Ionis Pharmaceuticals, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Ionis Pharmaceuticals consolidates its wholly owned subsidiary, Akcea Therapeutics. The company develops RNA-targeted therapeutics and relies substantially on collaboration, licensing, milestone and royalty revenue.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $38.5 million | $120.4 million | $75.3 million | $183.0 million |
| Operating expenses | $87.4 million | $75.8 million | $178.9 million | $147.7 million |
| Income (loss) from operations | $(48.9) million | $44.6 million | $(103.6) million | $35.3 million |
| Net income (loss) | $(56.9) million | $35.6 million | $(119.8) million | $18.9 million |
| Basic and diluted EPS | $(0.47) | $0.30 basic; $0.29 diluted | $(0.99) | $0.16 basic; $0.15 diluted |
Calculated margins: Operating margin was approximately negative 127% in the quarter and negative 138% for the first six months. Net margin was approximately negative 148% and negative 159%, respectively.
- Research and development revenue was $22.5 million in the second quarter and $57.7 million year to date, compared with $119.7 million and $181.6 million in the prior-year periods.
- Licensing and royalty revenue increased to $16.0 million in the quarter and $17.7 million year to date, primarily from the $15 million Kynamro upfront payment from Kastle.
- Research, development and patent expense was $77.6 million in the quarter and $158.5 million year to date. Excluding non-cash stock compensation, these expenses were $63.1 million and $129.3 million.
- Non-cash stock-based compensation was $19.3 million in the quarter and $39.4 million year to date, up from $13.6 million and $26.9 million, respectively, in 2015.
- Net cash used in operating activities was $109.6 million for the first six months, compared with $22.4 million of cash provided in the prior-year period.
- Investing activities provided $92.9 million, principally from net sales of short-term investments. Financing activities provided $0.4 million.
- Cash and cash equivalents declined to $112.5 million from $128.8 million at December 31, 2015. Cash, cash equivalents and short-term investments totaled $664.1 million, compared with $779.2 million at year-end.
- Working capital was $586.9 million, down from $688.1 million. Stockholders’ equity was $111.2 million, down from $200.8 million, and accumulated deficit was $1.215 billion.
Debt and obligations
- Debt and other obligations totaled $644.6 million at June 30, 2016.
- Convertible debt principal consisted of $500 million of 1% notes due November 2021 and $61.2 million of 2¾% notes due October 2019. The carrying amounts were $350.8 million and $50.9 million, respectively, reflecting debt discounts.
- The company had $8.5 million outstanding under a $30 million revolving credit facility, at a weighted-average interest rate of 1.72%. Ionis was in compliance with its covenants.
- Total contractual obligations were $750.5 million, including $527.5 million for the 1% notes, $67.1 million for the 2¾% notes and $122.3 million of facility rent payments.
- Interest expense was $9.6 million for the quarter and $19.1 million year to date, including substantial non-cash amortization of debt discounts and issuance costs.
Material changes versus the prior comparable periods
- Revenue fell 68% in the quarter and 59% year to date, largely because the second quarter of 2015 included $91.2 million of revenue from Bayer’s IONIS-FXI Rx license and significant milestone revenue.
- The company shifted from operating income to operating losses as revenue declined while clinical development expenses increased.
- Operating expenses increased 15% in the quarter and 21% year to date, driven by five Phase 3 studies, three open-label extension studies, growing Akcea expenses and higher stock-based compensation.
- Akcea’s operating loss increased to $14.8 million in the quarter and $30.8 million year to date, versus $8.9 million and $16.0 million, respectively, in 2015. Akcea had no revenue.
- Revenue concentration remained high. Biogen represented 25% of second-quarter revenue and 41% of year-to-date revenue; Kastle represented 39% and 20%, respectively.
- Unrealized investment losses of $13.3 million year to date reduced accumulated other comprehensive income, including a decline in the Regulus investment. The Regulus position was valued at $8.2 million at June 30, 2016 versus $24.8 million at year-end.
Guidance, outlook and unusual items
- Management expected second-half 2016 revenue to be significantly higher than first-half revenue. Subsequent to quarter-end, Ionis earned $75 million from Biogen for the nusinersen license and $10 million from Janssen for an IONIS-JBI1-2.5 Rx license; these amounts were not included in second-quarter revenue or June 30 cash.
- Management reported positive interim Phase 3 ENDEAR results for nusinersen in infantile-onset spinal muscular atrophy. Biogen assumed global development, regulatory and commercialization responsibilities and planned U.S. and E.U. filings in the following months.
- Ionis expected development costs to increase modestly as late-stage programs progressed. Akcea expenses were expected to rise as it built commercialization infrastructure for volanesorsen.
- Management expected data from Phase 3 programs for IONIS-TTR Rx and volanesorsen in the first half of 2017. Four of five Phase 3 studies had completed target enrollment and were entering their most expensive stage.
- In May 2016, Kastle acquired global rights to Kynamro for a $15 million upfront payment, potential additional payments of up to $80 million and future tiered royalties. Ionis also received a 10% Kastle equity position, which was fully reserved because realization was uncertain.
- In the Gilead patent litigation, a jury upheld the asserted patents and awarded Ionis and Merck 4% of $5 billion in past sofosbuvir sales, but the judge subsequently ruled the patents unenforceable under the doctrine of unclean hands. Ionis and Merck intended to appeal; the filing does not establish a recoverable amount.
Principal risks and contingencies
- Revenue is volatile and dependent on a limited number of partners, milestone achievements, license transactions and collaboration funding.
- The company has a substantial accumulated deficit, negative operating cash flow and may require additional financing if commercialization or partnering objectives are not achieved.
- Clinical, regulatory and commercialization success is uncertain for nusinersen, IONIS-TTR Rx, volanesorsen, Kynamro and other pipeline products.
- Risks include clinical trial failure or delay, regulatory restrictions, adverse safety findings, manufacturing constraints, third-party clinical service failures, competition, reimbursement limitations and intellectual-property disputes.
- Convertible notes could result in cash repayment or dilution of existing holders; approximately 11.2 million shares could be issuable upon conversion of the notes.
- Management stated that disclosure controls and procedures were effective as of June 30, 2016, with no material changes to internal control over financial reporting.
Facts investors should verify
- Whether Biogen’s nusinersen regulatory filings and subsequent approval milestones occurred as planned and the resulting license, milestone and royalty economics.
- Actual second-half 2016 revenue, including recognition of the $75 million Biogen and $10 million Janssen license fees.
- Progress, results and regulatory timelines for the Phase 3 programs for IONIS-TTR Rx and volanesorsen.
- Operating cash burn, Akcea spending and the timing of potential additional financing.
- Resolution and collectability of the Gilead litigation award after appeal.
- Changes in the value and accounting treatment of the Regulus and Kastle investments and other equity holdings.