Business Context and Reporting Period
Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2012. The company develops antisense medicines across cardiovascular, severe and rare, neurologic, metabolic and cancer indications. Its business model relies substantially on pharmaceutical collaborations, upfront payments, milestones, licensing revenue and future royalties.
The company reported 28 drugs in development, including 16 partnered programs. KYNAMRO (mipomersen) was its lead commercial product candidate; the FDA approved KYNAMRO for homozygous familial hypercholesterolemia in January 2013, after the reporting period.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $102.0 million | $99.1 million | +3.0% |
| Research and development expense | $158.5 million | $157.4 million | +0.7% |
| General and administrative expense | $12.5 million | $12.8 million | -2.1% |
| Total operating expenses | $171.0 million | $170.2 million | +0.5% |
| Loss from operations | $(68.9) million | $(71.1) million | Improved |
| Net loss | $(65.5) million | $(84.8) million | Improved |
| Basic and diluted loss per share | $(0.65) | $(0.85) | Improved |
| Net cash provided by operating activities | $1.9 million | $(111.9) million | Improved |
- Revenue consisted primarily of $99.1 million from collaborative research and development arrangements and $2.9 million from licensing and royalties.
- Operating margin was approximately negative 67.5%; net margin was approximately negative 64.2%.
- Cash, cash equivalents and short-term investments were $374.4 million at December 31, 2012, compared with $343.7 million at year-end 2011. Working capital increased to $349.1 million from $284.0 million.
- Total debt and other obligations were approximately $284.1 million, compared with $239.9 million at year-end 2011. The company issued $201.3 million of 2.75% convertible senior notes due 2019 and redeemed its $162.5 million 2.625% convertible subordinated notes.
- Contractual obligations totaled approximately $423.8 million, including $240.0 million of principal and interest on the 2019 convertible notes and $143.7 million of facility rent payments.
- Stockholders’ equity was $182.8 million, while accumulated deficit reached $907.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly as new collaboration payments from Biogen Idec and AstraZeneca and the $25 million KYNAMRO NDA-acceptance milestone offset the planned completion of Genzyme upfront-payment amortization.
- Biogen Idec and AstraZeneca provided $96 million of upfront payments during 2012. The company reported potential future milestones and licensing fees of more than $2 billion from these 2012 alliances.
- R&D spending remained broadly flat overall, but spending on other antisense development programs increased as the pipeline matured, while KYNAMRO development spending declined.
- Operating cash flow turned positive, primarily because of increased deferred contract revenue and collaboration-related cash receipts.
- Net loss improved by $19.3 million, principally because of an $18.4 million gain associated with the Regulus Therapeutics IPO and a related $9.1 million tax benefit. These benefits were partly offset by higher interest expense and a $4.8 million loss on early debt retirement.
- Regulus completed its IPO in October 2012. Isis purchased $3.0 million of Regulus shares, reduced its ownership below 20%, changed from equity-method to fair-value accounting, and reported a $33.6 million investment at year-end.
- Deferred contract revenue increased materially, including $62.6 million related to Biogen Idec and $15.7 million related to AstraZeneca at December 31, 2012.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected continued advancement of the pipeline, including Phase 2 data for ISIS-APOCIII Rx, ISIS-CRP Rx and ISIS-FXI Rx during 2013 and initiation of additional Phase 2 or Phase 3 programs.
- The company planned a Phase 2/3 program for ISIS-SMN Rx in 2013 and expected further development of ISIS-TTR Rx, including a Phase 2/3 study initiated in February 2013.
- Management expected KYNAMRO commercialization to be led by Genzyme in the United States. KYNAMRO remained under review in Europe after the EMA issued a negative opinion in December 2012; Genzyme requested re-examination.
- KYNAMRO carries a boxed warning for hepatic toxicity and is distributed under a Risk Evaluation and Mitigation Strategy. Reported clinical risks included injection-site reactions, flu-like symptoms, elevated liver transaminases and increases in liver fat.
- KYNAMRO faces competition from apheresis, existing lipid-lowering therapy and Juxtapid, an oral treatment approved for HoFH in December 2012.
- Revenue is highly dependent on a limited number of collaborators: Genzyme represented 66% of 2012 revenue and Biogen Idec represented 8%. Collaboration termination, delayed milestones or reduced partner investment could materially affect results.
- The company continued to incur substantial losses and stated that additional financing could be required if commercialization, partnering or milestone objectives are not achieved.
- A patent infringement action against Santaris remained pending; the court denied Santaris’s summary judgment motion in September 2012 and allowed limited discovery. A securities class-action lawsuit filed in December 2012 was voluntarily withdrawn without prejudice in February 2013.
- The company reported effective disclosure controls and internal control over financial reporting, and Ernst & Young issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether KYNAMRO achieves meaningful commercial adoption, reimbursement and sales growth despite its boxed warning, REMS requirements, injectable dosing and competition from Juxtapid and apheresis.
- The timing and outcome of European and other international regulatory reviews for KYNAMRO.
- Actual cash collections, revenue recognition and deferred-revenue amortization from the Biogen Idec, AstraZeneca, Genzyme and GSK collaborations.
- Progress, safety and efficacy results for ISIS-TTR Rx, ISIS-SMN Rx, ISIS-APOCIII Rx, ISIS-FXI Rx and ISIS-STAT3 Rx.
- The company’s ability to sustain operations while reporting recurring losses and carrying substantial debt and long-term facility obligations.
- Potential dilution from approximately 12.1 million shares issuable under the 2019 convertible notes, in addition to outstanding equity awards.
- The resolution and potential financial impact of the Santaris patent litigation and any future intellectual-property challenges.