Business Context and Reporting Period
Ionis Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The consolidated results include Ionis and its approximately 76%-owned affiliate, Akcea Therapeutics. Ionis develops RNA-targeted antisense medicines and derives revenue from commercial royalties, product sales, licensing, milestones and collaborative research and development.
Key commercial medicines were SPINRAZA, for which Biogen pays royalties, and Akcea’s TEGSEDI. WAYLIVRA received conditional European Commission authorization in May 2019 and was being prepared for European launch.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $163.8 million | $117.7 million | $461.0 million | $262.2 million |
| Operating expenses | $182.6 million | $168.0 million | $358.3 million | $315.7 million |
| Income (loss) from operations | $(18.8) million | $(50.3) million | $102.7 million | $(53.6) million |
| Net income (loss) | $(10.0) million | $(56.6) million | $80.9 million | $(67.4) million |
| Ionis stockholder net income (loss) | $(0.9) million | $(40.4) million | $83.6 million | $(41.8) million |
| Diluted EPS | $(0.01) | $(0.29) | $0.61 | $(0.30) |
- Commercial revenue was $88.3 million in the second quarter and $156.4 million in the first half, including SPINRAZA royalties of $70.5 million and $130.2 million, respectively, and TEGSEDI sales of $9.9 million and $16.6 million.
- Research and development revenue under collaborations was $75.5 million in the second quarter and $304.6 million in the first half.
- Operating margin was approximately negative 11.5% in the quarter and positive 22.3% for the first half. Net margin was approximately negative 6.1% in the quarter and positive 17.5% for the first half.
- Research, development and patent expense was $106.2 million in the quarter and $212.6 million year to date. Selling, general and administrative expense was $75.1 million and $143.3 million, respectively.
- Stock-based compensation was $41.9 million in the quarter and $87.4 million year to date, compared with $33.9 million and $62.3 million in the comparable periods.
- Cash provided by operating activities was $80.6 million for the first half, compared with $513.4 million in 2018. The prior-year amount benefited substantially from a $1 billion Biogen collaboration payment.
- Investing cash flow was negative $180.9 million, primarily reflecting net purchases of short-term investments. Financing cash flow was positive $94.0 million, primarily from employee equity awards.
- Cash and cash equivalents were $272.5 million, and short-term investments were $2.0 billion, at June 30, 2019. Total cash, cash equivalents and short-term investments were approximately $2.3 billion.
- Total assets were $2.9 billion, stockholders’ equity was $1.5 billion, and working capital was $2.2 billion at June 30, 2019.
- Debt and other obligations totaled $775.9 million. The carrying value of the 1% convertible senior notes was $586.8 million, with $685.5 million of principal outstanding and a November 2021 maturity. The notes had a reported fair value of $813.8 million.
Material Changes Versus the Prior Comparable Period
- First-half revenue increased approximately 76% year over year, driven by the $150 million Novartis license fee for AKCEA-APO(a)-L Rx, a $35 million Roche milestone, a $20 million Alnylam sublicense fee, higher SPINRAZA royalties and initial TEGSEDI sales.
- SPINRAZA royalties increased more than 30% in the first half, consistent with higher product sales. Biogen reported approximately 8,400 patients on therapy as of June 2019.
- TEGSEDI generated $10 million of second-quarter sales and $17 million of first-half sales, but Akcea continued to incur launch and commercialization costs. Ionis’s share of TEGSEDI commercialization losses was $11.5 million in the quarter and $20.5 million year to date.
- Operating expenses rose year over year, principally because of the global TEGSEDI launch and higher stock-based compensation.
- First-half operating income and net income turned positive from losses in 2018, although the improvement was significantly affected by nonrecurring or milestone-related collaboration revenue.
- Ionis received 2.8 million Akcea shares in the first quarter as payment for a $75 million sublicense fee related to the Novartis transaction, increasing Ionis’s ownership to approximately 76%.
- Ionis adopted the new lease accounting standard on January 1, 2019, recognizing right-of-use assets and operating lease liabilities. The adoption did not affect the statement of operations.
Guidance, Outlook, Commentary and Risks
- Management stated that its financial position should support execution of its corporate goals through 2019 and beyond, but the filing does not provide formal revenue, earnings or cash-flow guidance.
- Management described a pipeline of more than 40 medicines, including two Phase 3 programs, IONIS-HTT Rx and tofersen, and potential additional Phase 3 starts in 2019 and by the end of 2020.
- WAYLIVRA was expected to launch in Europe during the third quarter of 2019, beginning in Germany, with additional European launches planned. Management reported ongoing U.S. and Canadian regulatory discussions and a $6 million PTC milestone for European approval.
- The filing reports positive BROADEN study topline results for WAYLIVRA in familial partial lipodystrophy after quarter-end; investors should distinguish this subsequent disclosure from the June 30 financial results.
- Principal risks include dependence on Biogen and other partners, variable collaboration and milestone revenue, regulatory and clinical-development failures, competition, reimbursement and market acceptance, TEGSEDI and WAYLIVRA safety monitoring requirements, manufacturing dependence, intellectual-property disputes, and the possibility of future operating losses.
- TEGSEDI carries a U.S. boxed warning and REMS requirements related to thrombocytopenia and glomerulonephritis. WAYLIVRA requires platelet monitoring and is subject to post-authorization safety obligations in Europe.
- Management expects to use existing cash, cash equivalents and investments to fund operations, but stated that it may pursue equity, debt, refinancing or other financing depending on business performance and market conditions.
- The company was in compliance with its credit agreement covenants. It had $12.5 million outstanding under a revolving credit facility maturing in September 2019.
- Disclosure controls and procedures were assessed as effective as of June 30, 2019. Legal proceedings were reported as not applicable.
Important Facts for Investors to Verify
- Separate recurring commercial revenue from one-time or milestone-driven collaboration revenue, particularly the $150 million Novartis license fee, $35 million Roche milestone and $20 million Alnylam sublicense fee.
- Track SPINRAZA royalty growth, Biogen patient counts and the effect of competitive SMA therapies.
- Assess whether TEGSEDI sales growth can offset Akcea’s commercialization, monitoring and launch costs, and review TEGSEDI’s net-sales reserves and safety requirements.
- Verify the regulatory and launch status of WAYLIVRA, including European post-approval obligations and the U.S. regulatory pathway.
- Review the sustainability of first-half profitability, given the contribution of nonrecurring collaboration revenue, $87.4 million of stock-based compensation and continued research and commercialization spending.
- Confirm convertible-note maturity, potential dilution of approximately 10.3 million shares, the September 2019 revolving-credit maturity and total contractual obligations of approximately $820.2 million.
- Monitor deferred collaboration revenue of approximately $540.8 million related to Biogen, $61.2 million related to Roche and $15.8 million related to Novartis, together with the timing of future revenue recognition.