Isis Pharmaceuticals, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2011. Isis develops antisense therapeutics and funds research primarily through collaborative agreements, licensing, milestone payments and partner support. The company had 99.7 million common shares outstanding as of August 1, 2011.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Total revenue | $24.8 million | $23.5 million | $46.0 million | $53.4 million |
| Research and development revenue | $24.3 million | $21.1 million | $44.3 million | $49.7 million |
| Licensing and royalty revenue | $0.5 million | $2.4 million | $1.7 million | $3.7 million |
| Operating expenses | $38.9 million | $42.2 million | $76.1 million | $77.0 million |
| Loss from operations | $(14.1) million | $(18.7) million | $(30.2) million | $(23.6) million |
| Net loss | $(17.9) million | $(25.2) million | $(37.9) million | $(34.8) million |
| Net loss per share | $(0.18) | $(0.25) | $(0.38) | $(0.35) |
| Operating cash flow | Not separately provided for the quarter | $(66.0) million | $(16.7) million |
Q2 operating margin was approximately negative 56.7%, compared with negative 79.4% in Q2 2010. Six-month operating margin was approximately negative 65.6%, compared with negative 44.1% in the prior-year period. Q2 net margin was approximately negative 72.1%; six-month net margin was approximately negative 82.4%.
- Cash and cash equivalents were $85.0 million at June 30, 2011, compared with $70.1 million at December 31, 2010.
- Short-term investments were $310.2 million, down from $402.3 million at year-end 2010. Cash, cash equivalents and short-term investments totaled $395.2 million, versus $472.4 million at year-end.
- Working capital was $318.7 million, compared with $377.2 million at December 31, 2010.
- Total assets were $529.6 million and stockholders’ equity was $212.2 million at June 30, 2011.
- Debt and other obligations totaled $206.2 million, compared with $144.3 million at year-end. This included $137.1 million of convertible notes, $58.7 million related to the leased facility and other obligations.
- Six-month investing cash flow was positive $81.4 million, principally reflecting net sales of short-term investments. Capital expenditures were $6.0 million.
- Research and development expense was $70.3 million for the first six months, including $4.6 million of non-cash stock compensation. General and administrative expense was $5.9 million.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 5.6%, but six-month revenue declined 14.0%, primarily because prior-year upfront-fee amortization and a Regulus-related payment did not recur.
- Q2 net loss improved by $7.3 million, mainly because of lower operating expenses and a smaller equity-method loss from Regulus. The six-month net loss increased by $3.1 million because of lower revenue.
- Six-month operating cash use increased by $49.4 million, reflecting the company’s continuing research and development spending and working-capital changes.
- Research and development expenses were broadly flat year over year for the first six months. Lower mipomersen development costs were offset by increased spending on the maturing pipeline.
- Non-cash stock compensation declined to $5.2 million from $6.5 million in the first half of 2010, contributing to lower reported operating expenses.
- The company recorded a $48.6 million facility asset and corresponding financing liability after assuming additional responsibility for construction of its new leased facility. The $10.1 million land cost recorded in 2010 was also associated with the facility.
- Regulus’s equity-method loss declined to $1.9 million from $5.4 million for the first six months, partly due to revenue from its Sanofi alliance.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected full-year 2011 research and development expense to exceed 2010 levels as pipeline programs advance into larger and longer clinical studies. Antisense discovery costs were expected to be comparable to 2010.
- Beginning in the second half of 2011, Isis expected to reach its $125 million mipomersen development funding commitment; thereafter, Isis and Genzyme would share development costs equally until the program becomes profitable.
- Genzyme filed for European marketing approval for mipomersen and planned a U.S. filing in 2011. The filing states that approval was expected in 2012, but approval, labeling, timing and commercialization remained uncertain.
- The GSK collaboration generated a $5.0 million milestone in Q2 for initiating a Phase 1 study of ISIS-TTR Rx and a $3.0 million expansion payment for a sixth program. Isis recognized $7.0 million of GSK-related revenue in Q2 and $8.7 million year to date; $29.1 million remained deferred.
- GSK collaboration revenue is concentrated and contingent on development progress. Potential future payments of up to nearly $1.5 billion are described for the six programs, but these amounts are contingent and are not current revenue or guaranteed cash proceeds.
- The company planned to move most operations into the new facility in August 2011. Depreciation was expected to begin in Q3, rent payments in January 2012, and additional interest expense was expected from the facility liability.
- Contractual obligations totaled $367.7 million, including $175.3 million of convertible note principal and interest, $150.7 million of new facility rent, and $30.7 million of operating leases. Payments due within one year totaled $15.0 million.
- Revenue is highly dependent on a limited number of collaborators: one partner represented 67% of Q2 revenue and 72% of six-month revenue; a second represented 28% and 19%, respectively. One significant partner represented approximately 90% of contract receivables at June 30, 2011.
- Key risks include clinical-trial failure, regulatory delay or rejection of mipomersen and other drugs, dependence on Genzyme and other partners, manufacturing and supply constraints, intellectual-property disputes, continued operating losses, the need for additional financing, and stock-price volatility.
- The company reported effective disclosure controls as of June 30, 2011, with no material change in internal control over financial reporting during the quarter. A Bruker/Ibis legal dispute was formally dismissed in April 2011 with no payment by either party.
Important Facts for Investors to Verify
- Regulatory status, filing dates, approval decisions and labeling for mipomersen in the United States and Europe.
- Actual timing and cost of the new facility move, depreciation, rent commencement and incremental interest expense.
- Cash burn, milestone receipts, deferred revenue amortization and the sustainability of partner-funded research revenue.
- Genzyme’s development and commercialization commitments, including the transition to shared mipomersen development costs after Isis reaches $125 million of funding.
- Clinical progress and financing requirements for the broader antisense pipeline, including GSK programs and Regulus.
- Terms, conversion or repurchase provisions and maturity exposure of the 2 5/8% convertible notes, including potential dilution of approximately 11.1 million shares.