Business Context and Reporting Period
Ionis Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Results consolidate Ionis and majority-owned Akcea Therapeutics. Ionis develops RNA-targeted antisense therapeutics and generates revenue from commercial royalties, collaborative research and development, licensing, milestones, and royalty arrangements.
During the quarter, Ionis and Biogen entered into a strategic neurology collaboration and stock purchase agreement. Biogen paid $1.0 billion, comprising a $625 million equity investment at a 25% premium and a $375 million upfront collaboration payment.
Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $117.7 million | $112.3 million | $262.2 million | $228.1 million |
| Commercial revenue | $57.2 million | $23.7 million | $99.2 million | $31.5 million |
| SPINRAZA royalties | $56.7 million | $22.4 million | $97.7 million | $27.6 million |
| R&D collaboration revenue | $60.5 million | $88.6 million | $162.9 million | $196.6 million |
| Operating expenses | $168.0 million | $105.8 million | $315.7 million | $202.1 million |
| Loss from operations | $(50.3) million | $6.5 million | $(53.6) million | $25.9 million |
| Net income (loss) | $(56.6) million | $(3.1) million | $(67.4) million | $5.9 million |
| Net income (loss) attributable to Ionis stockholders | $(40.4) million | $(3.1) million | $(41.8) million | $5.9 million |
| Basic and diluted EPS | $(0.29) | $(0.02) | $(0.30) | $0.05 |
Calculated operating margins were approximately negative 42.7% in Q2 and negative 20.4% for the first six months. Net loss attributable to Ionis stockholders represented approximately negative 34.3% and negative 15.9% of revenue, respectively.
- Cash and cash equivalents were $805.5 million at June 30, 2018, compared with $129.6 million at December 31, 2017.
- Short-term investments were $1.175 billion, resulting in cash, cash equivalents, and short-term investments of approximately $2.0 billion.
- Net cash provided by operating activities was $513.4 million for the first six months, substantially supported by $483.8 million of deferred contract revenue activity.
- Net cash used in investing activities was $295.7 million, primarily reflecting purchases of short-term investments.
- Net cash provided by financing activities was $458.1 million, principally reflecting the $448.0 million cash proceeds from Biogen's stock purchase.
- Deferred contract revenue was $717.2 million at June 30, 2018, including $160.6 million current and $556.6 million long-term.
- Carrying value of the 1% convertible senior notes was $550.3 million. The notes had $685.5 million principal outstanding, mature in November 2021, and have a $66.81 conversion price.
- Mortgage debt was $59.8 million, and borrowings under the revolving credit facility were $12.5 million. The company reported compliance with its credit covenants.
- Total stockholders' equity was $817.4 million, including $121.2 million of noncontrolling interest in Akcea. Accumulated deficit was $1.283 billion.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 15% year over year, primarily because SPINRAZA royalties increased $70.2 million. Q2 SPINRAZA royalties increased approximately 153% year over year.
- R&D collaboration revenue declined 17% for the first six months because the prior-year period included a $50 million Biogen milestone related to SPINRAZA's European approval, while 2018 included fewer milestone payments.
- Operating expenses increased 56% for the first six months. Selling, general and administrative expense increased to $109.9 million from $36.0 million as Akcea built commercial infrastructure for TEGSEDI and WAYLIVRA and paid higher SPINRAZA-related in-licensing fees.
- Research, development and patent expense increased to $205.9 million from $166.1 million, reflecting greater medical affairs, pipeline, and drug-development investment.
- Net income attributable to Ionis stockholders shifted to a loss of $41.8 million from income of $5.9 million for the first six months.
- Ionis adopted ASC Topic 606 retrospectively on January 1, 2018. The adoption reduced cumulative revenue recognized through December 31, 2017 by $53.6 million and increased revised deferred revenue at that date by $54.2 million. Prior-period figures in the filing are marked “as revised.”
- Akcea's ownership structure changed in April 2018. Ionis increased its ownership to approximately 75% through receipt and purchase of Akcea shares, while third-party ownership generated a $25.6 million reduction to Ionis's share of the six-month consolidated loss.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects operating expenses to continue increasing during 2018 as TEGSEDI launches and WAYLIVRA commercialization activities continue. Akcea's commercial and medical-affairs infrastructure is being expanded.
- Revenue from the 2018 Biogen collaboration is being recognized over the estimated performance period through June 2028. Management expects quarterly amortization from this collaboration to be nearly $14 million beginning in Q3 2018.
- TEGSEDI received European marketing authorization in July 2018, with an expected initial German launch after the summer holidays. The FDA PDUFA date for U.S. TEGSEDI approval was October 6, 2018.
- WAYLIVRA had an FDA advisory committee vote in favor of approval, with an FDA PDUFA date of August 30, 2018. The filing states that launch preparations were underway, subject to approval.
- SPINRAZA remained the principal commercial revenue driver. Biogen reported second-quarter global SPINRAZA sales of $423 million, up 250% from the prior-year quarter, according to management commentary.
- Key risks include regulatory approval and commercialization risk for TEGSEDI and WAYLIVRA, platelet and renal safety monitoring requirements, competition, reimbursement and pricing pressure, reliance on Biogen and other partners, clinical-trial failure, manufacturing and supply constraints, intellectual-property disputes, and continued operating losses.
- Ionis reported an adverse appellate ruling in the Gilead patent litigation in April 2018. The company and Merck requested additional time to petition the Supreme Court, with a September 21, 2018 deadline. The filing does not indicate a recognized recovery from the jury's prior damages determination.
- The company had $151.8 million of unrecognized stock-based compensation related to stock options and $33.6 million related to restricted stock units at June 30, 2018.
Important Facts for Investors to Verify
- Whether TEGSEDI and WAYLIVRA received the expected U.S. and other-market approvals and achieved commercially meaningful launches.
- Subsequent SPINRAZA sales, royalty rates, reimbursement expansion, and the sustainability of royalty growth.
- Akcea's product revenue, launch costs, cash burn, and Ionis's effective ownership percentage after subsequent share issuances.
- The timing and amount of revenue recognized from the Biogen collaboration, including the substantial deferred revenue balance and long performance period.
- Clinical and regulatory developments, particularly platelet and renal safety monitoring for TEGSEDI and WAYLIVRA.
- Future milestone, licensing, and collaboration payments, which are highly variable and not assured.
- The status and potential financial effect of the Gilead patent litigation and any Supreme Court proceedings.
- The maturity, conversion, and potential dilution implications of the $685.5 million principal amount of convertible notes due in 2021.