Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010 for Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals). The company is a biopharmaceutical firm focused on antisense technology and microRNA therapeutics. A significant accounting change occurred in Q1 2010: the company deconsolidated its majority-owned subsidiary, Regulus Therapeutics Inc., due to the adoption of a new accounting standard regarding variable interest entities. Regulus is now accounted for using the equity method. Additionally, results from the sale of Ibis Biosciences in 2009 are reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $29.9 million | $31.6 million |
| Net Loss (Continuing Ops) | $(9.7) million | $(1.7) million |
| Net Loss (Total) | $(9.7) million | $185.3 million (Income) |
| Cash & Short-Term Investments | $519.1 million | $574.3 million (Dec 31, 2009) |
| Working Capital | $438.3 million | $484.7 million (Dec 31, 2009) |
| Long-Term Debt | $135.5 million | $140.8 million (Dec 31, 2009) |
| Operating Expenses | $34.8 million | $32.2 million |
Note: Q1 2009 net income included a $187.0 million gain from the sale of Ibis Biosciences (discontinued operations).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5% to $29.9 million. This was driven by the cessation of amortization for the Ortho-McNeil-Janssen collaboration and the deconsolidation of Regulus revenue ($0.6 million). These decreases were partially offset by a $6 million milestone payment from Bristol-Myers Squibb (BMS).
- Increased Operating Loss: The loss from operations widened to $4.9 million from $0.6 million. This was primarily due to increased R&D spending for the mipomersen Phase 3 program and pipeline expansion, partially offset by the removal of Regulus's operating expenses ($2.5 million).
- Investment Losses: The company recorded a $1.0 million net loss on investments, primarily due to an $0.9 million other-than-temporary impairment of its investment in Antisense Therapeutics Limited (ATL) and a valuation allowance for Excaliard Pharmaceuticals.
- Cash Position: Cash and cash equivalents decreased by $6.7 million during the quarter, primarily due to operating cash usage and the deconsolidation of Regulus's cash balance.
Outlook, Commentary, and Risks
- New Strategic Alliance: In March 2010, Isis entered a new alliance with GlaxoSmithKline (GSK) to develop antisense drugs for rare and infectious diseases. The deal includes a $35 million upfront payment (amortization begins Q2 2010) and potential milestones totaling nearly $1.5 billion.
- Regulus Update: Regulus formed a new alliance with GSK to target miR-122 for Hepatitis C, receiving $8 million upfront. Regulus is now reported as an equity investment, with a $1.5 million equity loss recorded in Q1 2010.
- Clinical Progress: Positive Phase 3 data was reported for mipomersen (treating familial hypercholesterolemia), meeting primary and secondary endpoints. Phase 1 studies were initiated for ISIS-SOD1 Rx and BMS-PCSK9 Rx.
- Liquidity: The company maintains a strong balance sheet with $519.1 million in cash and investments. Management expects to fund operations through existing cash, partnership revenues, and potentially future financing.
- Risks: Key risks include the failure of clinical trials (specifically mipomersen and ISIS 113715), regulatory delays, dependence on third-party partners for funding and commercialization, and the volatility of the biopharmaceutical market.
Investor Verification Checklist
- Accounting Change Impact: Verify the long-term impact of deconsolidating Regulus on reported revenue and expense trends.
- GSK Alliance Terms: Confirm the amortization schedule for the $35 million GSK upfront payment and the specific milestones required to unlock the potential $1.5 billion in future payments.
- Mipomersen Timeline: Monitor the FDA filing timeline for mipomersen (anticipated H1 2011) and the requirements for the outcome study needed for broader indications.
- Investment Impairments: Review the status of the impaired investments (ATL and Excaliard) to assess potential future write-downs.
- Lease Obligations: Note the new 20-year lease with BioMed Realty for a new facility, with estimated maximum future payments of $172 million, though rent payments do not begin until 2012.