner payments and increased deferred contract revenue.
- Investing activities used $88.0 million, including $105.0 million of net purchases of short-term investments, $5.3 million of capital expenditures and $3.3 million for licenses and other assets. Proceeds included $25.5 million from the Regulus sale.
- Cash and cash equivalents declined to $126.6 million from $143.0 million at December 31, 2014. Short-term investments increased to $685.6 million from $585.8 million.
- Cash, cash equivalents and short-term investments totaled $812.2 million at September 30, 2015, compared with $728.8 million at year-end 2014. Working capital was $746.1 million versus $721.3 million.
- Total debt and other obligations were $641.4 million, compared with $643.5 million at December 31, 2014. Debt included $500.0 million of 1% convertible senior notes maturing in 2021 and $61.2 million of 2.75% convertible senior notes maturing in 2019.
- The company had no borrowings under its new $20 million five-year revolving credit facility and was in compliance with its covenants.
- Contractual obligations totaled approximately $755.2 million, including $532.5 million for the 1% notes, $68.8 million for the 2.75% notes and $127.1 million of facility rent payments.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased $102.8 million, or approximately 79%, primarily due to collaboration and milestone revenue, including the Bayer ISIS-FXI Rx license.
- The company recognized $91.2 million from Bayer for the ISIS-FXI Rx license, $51.7 million of Biogen milestones, $22.0 million from Roche, $15.0 million from GSK and $49.5 million from amortized upfront fees and manufacturing services.
- Operating expenses increased $57.8 million, or approximately 31%, primarily because of more advanced clinical trials, including Phase 3 programs, Akcea development and pre-commercialization activities, and higher stock-based compensation.
- Research, development and patent expenses increased to $221.0 million for the nine months from $173.8 million. Excluding stock compensation, research and development and patent expenses were $188.7 million versus $154.9 million.
- Akcea incurred $30.7 million of operating losses for the nine months and generated no revenue. Management expected Akcea expenses to continue increasing as it prepared for a potential volanesorsen launch.
- Licensing and royalty revenue decreased by $7.7 million for the nine months because the prior-year period included a $7.7 million Alnylam sublicensing payment.
- Revenue concentration remained significant. Bayer represented 40% of nine-month revenue, Biogen 32%, and GSK 10%; three significant partners represented approximately 96% of contracts receivable.
Guidance, Outlook, Commentary and Risks
- Management expected clinical development costs to continue increasing as Phase 3 programs progressed in the fourth quarter of 2015. Akcea operating and commercialization infrastructure costs were also expected to rise.
- The company expected Phase 3 data in 2016 or 2017 for ISIS-TTR Rx, nusinersen and volanesorsen, potentially supporting regulatory filings. These statements were forward-looking and subject to clinical, regulatory and commercial uncertainty.
- In July 2015, AstraZeneca paid a $65 million upfront payment for a cardiovascular, metabolic and renal disease collaboration. The company was eligible for more than $4 billion in potential license fees and milestones, plus tiered royalties, but these amounts were contingent on future development and regulatory achievements.
- Other notable development activity included Phase 2 or Phase 3 advancement of volanesorsen, ISIS-FXI Rx, ISIS-GCGR Rx, ISIS-HTT Rx and ISIS-FGFR4 Rx, and Phase 1 initiation for ISIS-DGAT2 Rx and ISIS-GSK4-L Rx.
- Key risks included failure to obtain regulatory approval, unsuccessful or delayed clinical trials, adverse safety findings, limited market acceptance of KYNAMRO or future products, dependence on collaboration partners, manufacturing constraints, intellectual-property disputes, need for future financing and continued operating losses.
- The company disclosed ongoing Gilead litigation concerning patents jointly owned with Merck and relating to sofosbuvir. Merck was responsible for litigation costs under the applicable agreement.
- The filing stated that disclosure controls and procedures were effective as of September 30, 2015, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether ISIS-TTR Rx, nusinersen and volanesorsen achieved expected clinical milestones and supported regulatory filings in 2016–2017.
- The sustainability and timing of collaboration revenue, particularly the concentration in Bayer, Biogen, GSK, Roche and AstraZeneca.
- Akcea’s spending trajectory, launch readiness and eventual commercial performance of volanesorsen.
- The clinical, regulatory and commercial outlook for KYNAMRO, including its boxed warning, REMS requirements and dependence on Genzyme.
- The outcome and potential financial impact of the Gilead patent litigation.
- Cash consumption, future milestone receipts, debt maturities and whether additional equity or debt financing becomes necessary.
- The effect of deferred revenue recognition and management estimates on the timing of reported collaboration revenue.