Isis Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014. The interim financial statements are unaudited. The company operated as a single drug discovery and development segment and had 117.7 million common shares outstanding as of August 1, 2014.
Business Context
Isis Pharmaceuticals, now known as Ionis Pharmaceuticals, focused on antisense drug discovery and development, with a pipeline of 32 drugs and numerous collaborations with Biogen Idec, AstraZeneca, GSK, Roche, Genzyme and others. KYNAMRO was approved in the United States for homozygous familial hypercholesterolemia and commercialized by Genzyme.
The company’s business model depended substantially on collaboration funding, upfront payments, milestone payments, licensing fees, royalties and partner-funded research and development. Biogen Idec represented 60% of second-quarter revenue and 52% of first-half revenue; AstraZeneca represented 27% and 22%, respectively.
Financial Highlights
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $57.1 million | $38.1 million | $85.2 million | $81.5 million |
| Operating expenses | $63.7 million | $46.0 million | $121.6 million | $87.8 million |
| Loss from operations | $(6.7) million | $(7.9) million | $(36.3) million | $(6.3) million |
| Net loss | $(12.1) million | $(10.1) million | $(43.4) million | $(11.8) million |
| Basic and diluted loss per share | $(0.10) | $(0.09) | $(0.37) | $(0.11) |
Second-quarter revenue increased 50% year over year, primarily because of milestone payments. First-half revenue increased 5%. Research and development revenue was $56.6 million in the quarter and $76.2 million year to date. Licensing and royalty revenue was $0.4 million in the quarter and $9.1 million year to date, including $7.7 million of sublicensing revenue from Alnylam related to its Genzyme collaboration.
Milestone revenue was $40.5 million in the second quarter and $41.5 million during the first half. First-half milestone revenue included $24.5 million from Biogen Idec, $15.0 million from AstraZeneca and $2.0 million from GSK.
Operating expenses rose primarily because the pipeline advanced into larger and later-stage clinical trials. Research, development and patent expenses increased to $112.7 million for the first half from $80.9 million in the prior-year period. Non-cash stock-based compensation increased to $14.8 million from $5.5 million, primarily because of the higher stock price.
Cash Flow, Liquidity and Debt
| Balance or cash flow | June 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $94.1 million | $160.0 million |
| Short-term investments | $496.8 million | $496.8 million |
| Cash, cash equivalents and short-term investments | $590.8 million | $656.8 million |
| Working capital | $605.0 million | $637.7 million |
| Stockholders’ equity | $366.9 million | $378.4 million |
| Accumulated deficit | $(1.011) billion | $(967.6) million |
- Operating cash flow was $(66.3) million for the first six months of 2014, compared with $12.2 million provided in the prior-year period.
- The operating cash outflow reflected the net loss, a $30.8 million increase in contract receivables and an $19.0 million reduction in deferred contract revenue.
- Investing cash flow was $(7.6) million, including $179.2 million of investment purchases and $175.8 million of investment proceeds.
- Financing cash flow was $8.0 million, primarily from equity awards, partially offset by $5.4 million of debt and capital lease payments.
- Debt and other obligations totaled $281.5 million. The company had $153.7 million of carrying value for its 2.75% convertible senior notes and a $71.5 million long-term financing liability related to its leased facility.
- The convertible notes mature in 2019, and holders may convert approximately 12.1 million shares at a conversion price of $16.63 per share under specified conditions.
- Contractual obligations totaled $399.4 million, including $231.7 million of convertible-note principal and interest and $134.8 million of facility rent payments.
Management stated that existing cash, cash equivalents and short-term investments were intended to finance activities, but identified potential future financing through equity, debt, refinancing or credit facilities depending on operating performance and market conditions.
Material Changes and Unusual Items
- Biogen Idec revenue increased to $34.5 million in the second quarter and $44.7 million in the first half, compared with $7.4 million and $11.2 million, respectively, in 2013.
- AstraZeneca revenue was $15.6 million in the quarter and $19.1 million year to date. The company recognized a $15.0 million milestone upon initiation of a Phase 1 study for ISIS-AR Rx.
- Biogen Idec milestones included payments related to ISIS-SMN Rx, initiation of a Phase 1 study for ISIS-DMPK Rx and selection of a neurological target.
- The company initiated or advanced multiple clinical programs, including Phase 3 development of ISIS-SMN Rx in infants with spinal muscular atrophy, Phase 2 development of ISIS-APO(a) Rx, and Phase 1 studies for ISIS-PKK Rx and ISIS-DMPK Rx.
- GSK and the company amended development plans for ISIS-HBV Rx and ISIS-GSK4 Rx. Roche’s Huntington’s disease program added ISIS-HTT Rx to the pipeline.
- Comprehensive loss was $(39.7) million for the first half of 2014, compared with comprehensive income of $2.7 million in the prior-year period, primarily reflecting changes in unrealized investment gains and losses.
- The company held $56.7 million of Regulus equity and reported total equity securities of $59.2 million. Investment valuation changes can affect comprehensive income and stockholders’ equity.
- Contract receivables from three significant partners represented approximately 97% of total contract receivables at June 30, 2014.
Outlook, Commentary and Risks
Management expected to continue advancing later-stage programs, including ISIS-APOCIII Rx, ISIS-SMN Rx and ISIS-TTR Rx, while using partnerships to limit cash requirements and fund development. The company planned to initiate a Phase 3 program for ISIS-APOCIII Rx in 2014 and targeted a potential 2016 regulatory filing.
- Revenue timing was highly variable because it depended on collaboration milestones, licensing transactions, partner decisions and the estimated periods over which services were performed.
- The company expected continued operating losses and stated that it might require additional funding if commercialization, licensing or partnering objectives were not achieved.
- Future revenue depended heavily on a limited number of partners, particularly Biogen Idec and AstraZeneca. Partners generally could terminate programs under specified circumstances or elect not to exercise licensing options.
- Clinical, regulatory and manufacturing risks could delay or prevent approval or commercialization of KYNAMRO and pipeline drugs. KYNAMRO carried a boxed warning for hepatic toxicity and was subject to a REMS program in the United States.
- Market acceptance, reimbursement, competition, adverse clinical results, intellectual-property challenges and partner performance could materially affect results.
- The company was involved in patent litigation with Santaris and Gilead. In June 2014, the court dismissed certain Santaris allegations, while the remainder of that case continued. Merck was responsible for costs of the Gilead litigation under the applicable agreement.
- The company adopted no immediate change from recently issued revenue-recognition guidance and stated that the impact of adoption in 2017 could not yet be estimated.
Important Facts for Investors to Verify
- Whether milestone-driven revenue in 2014 was recurring or represented unusually concentrated, nonrecurring payments.
- The timing and probability of additional milestones, license fees and royalty income from Biogen Idec, AstraZeneca, GSK and Roche.
- Clinical and regulatory progress for ISIS-SMN Rx, ISIS-TTR Rx and ISIS-APOCIII Rx, including the anticipated Phase 3 and filing milestones.
- Cash burn, contract-receivable collections and the sustainability of the $590.8 million liquidity balance relative to planned development spending.
- Potential dilution or cash requirements related to the convertible notes and other contractual obligations.
- Commercial performance, safety restrictions and international regulatory status of KYNAMRO.
- Exposure to partner concentration, partner termination rights, clinical failures, intellectual-property litigation and potential future financing needs.