SEC Form 10-Q Summary
Company: Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals, Inc.)
Reporting period: Three and nine months ended September 30, 2012; filed November 6, 2012. Financial statements are unaudited.
Business Context and Reporting Period
The company operates as a single-segment antisense drug discovery and development business. Its strategy is to discover and advance drugs to clinical value inflection points, then partner with larger pharmaceutical companies for later-stage development, regulatory approval and commercialization. KYNAMRO, partnered with Genzyme, was the lead commercial opportunity and was under FDA review during the period.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $11.6 million | $20.7 million | $82.2 million | $66.7 million |
| Research and development expense | $36.6 million | $39.9 million | $115.7 million | $110.2 million |
| General and administrative expense | $3.1 million | $3.1 million | $9.3 million | $9.0 million |
| Loss from operations | $(28.0) million | $(22.3) million | $(42.8) million | $(52.5) million |
| Net loss | $(37.6) million | $(26.9) million | $(62.8) million | $(64.8) million |
| Net loss per share | $(0.37) | $(0.27) | $(0.63) | $(0.65) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(34.2) million | $(89.2) million |
Approximate operating margins were negative 242% for Q3 2012 and negative 52% for the first nine months of 2012. Approximate net margins were negative 324% and negative 76%, respectively.
- Cash and cash equivalents were $84.6 million at September 30, 2012, compared with $65.5 million at December 31, 2011.
- Short-term investments were $259.0 million, producing cash, cash equivalents and short-term investments of approximately $343.6 million.
- Working capital was approximately $310.0 million, compared with $284.0 million at year-end 2011.
- Total assets were $485.7 million and stockholders’ equity was $170.3 million.
- Accumulated deficit was $904.3 million.
- Debt and other obligations totaled approximately $285.2 million, compared with $239.9 million at December 31, 2011.
- The company issued $201.3 million of 2.75% convertible senior notes due 2019, receiving approximately $194.7 million net of issuance costs, and redeemed all $162.5 million principal of its 2.625% convertible subordinated notes.
- Contractual obligations totaled approximately $426.9 million, including $240.0 million of principal and interest on the new convertible senior notes and $145.1 million of facility rent payments.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 44% year over year, primarily because 2011 included greater collaboration-related revenue and because amortization of Genzyme upfront payments ended in May 2012.
- Nine-month revenue increased 23% year over year, primarily due to the $25 million Genzyme milestone for FDA acceptance of the KYNAMRO NDA, $10.9 million of KYNAMRO drug-substance sales to Genzyme and recognition of Biogen Idec upfront payments.
- Nine-month operating expenses increased 5% to $125.0 million, driven by higher development costs for the maturing pipeline, partly offset by lower KYNAMRO development costs as Genzyme began sharing those expenses equally.
- Nine-month operating cash use improved substantially from $89.2 million to $34.2 million, while financing activities provided $40.3 million versus using $1.3 million in the prior-year period.
- Interest expense increased to $16.3 million from $11.6 million, largely because of additional non-cash interest expense associated with the facility liability and convertible debt accounting.
- The company recognized a $4.8 million loss on early debt retirement, including a $3.6 million non-cash component and a $1.2 million redemption premium.
- Revenue remained highly concentrated. Genzyme represented 78% of nine-month revenue and 41% of third-quarter revenue; one significant partner represented approximately 82% of contract receivables at September 30, 2012.
Guidance, Outlook, Commentary and Risks
- The filing does not provide formal revenue, earnings or cash-flow guidance. Management stated that it intended to use existing cash, cash equivalents and short-term investments to finance operations, while retaining the option to issue equity or debt, refinance debt or obtain credit facilities.
- KYNAMRO remained subject to regulatory approval. The FDA advisory committee voted 9-6 that available data supported approval for homozygous familial hypercholesterolemia, but the filing emphasized that approval, labeling, commercialization and market acceptance were not assured.
- Genzyme was responsible for KYNAMRO commercialization and finished-product manufacturing, while Isis continued to supply drug substance for clinical development and initial launch. Genzyme could terminate the collaboration under specified circumstances.
- New Biogen Idec collaborations provided $41 million of upfront payments during 2012 and potential future milestone and royalty revenue, but payments depend on continued development, licensing decisions and regulatory success.
- The company and GSK amended the ISIS-TTR Rx program for accelerated development. The amended arrangement included a $2.5 million upfront payment, a potential $7.5 million payment upon initiation of a Phase 2/3 study and additional potential milestones.
- In October 2012, Regulus completed an IPO. Isis’s ownership fell below 20%, ending equity-method accounting. Management expected to record a fourth-quarter gain of approximately $15 million to $20 million and thereafter account for the investment at fair value.
- Key risks include clinical and regulatory failure, adverse events, manufacturing and supply constraints, dependence on collaborators, partner termination, market competition, patent litigation, continued operating losses, funding requirements and stock-price volatility.
- The company was pursuing patent litigation against Santaris; the court denied Santaris’s summary judgment motion in September 2012 and opened limited discovery. Alnylam also joined litigation against Tekmira as a co-plaintiff under contractual patent-enforcement rights.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2012 and identified no material change in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Regulatory outcome, labeling and commercial launch status of KYNAMRO, including Genzyme’s development and manufacturing commitments.
- Timing and actual amount of the expected Regulus fair-value gain following its October 2012 IPO.
- Progress and funding requirements for the Biogen Idec, GSK and other partnered programs, including milestone eligibility.
- Cash burn, operating losses and the company’s ability to fund development under the $426.9 million contractual-obligation schedule.
- Conversion, repurchase and potential dilution terms associated with the $201.3 million convertible senior notes.
- Revenue concentration and collectability of contract receivables from major partners.
- Status, potential costs and intellectual-property consequences of the Santaris and Alnylam-related litigation.