IONIS Pharmaceuticals, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Ionis Pharmaceuticals, formerly Isis Pharmaceuticals, reported for the fiscal year ended December 31, 2015. The company develops RNA-targeted antisense therapeutics and reported two segments: Ionis Core and wholly owned Akcea Therapeutics. Ionis changed its name and ticker from ISIS to IONS in December 2015.
The principal value drivers were three Phase 3 programs: nusinersen for spinal muscular atrophy, IONIS-TTR Rx for transthyretin amyloidosis, and volanesorsen for familial chylomicronemia syndrome and familial partial lipodystrophy. Ionis also maintained a broad Phase 2 and preclinical pipeline supported by collaborations with Biogen, Bayer, GSK, AstraZeneca, Roche, Janssen and others.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $283.7 million | $214.2 million | +32.5% |
| Research, development and patent expense | $322.3 million | $241.8 million | +33.3% |
| Total operating expenses | $359.5 million | $261.9 million | +37.3% |
| Loss from operations | $75.8 million | $47.7 million | Loss increased |
| Net loss | $88.3 million | $39.0 million | Loss increased |
| Basic and diluted loss per share | $0.74 | $0.33 | Loss increased |
| Net cash provided by operating activities | $21.1 million | $6.3 million | Improved |
| Cash, cash equivalents and short-term investments | $779.2 million | $728.8 million | +6.9% |
| Working capital | $688.1 million | $721.3 million | Decreased |
Revenue was primarily collaboration-driven rather than product-driven. Research and development revenue under collaborative agreements was $281.4 million, including $115.7 million of milestone revenue, $91.2 million recognized from the Bayer license, and $76.8 million primarily from amortized upfront fees and manufacturing services. Licensing and royalty revenue declined to $2.3 million from $11.6 million, mainly because 2014 included a $9.5 million Alnylam sublicensing payment.
Reported operating margin was approximately (26.7%) and net margin approximately (31.1%). The filing does not present adjusted EBITDA or a comparable non-GAAP profit measure. Stock-based compensation was $59.3 million, up from $31.4 million, and was included in operating expenses.
Operating cash flow was positive despite the net loss, supported by non-cash charges, including $59.3 million of stock-based compensation, $23.2 million of convertible-debt discount and issuance-cost amortization, and $20.2 million of gain on the Regulus investment that reduced cash-flow conversion. Investing cash flow was negative $60.1 million, principally reflecting purchases of short-term investments and capital expenditures. Financing cash flow was positive $24.7 million, including $8.5 million drawn under the credit facility and $24.9 million from equity awards.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $128.8 million; short-term investments were $650.4 million.
- Total debt and other obligations were approximately $644.8 million on a contractual basis; the balance sheet carried $472.6 million of long-term obligations before current portions and other presentation differences.
- Convertible debt included $500 million of 1% notes due 2021 and approximately $61.2 million of 2.75% notes due 2019. The notes were convertible into approximately 7.5 million and 3.7 million shares, respectively, subject to stated conditions.
- Ionis had $8.5 million outstanding under its revolving credit facility at year-end. The facility was amended in February 2016 to increase availability to $30 million.
- Contractual obligations totaled $758.5 million, including convertible debt, facility rent, operating leases and other obligations.
- Stockholders’ equity declined to $200.8 million from $257.8 million, while the accumulated deficit increased to $1.095 billion.
Material changes versus the prior comparable period
- Revenue increased $69.5 million, driven by higher collaboration milestones and the Bayer IONIS-FXI Rx license.
- Operating expenses increased $97.6 million as the company advanced three Phase 3 programs and Akcea expanded its development and pre-commercial infrastructure.
- Nusinersen, IONIS-TTR Rx and volanesorsen each completed target enrollment in a pivotal Phase 3 study during 2015.
- Akcea operating expenses, excluding non-cash compensation, increased to $47.9 million from $21.7 million as it advanced volanesorsen and built commercial capabilities.
- Ionis licensed IONIS-FXI Rx to Bayer and recognized $91.2 million of the $100 million upfront payment as license revenue; $4.3 million was allocated to development services and $4.5 million to initial API supply.
- Ionis formed a cardiovascular and renal disease collaboration with AstraZeneca and received a $65 million upfront payment, which is being amortized through August 2021.
- Ionis added nine new drugs to development in 2015, exceeding its goal of adding three to five annually.
- The gain on the Regulus investment remained material at $20.2 million, but unrealized investment losses contributed to comprehensive loss of $141.6 million.
- Interest expense increased to $36.7 million from $22.2 million, primarily because of non-cash amortization related to the 1% convertible notes issued in 2014.
Guidance, outlook, risks and unusual items
Management expected Phase 3 data for all three lead programs in the first half of 2017 and potential regulatory filings in 2017 or 2018 if results were positive. The company expected Phase 3 costs to increase modestly in 2016 and Akcea’s commercial, regulatory and development spending to continue increasing.
Ionis and its partners were preparing for possible commercialization, but all three lead programs remained subject to clinical, regulatory, manufacturing, reimbursement and market-acceptance risks. Management stated that positive Phase 3 data would be required before marketing applications could be supported; no guarantee of approval or commercialization was provided.
- Revenue was concentrated among partners: Biogen represented 37% of 2015 revenue, Bayer 33%, GSK 12% and Roche 11%.
- Akcea had not generated revenue as of year-end and required continued investment to develop and commercialize its pipeline.
- The company had a history of losses, an accumulated deficit of approximately $1.1 billion and a full valuation allowance against deferred tax assets.
- Key risks included failure or delay of clinical trials, adverse safety findings, regulatory non-approval, competition, manufacturing constraints, dependence on partners, intellectual-property disputes, reimbursement pressure and the need for future financing.
- Ionis and Merck were litigating patent claims against Gilead concerning sofosbuvir. As of the filing, no loss was considered both probable and estimable; in February 2016, the court denied Gilead’s invalidity summary-judgment motion and granted Ionis and Merck summary judgment on infringement, subject to remaining invalidity defenses.
- Ionis terminated its Kynamro license agreement with Genzyme in January 2016. The filing does not provide a clear estimate of the future financial impact.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor verification checklist
- Verify the detailed allocation and recognition timing of collaboration revenue, particularly Bayer, Biogen, AstraZeneca, GSK and Roche.
- Review Phase 3 results and regulatory outcomes for nusinersen, IONIS-TTR Rx and volanesorsen rather than relying on pre-approval expectations.
- Assess partner concentration and the termination, option and funding provisions in the collaboration agreements.
- Reconcile contractual debt obligations with balance-sheet carrying values and evaluate potential dilution from approximately 11.2 million shares issuable under convertible notes.
- Monitor cash consumption, Akcea’s increasing operating requirements and the timing of future milestone receipts.
- Review the outcome and potential economics of the Gilead patent litigation and the post-2015 consequences of the Genzyme/Kynamro termination.
- Evaluate investment volatility, especially the remaining Regulus position and its effect on comprehensive income and liquidity.