Business Context and Reporting Period
Isis Pharmaceuticals, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company operated as a single-segment antisense drug discovery and development business, with a broad pipeline of 31 drugs and partnerships with major pharmaceutical companies.
KYNAMRO (mipomersen) was approved by the FDA in January 2013 for homozygous familial hypercholesterolemia and was commercialized by Genzyme, a Sanofi company. Key pipeline programs included ISIS-APOCIII Rx, ISIS-SMN Rx and ISIS-TTR Rx.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $147.3 million | $102.0 million | +44% |
| Research and development revenue | $144.2 million | $96.4 million | +50% |
| Licensing and royalty revenue | $3.1 million | $5.6 million | -45% |
| Operating expenses | $199.0 million | $171.0 million | +16% |
| Loss from operations | $(51.7) million | $(68.9) million | Improved |
| Net loss | $(60.6) million | $(65.5) million | Improved |
| Basic and diluted loss per share | $(0.55) | $(0.65) | Improved |
| Net cash provided by operating activities | $63.5 million | $1.9 million | Improved |
Revenue was driven primarily by partner milestones and upfront-fee amortization. The company recognized $83 million of milestone and licensing revenue, including $25 million from Genzyme for KYNAMRO FDA approval, $26.5 million from GSK, $17 million from Biogen Idec, $10 million from AstraZeneca and $3.5 million from Xenon.
Operating expenses increased as the pipeline advanced into later-stage clinical development. Research, development and patent expenses were $184.0 million, including $174.4 million excluding non-cash equity compensation. The 2013 operating margin was approximately negative 35%, and the net margin was approximately negative 41%.
At December 31, 2013, cash, cash equivalents and short-term investments totaled $656.8 million, compared with $374.4 million in 2012. Working capital was $637.7 million, compared with $349.1 million. Cash flow benefited from $225 million of partner payments, $173.3 million of net proceeds from a common-stock offering and $63.0 million from equity awards.
Total debt and other obligations were approximately $283.5 million. The principal debt was $201.3 million of 2.75% convertible senior notes due 2019, with a carrying value of $150.3 million. Contractual obligations totaled $408.3 million, including convertible notes, facility rent, equipment financing and operating leases.
Fourth-Quarter 2013 Results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Revenue | $42.2 million | $19.9 million |
| Operating expenses | $62.1 million | $46.0 million |
| Loss from operations | $(19.9) million | $(26.1) million |
| Net loss | $(24.3) million | $(2.6) million |
| Loss per share | $(0.21) | $(0.03) |
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because of milestone payments, including the KYNAMRO approval milestone and payments from GSK, Biogen Idec, AstraZeneca and Xenon.
- Research and development spending increased as ISIS-APOCIII Rx and ISIS-SMN Rx advanced toward Phase 3 and other clinical programs expanded.
- Operating loss and net loss improved for the full year despite higher spending, but fourth-quarter net loss increased materially versus the prior-year quarter.
- The company completed a common-stock offering that generated $173.3 million of net proceeds and issued additional shares through employee equity exercises.
- Cash and short-term investments increased by $282.3 million year over year, while stockholders’ equity increased to $378.4 million from $182.8 million.
- The company recorded a $6.4 million charge primarily for patent and intangible-asset write-downs as it restructured its patent portfolio.
- Regulus was accounted for at fair value; its carrying value increased to $52.1 million at year-end, but the $18.4 million IPO-related gain recognized in 2012 did not recur.
Guidance, Outlook, Risks and Unusual Items
- Management planned to initiate Phase 3 development of ISIS-APOCIII Rx in 2014, with a potential 2016 regulatory filing.
- Management planned Phase 3 studies for ISIS-SMN Rx in infants and children during 2014 and expected continued advancement of ISIS-TTR Rx in Phase 3 development.
- The company expected development expenses to increase as programs moved into larger and longer Phase 3 studies.
- Revenue remained dependent on the timing and achievement of partner milestones, licensing payments, upfront-fee amortization and royalties; future milestone amounts were not assured.
- KYNAMRO carried a boxed warning for hepatic toxicity and was distributed in the United States under a Risk Evaluation and Mitigation Strategy. Market acceptance, reimbursement, pricing and competition from lomitapide were significant commercial risks.
- The European Medicines Agency’s CHMP maintained a negative opinion on KYNAMRO for HoFH in March 2013.
- Material development risks included clinical-trial failure or delay, regulatory rejection, manufacturing constraints, partner termination or reduced commitment, patent disputes and dependence on third-party manufacturers and clinical research organizations.
- Isis and Santaris were engaged in patent litigation, and Isis and Merck were defending patent claims involving Gilead’s sofosbuvir. Management stated that no loss was probable and estimable as of December 31, 2013.
- Xenon discontinued XEN701 in the first quarter of 2014; Isis expected to regain the related development rights.
Most Important Facts to Verify
- Whether KYNAMRO prescriptions, treated patients, reimbursement and sales improved sufficiently to generate meaningful profit-share revenue.
- The timing, enrollment, safety and efficacy results of the planned Phase 3 programs for ISIS-APOCIII Rx and ISIS-SMN Rx and the ongoing Phase 3 program for ISIS-TTR Rx.
- The sustainability of revenue, given that a significant portion came from nonrecurring partner milestones and upfront payments.
- Cash-burn trends and whether the $656.8 million liquidity balance is sufficient to fund expanded Phase 3 development and other obligations.
- The potential dilution and settlement terms associated with the convertible notes, which could convert into approximately 12.1 million shares.
- Progress and potential exposure in the Santaris and Gilead patent litigation.
- The effect of KYNAMRO’s boxed warning, REMS requirements, adverse-event profile and competition from oral therapies.