Business Context and Reporting Period
Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company operated as a single-segment antisense drug discovery and development business, with revenue primarily generated through collaborations, milestone payments, licensing and royalties. KYNAMRO was approved in the United States for homozygous familial hypercholesterolemia and commercialized by Genzyme.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $23.6 million | $11.6 million | $105.0 million | $82.2 million |
| Operating expenses | $49.1 million | $39.6 million | $136.8 million | $125.0 million |
| Loss from operations | $(25.5) million | $(28.0) million | $(31.8) million | $(42.8) million |
| Net loss | $(24.6) million | $(37.6) million | $(36.4) million | $(62.8) million |
| Net loss per share | $(0.21) | $(0.37) | $(0.33) | $(0.63) |
| Operating cash flow | Not separately provided | Not separately provided | $78.0 million | $(34.2) million |
- Revenue increased approximately 103% year over year in the quarter and 28% for the first nine months. Research and development revenue under collaborative agreements was $23.4 million in Q3 and $102.9 million year to date; licensing and royalty revenue was $0.2 million and $2.1 million, respectively.
- Operating expenses increased primarily because multiple pipeline programs advanced into later-stage clinical development. Research, development and patent expense was $126.6 million for the first nine months, including $122.8 million of research and development expense and $3.8 million of patent expense.
- The company remained loss-making, but losses narrowed substantially. The nine-month improvement reflected higher collaboration revenue, a $6.4 million income tax benefit and the absence of the $4.8 million 2012 loss on early debt retirement.
- Cash, cash equivalents and short-term investments totaled $670.9 million at September 30, 2013, compared with $374.4 million at December 31, 2012. Working capital was $660.0 million versus $349.1 million.
- Cash flow from operations was $78.0 million, while investing activities used $170.5 million, primarily for purchases of short-term investments. Financing activities provided $224.4 million, including $173.2 million from a common-stock offering and $56.9 million from equity awards.
- Total debt and other obligations were approximately $283.4 million. The company had $148.7 million carrying value of 2.75% convertible senior notes due 2019; their reported fair value was $480.6 million. Contractual obligations totaled $414.4 million, including facility rent, convertible debt, equipment financing and leases.
- Stockholders’ equity increased to $401.4 million from $182.8 million, primarily reflecting the equity offering, equity award proceeds and unrealized appreciation in the Regulus investment. The accumulated deficit was $943.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by milestone and collaboration activity, including $25.0 million from Genzyme following FDA approval of KYNAMRO, $16.5 million from GSK, $10.0 million from AstraZeneca, $5.5 million from Biogen Idec and $3.5 million from Xenon.
- In September 2013, Isis entered into a strategic neurology collaboration with Biogen Idec and received a $100.0 million upfront payment. The payment was recorded as deferred revenue and began amortizing over the performance period in October 2013; it was not materially recognized in the reported third-quarter revenue.
- Isis raised $173.2 million net through a June public offering of 9.6 million shares at $19.00 per share, increasing shares outstanding and potentially diluting existing holders.
- The carrying value of the Regulus investment increased from $33.6 million to $65.0 million. Related unrealized gains were recorded in accumulated other comprehensive income rather than operating income.
- Deferred contract revenue increased to $207.0 million, comprising $56.0 million current and $151.0 million long term, compared with $102.6 million at year-end 2012.
- Research and development spending increased as the company advanced programs including ISIS-APOCIIIRx, ISIS-SMNRx, ISIS-TTRRx and other clinical candidates. KYNAMRO development expense declined as responsibility transitioned to Genzyme.
Guidance, Outlook, Commentary and Risks
- No formal quantitative full-year revenue or earnings guidance is provided in the filing. Management expected continued investment in pipeline development and planned to use offering proceeds to advance ISIS-APOCIIIRx into Phase 3 development.
- Management described a pipeline of approximately 30 drugs in development and identified potential near- and mid-term licensing opportunities. It also stated that several programs could potentially reach the market by 2017, subject to clinical and regulatory success.
- The company remained dependent on collaboration funding and milestone timing. Revenue can fluctuate significantly because of the timing of upfront payments, licensing fees and development or regulatory milestones.
- KYNAMRO commercialization remained dependent on Genzyme. The product carried a boxed warning for hepatic toxicity and was subject to a REMS program. The European Medicines Agency’s CHMP maintained a negative opinion on the European marketing application in March 2013.
- Key risks included clinical trial failure or delay, adverse events, regulatory nonapproval, manufacturing constraints, partner termination or reduced commitment, market acceptance and reimbursement, patent litigation, and the need for future financing if collaboration or product revenue is insufficient.
- Isis was pursuing patent litigation against Santaris Pharma. Gilead also filed an action concerning patents jointly owned by Merck and Isis; Merck was responsible for related costs. The filing does not provide a clear estimate of potential financial exposure.
- Subsequent to quarter-end, the company reported a $10.0 million Biogen Idec milestone for advancing ISIS-DMPKRx. The filing also disclosed a $1.5 million payment to CHDI recorded in third-quarter research and development expense.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2013, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether collaboration and milestone revenue, particularly from Biogen Idec, GSK, AstraZeneca and Genzyme, is sustainable or primarily timing-related.
- The revenue-recognition schedule and performance obligations associated with the $100.0 million Biogen Idec upfront payment and other deferred contract revenue.
- Clinical progress, safety data, regulatory status and commercial uptake for KYNAMRO and the principal pipeline programs.
- The valuation and liquidity of the $65.0 million Regulus investment and the effect of market-price changes on comprehensive income and equity.
- The fair value, conversion terms and potential dilution from the 2.75% convertible senior notes, including the approximately 12.1 million potential shares.
- Outstanding patent litigation, potential infringement remedies and any resulting effects on licensing rights, development programs or costs.
- Future cash requirements, milestone receipts, partner commitments and whether the company can maintain development spending without additional equity or debt financing.