Ionis Pharmaceuticals, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Ionis Pharmaceuticals is a biotechnology company developing RNA-targeted therapeutics through its Ionis Core and Akcea Therapeutics segments. The filing covers the three months ended March 31, 2017; interim financial statements are unaudited. SPINRAZA, marketed by Biogen for spinal muscular atrophy, generated the company’s first significant commercial royalty revenue.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $110.3 million | $36.9 million |
| Commercial revenue | $8.8 million | $1.7 million |
| SPINRAZA royalties | $5.2 million | None |
| R&D revenue under collaborations | $101.5 million | $35.2 million |
| Operating expenses | $96.3 million | $91.5 million |
| Income (loss) from operations | $14.0 million | $(54.7) million |
| Net income (loss) | $3.5 million | $(62.9) million |
| Basic and diluted earnings (loss) per share | $0.03 | $(0.52) |
| Net cash provided by operating activities | $122.7 million | $(75.8) million |
Revenue increased approximately 199% year over year, while operating expenses increased approximately 5%. Operating margin was approximately 12.7% and net margin was approximately 3.1%, compared with losses in the prior-year quarter. Operating expenses included $20.9 million of non-cash stock-based compensation.
At March 31, 2017, cash and cash equivalents were $114.2 million and short-term investments were $746.1 million, for total cash, cash equivalents and short-term investments of $860.3 million. Working capital was $791.8 million, compared with $664.1 million at December 31, 2016. Total assets were $1.084 billion and stockholders’ equity was $201.8 million.
Debt and other obligations totaled $773.1 million. The company had $508.4 million of carrying value for its 1% convertible senior notes, with $685.5 million of principal outstanding and a November 2021 maturity. It also had $12.5 million outstanding under a $30 million revolving credit facility, maturing in September 2019, and was in compliance with its covenants.
Material changes versus the prior comparable period
- Revenue increased primarily because of a $64.9 million Bayer license-related amount, increased collaboration revenue, the Novartis collaboration, and initial SPINRAZA royalties.
- Biogen revenue was $20.4 million, or 18% of total revenue, compared with $21.3 million, or 58%, in Q1 2016. Bayer revenue was $65.5 million, or 59% of total revenue, compared with $1.3 million, or 3%, in the prior-year quarter.
- Akcea’s operating expenses rose substantially, principally because of $48.4 million of sublicensing expense related to the Novartis collaboration, including $33.4 million that was non-cash.
- Research and development expenses excluding stock compensation were broadly flat at $66.5 million. Management expected R&D spending to decline as certain Phase 3 programs wind down, while selling, general and administrative expenses were expected to rise as Akcea prepared for commercialization.
- Operating cash flow improved by $198.4 million year over year, helped by partner receipts, changes in contracts receivable and deferred contract revenue.
Guidance, outlook, commentary, risks and unusual items
- Management expected SPINRAZA royalty revenue to increase as the launch progressed and as Biogen pursued additional international approvals. Biogen reported $47 million of SPINRAZA sales in Q1 2017 and received a positive European CHMP opinion in April 2017.
- Ionis and Akcea planned to seek marketing authorization for volanesorsen in the United States, Europe and Canada in the third quarter of 2017 following positive Phase 3 FCS data. The company planned to report Phase 3 IONIS-TTRRx data in the second quarter of 2017.
- In January 2017, Novartis paid $75 million under a collaboration with Akcea and purchased $100 million of Ionis common stock. Novartis is also required to purchase an additional $50 million of stock in the future, subject to the agreement’s conditions. The company recognized $9.6 million of Novartis-related revenue in Q1 and recorded $98.8 million of related deferred revenue.
- In February 2017, Bayer amended its agreement to advance IONIS-FXIRx and develop IONIS-FXI-LRx. Ionis recognized $64.9 million for the IONIS-FXI-LRx license in Q1. Bayer paid the related $75 million in April 2017, after the quarter ended. Ionis remains eligible for additional milestones and tiered royalties.
- Revenue is volatile because it depends heavily on the timing of partner upfront payments, license fees and milestones. One significant partner represented approximately 92% of contracts receivable at March 31, 2017.
- Key development and commercialization risks include failure to obtain regulatory approvals, adverse clinical results, thrombocytopenia and other safety issues for volanesorsen, limited market acceptance or reimbursement, dependence on Biogen and other partners, manufacturing constraints, intellectual-property disputes and the need for future financing.
- The Gilead patent litigation remained pending on appeal. A jury had found the patents valid and awarded Ionis and Merck 4% of $5 billion in past sofosbuvir sales, but the trial court ruled the patents unenforceable against Gilead; the appeal was pending.
- The company planned to adopt new revenue recognition and financial-instrument accounting guidance on January 1, 2018 and was still evaluating the effects and adoption method.
Important facts for investors to verify
- Whether SPINRAZA royalties continue to grow with international approvals and commercial uptake.
- The timing and outcome of volanesorsen and IONIS-TTRRx regulatory filings, clinical results and safety monitoring requirements.
- The sustainability of revenue after the large Bayer-related Q1 recognition and the extent to which future results depend on additional partner milestones.
- Novartis’s exercise of its options, the planned Akcea IPO and the required future $50 million stock purchase.
- The company’s ability to fund Akcea’s commercialization plans while carrying substantial convertible debt and an accumulated deficit of approximately $1.2 billion.
- The outcome of the Gilead patent appeal and the potential financial effect, which is not assured by the prior jury award.