IONIS PHARMACEUTICALS INC quarterly report, Q2 FY2017

Business Context and Reporting Period

Ionis Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company develops RNA-targeted therapeutics through its Ionis Core business and consolidated subsidiary Akcea Therapeutics. Key programs included SPINRAZA, volanesorsen, inotersen, IONIS-FXI and Akcea’s cardiometabolic pipeline.

SPINRAZA had been approved in the United States and Europe, with approvals in Japan and Canada occurring after quarter-end. Akcea completed an initial public offering in July 2017; Ionis retained approximately 68% ownership and expected to continue consolidating Akcea.

Financial Performance and Liquidity

Metric	Three Months Ended June 30	Six Months Ended June 30
Total revenue	$104.2 million, versus $38.5 million in 2016	$214.5 million, versus $75.3 million in 2016
Operating expenses	$105.8 million, versus $87.4 million	$202.1 million, versus $178.9 million
Income (loss) from operations	$(1.7) million, versus $(48.9) million	$12.3 million, versus $(103.6) million
Net loss	$(11.2) million, or $(0.09) per share	$(7.7) million, or $(0.06) per share
Prior-year net loss	$(56.9) million, or $(0.47) per share	$(119.8) million, or $(0.99) per share

Commercial revenue was $22.9 million in the second quarter and $31.7 million for the first half, including SPINRAZA royalties of $22.4 million and $27.6 million, respectively.
Research and development revenue under collaborative agreements was $81.2 million in the second quarter and $182.8 million for the first half. First-half revenue included $66.7 million from Bayer, $57.0 million of Biogen milestones, $52.4 million from amortization of upfront fees and $6.7 million primarily from partner services.
Operating expenses increased primarily because Akcea was building infrastructure to commercialize volanesorsen and Ionis incurred fees under SPINRAZA-related in-licensing arrangements. First-half stock-based compensation was $42.2 million, compared with $39.4 million in 2016.
Cash provided by operating activities was $125.0 million for the first half of 2017, compared with cash used of $109.6 million in the prior-year period. Investing activities used $154.0 million, primarily for purchases of short-term investments, while financing activities provided $77.3 million.
Cash and cash equivalents were $133.0 million at June 30, 2017. Cash, cash equivalents and short-term investments totaled $855.7 million, compared with $665.2 million at December 31, 2016.
Working capital was $772.6 million, compared with $664.1 million at year-end 2016. Total debt and other obligations were $773.2 million, compared with $774.1 million at December 31, 2016.
The company had $685.5 million of principal outstanding under 1% convertible senior notes maturing in 2021, with a conversion price of $66.81 per share, and $12.5 million outstanding under a revolving credit facility. The company was in compliance with its credit facility covenants.

Material Changes Versus the Prior Comparable Period

Revenue increased substantially due to the launch of SPINRAZA royalties, Biogen milestone payments, the Bayer amendment and the Novartis collaboration.
First-half operating results improved from a $103.6 million loss to $12.3 million of operating income, and the net loss narrowed from $119.8 million to $7.7 million.
Biogen represented 76% of second-quarter revenue and 46% of first-half revenue, compared with 25% and 41%, respectively, in the prior-year periods. Bayer represented 31% of first-half revenue, and Novartis represented 11%.
Akcea’s first-half operating expenses increased to $94.9 million from $30.8 million, including a $48.4 million one-time sublicensing expense related to the Novartis collaboration, $33.4 million of which was non-cash.
Deferred contract revenue increased to $211.7 million at June 30, 2017 from $142.5 million at December 31, 2016, reflecting payments received before revenue recognition.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management expected selling, general and administrative expenses to continue increasing as Akcea prepared for a potential global volanesorsen launch and as SPINRAZA-related in-licensing fees continued.
Akcea filed for European marketing authorization for volanesorsen in July 2017 and planned to file in the United States and Canada in September 2017. Ionis and GSK were preparing to file for inotersen marketing authorization in the United States and Europe by year-end 2017.
Ionis reported positive Phase 3 results for volanesorsen in familial chylomicronemia syndrome and inotersen in hereditary transthyretin amyloidosis; regulatory approval remained uncertain.
In July 2017, Akcea raised $193.8 million in gross IPO proceeds, including a $50 million Novartis private placement, and received $182.4 million of net proceeds. Ionis invested $25.0 million and retained approximately 68% ownership.
Ionis purchased its primary research and development and manufacturing buildings for $79.4 million and $14.0 million, respectively, and obtained mortgages of approximately $51.3 million and $9.1 million. The transactions were expected to reduce future rent and interest costs but were to be recorded in the third quarter.
The company’s revenue is highly dependent on collaboration partners, particularly Biogen, and varies substantially with the timing of milestones, license fees, royalties and upfront-payment amortization.
Key risks include clinical and regulatory failure, adverse safety findings, limited market acceptance or reimbursement, manufacturing constraints, competition, dependence on Biogen and other partners, patent disputes, future financing needs and stock-price volatility.
The Gilead patent litigation remained pending on appeal. A prior jury awarded Ionis and Merck damages based on sofosbuvir sales, but the district court ruled the patents unenforceable under the doctrine of unclean hands; the appeal was ongoing.
The company planned to adopt new revenue-recognition and financial-instrument accounting standards on January 1, 2018 and had not yet determined their full impact.
Management concluded that disclosure controls and procedures were effective as of June 30, 2017, with no material change in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Whether SPINRAZA royalty growth and international launches can offset the volatility of milestone and collaboration revenue.
The timing and outcome of regulatory submissions and approvals for volanesorsen and inotersen, including safety and monitoring requirements.
Akcea’s post-IPO cash usage, commercialization spending and the effect of its approximately 68% ownership on Ionis’s future consolidated results.
The sustainability of operating income after excluding one-time collaboration revenue and considering rising Akcea and SPINRAZA-related expenses.
Biogen’s continued commercialization performance, manufacturing capacity and commitment to SPINRAZA.
The company’s substantial convertible debt, potential issuance of approximately 10.3 million shares upon conversion, and future financing requirements.
The outcome and potential financial effect of the Gilead patent appeal.