IONIS PHARMACEUTICALS, INC. (formerly Isis Pharmaceuticals, Inc.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period ended March 31, 2012. The interim financial statements are unaudited. The company operated as a single drug discovery and development segment and had 103.8 million common shares outstanding as of May 2, 2013.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $43.4 million | $23.2 million | 87% increase |
| Research and development revenue | $41.9 million | $21.8 million | 92% increase |
| Licensing and royalty revenue | $1.4 million | $1.4 million | Essentially unchanged |
| Research and development expense | $38.3 million | $38.7 million | 1% decrease |
| General and administrative expense | $3.4 million | $3.0 million | 15% increase |
| Income (loss) from operations | $1.6 million | $(18.5) million | Improved |
| Net loss | $(1.7) million | $(24.0) million | Improved |
| Net loss per share | $(0.02) | $(0.24) | Improved |
| Net cash used in operating activities | $(10.6) million | $(6.7) million | Greater use of cash |
Margins: Operating margin was approximately 3.7% in Q1 2013 versus approximately negative 79.4% in Q1 2012. Net margin was approximately negative 3.9% versus negative 103.3%.
- Cash and cash equivalents were $107.7 million at March 31, 2013, compared with $124.5 million at December 31, 2012.
- Short-term investments were $264.3 million, bringing cash, cash equivalents and short-term investments to $371.9 million, compared with $374.4 million at year-end 2012.
- Working capital was $361.5 million, compared with $349.1 million at December 31, 2012.
- Total assets were $553.0 million and stockholders’ equity was $201.1 million at March 31, 2013.
- Debt and other obligations totaled $283.0 million. The balance included $145.5 million of carrying value for 2¾% convertible senior notes due 2019; the notes had a fair value of $258.0 million.
- Operating cash outflow was supplemented by $11.8 million of equity issuance proceeds and $32.5 million of milestone payments received during the quarter. Net cash decreased by $16.8 million.
- Comprehensive income was $3.6 million, primarily reflecting unrealized investment gains, despite the $1.7 million net loss.
Material changes versus the prior comparable period
- Revenue increased primarily because of a $25.0 million Genzyme milestone for FDA approval of KYNAMRO and a $7.5 million GSK milestone for initiation of the ISIS-TTR Rx Phase 2/3 study.
- New AstraZeneca and Biogen Idec collaborations began contributing amortized revenue. Revenue from Genzyme declined as prior upfront payments had substantially completed their amortization.
- Operating expenses were broadly stable, but research and development spending excluding non-cash compensation declined to $35.8 million from $36.8 million. Lower development and KYNAMRO costs were partly offset by higher litigation costs and discovery spending.
- Interest expense declined to $4.8 million from $5.2 million following redemption of the former 2⅝% convertible subordinated notes and issuance of the 2¾% convertible senior notes.
- The company no longer recorded equity-method losses from Regulus after Regulus’ October 2012 IPO; its investment is now carried at fair value. The Regulus investment increased to $44.9 million from $33.6 million.
Outlook, commentary, risks and unusual items
- KYNAMRO was approved by the FDA in January 2013 and launched in the United States by Genzyme for homozygous familial hypercholesterolemia. The product carries a boxed warning for hepatic toxicity and is subject to a REMS program.
- The company reported 28 drugs in development, including programs in cardiovascular, rare disease, neurological, metabolic and oncology indications. Management stated that several programs could reach the market by 2017 and that Phase 2 data for selected programs could be available within 12 to 18 months.
- In April 2013, after quarter-end, the company entered a Huntington’s disease collaboration with Roche, received a $30.0 million upfront payment and became eligible for substantial milestone and royalty payments. The upfront payment will begin contributing to revenue in Q2 2013. The company also expects to pay CHDI $1.5 million related to the agreement, recorded as Q2 research and development expense.
- In April 2013, the company initiated a Phase 2 study of ISIS-SMN Rx in infants with spinal muscular atrophy and expected to earn a $3.5 million Biogen Idec milestone upon first patient dosing.
- Material uncertainties include clinical trial outcomes, regulatory approvals, product adoption and reimbursement, manufacturing capacity, reliance on partners, patent protection, and the company’s continuing history of losses. The company had an accumulated deficit of $908.6 million at March 31, 2013.
- Genzyme may terminate the KYNAMRO collaboration, and the European Medicines Agency’s CHMP maintained a negative opinion on KYNAMRO for HoFH in March 2013.
- The company is pursuing patent infringement litigation against Santaris Pharma. In April 2013, it amended its complaint to add additional patent and inducement claims. The filing does not provide a clear estimate of potential recovery or loss.
- Revenue is concentrated among partners: Genzyme represented 58% of Q1 revenue and GSK represented 23%. Four significant partners represented approximately 88% of contract receivables at March 31, 2013.
- Management stated that existing cash, cash equivalents and short-term investments are intended to finance operations, while noting that additional equity, debt, refinancing or credit facilities may be considered depending on business and market conditions.
- Disclosure controls and procedures were assessed as effective as of March 31, 2013, with no reported material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the timing, amount and accounting treatment of Genzyme, GSK, AstraZeneca and Biogen Idec milestones and deferred revenue.
- Assess KYNAMRO prescription uptake, commercial revenue, safety developments, REMS requirements and additional regulatory approvals, particularly in Europe.
- Track clinical, regulatory and milestone progress for ISIS-TTR Rx, ISIS-SMN Rx and other lead pipeline programs.
- Reconcile cash consumption with the $371.9 million reported liquidity balance and review the company’s $420.5 million schedule of contractual obligations.
- Monitor the fair value and liquidity restrictions associated with the $44.9 million Regulus investment and other biotechnology equity holdings.
- Review the Santaris patent litigation, potential costs and any effect on the company’s technology rights or development programs.
- Evaluate dependence on a limited number of collaboration partners and the risk that partners may terminate, delay or reduce funding for programs.