IONIS PHARMACEUTICALS INC quarterly report, Q3 FY2010

Isis Pharmaceuticals, Inc. Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2010. The filing was submitted November 4, 2010. The company was then named Isis Pharmaceuticals, Inc.; it later became Ionis Pharmaceuticals, Inc. The business focused on antisense drug discovery and development, collaborative research, licensing and royalties, with Regulus Therapeutics reported as an equity-method investment.

Financial Performance and Position

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Total revenue	$28.6 million	$26.8 million	$82.1 million	$89.3 million
Operating expenses	$37.6 million	$37.2 million	$114.6 million	$105.2 million
Loss from operations	$(8.9) million	$(10.4) million	$(32.5) million	$(15.9) million
Net loss attributable to common stockholders	$(12.5) million	$(11.6) million	$(47.3) million	$171.9 million
Loss per share	$(0.13)	$(0.12)	$(0.48)	$1.75
Operating cash flow	Not separately provided	Not separately provided	$(38.1) million	$(77.1) million

Approximate operating margins were negative 31% for Q3 2010 and negative 40% for the first nine months of 2010. Net margins were approximately negative 44% and negative 58%, respectively.
Research and development revenue was $27.8 million in Q3 and $77.5 million for the first nine months. Licensing and royalty revenue was $0.8 million and $4.6 million, respectively.
Research and development expense increased to $34.7 million in Q3 and $105.8 million for the first nine months, primarily reflecting expanded development activity, including mipomersen and the broader pipeline.
At September 30, 2010, cash and cash equivalents were $100.1 million and short-term investments were $397.8 million, for total cash, cash equivalents and short-term investments of approximately $497.9 million.
Working capital was $406.6 million, compared with $484.7 million at December 31, 2009. Total assets were $575.9 million and stockholders’ equity was $253.7 million.
Total debt and other obligations were approximately $140.3 million. The company had $162.5 million principal amount of 2 5/8% convertible subordinated notes, maturing in 2027, with a carrying value of $130.9 million at September 30, 2010.
The company held approximately 83% of its available-for-sale securities with maturities of one year or less.

Material Changes Versus the Prior Comparable Period

First-nine-month revenue declined 8% from 2009, despite new GSK-related revenue and milestone payments. The decline primarily reflected the completion of OMJP upfront-fee amortization and the removal of Regulus revenue following deconsolidation.
First-nine-month operating expenses increased approximately 9%, driven mainly by higher mipomersen and pipeline-development costs. Management expected operating expenses to increase further in the fourth quarter due to a broad Phase 2 program.
First-nine-month net loss increased substantially from $15.2 million attributable to common stockholders in 2009 to $47.3 million in 2010, excluding the prior-year benefit from the $187.2 million after-tax gain on the sale of Ibis Biosciences.
The company adopted new variable-interest-entity accounting guidance on January 1, 2010 and deconsolidated Regulus. Isis recognized $0.9 million of Regulus equity-method loss in Q3 and $6.4 million for the first nine months. It suspended recognition of $261,000 of additional Regulus losses at September 30, 2010.
Investing activities provided $30.9 million of cash in the first nine months, primarily because proceeds from sales and maturities of short-term investments exceeded purchases. Cash declined by $5.1 million during the period.
The company recorded a $1.2 million investment loss in the first nine months, including an $880,000 other-than-temporary impairment of its Antisense Therapeutics Limited investment and $349,000 of valuation allowances related to Excaliard and Achaogen.

Guidance, Outlook, Risks and Unusual Items

Management expected initial U.S. and European regulatory filings for mipomersen in the first half of 2011. Four planned Phase 3 studies had been completed, and the company reported positive LDL-C results in two studies. Reported adverse events included injection-site reactions, flu-like symptoms and generally similar liver-transaminase elevations.
In March 2010, Isis entered a GSK alliance covering up to six rare and serious disease programs. It received a $35 million upfront payment, recognized $8.5 million of related revenue during the first nine months, and recorded $31.5 million of related deferred revenue at September 30, 2010. Potential future payments were described as up to nearly $1.5 billion, plus royalties, subject to development and commercialization success.
Regulus entered alliances with sanofi-aventis and GSK. The sanofi-aventis alliance included a $25 million upfront payment and up to $750 million of potential milestones; the filing also disclosed a $10 million sanofi-aventis equity investment in Regulus in October 2010.
The company entered a 20-year lease for a planned 176,000-square-foot Carlsbad research facility, with rent expected to begin January 1, 2012. Estimated maximum potential payments over the initial lease term were $172 million. The land transaction was accounted for as a financing transaction, creating a $10.1 million long-term financing obligation.
Contractual obligations totaled approximately $219.5 million, including $177.4 million for convertible notes, $9.7 million for equipment financing, $30.8 million for operating leases and $1.6 million of other obligations.
Revenue was concentrated among a small number of partners: one partner represented 59% of Q3 revenue and 61% of nine-month revenue; a second represented 24% and 10%, respectively.
Material risks included clinical-trial failure or delay, regulatory nonapproval, adverse safety findings, dependence on collaboration partners, intellectual-property challenges, manufacturing capacity and compliance, future funding requirements, partner concentration, and continued operating losses.
A pending legal proceeding with Bruker Daltonics involved alleged breaches relating to the former Ibis T5000 business. Discovery was in an early stage, and the company stated that it could not predict or record a loss as of September 30, 2010.
Management stated that disclosure controls and procedures were effective as of September 30, 2010, with no material changes in internal control over financial reporting during the quarter.

Facts Investors Should Verify

Progress, regulatory submissions and safety data for mipomersen, including the timing and scope of the planned 2011 filings.
The sustainability and timing of collaboration revenue, milestones, deferred-revenue recognition and dependence on major partners.
Regulus’ cash needs, suspended losses, guarantees of its GSK notes and the effect of the deconsolidation and equity-method accounting.
Cash burn, future research and development spending, and whether approximately $497.9 million of cash and short-term investments remains sufficient for planned programs and obligations.
Terms and maturity risks associated with the $162.5 million convertible notes, including holder repurchase rights and potential dilution from conversion.
Financial exposure under the new BioMed facility lease and the estimated $172 million maximum future payment obligation.
Resolution and potential liability of the Bruker litigation and any other intellectual-property or collaboration disputes.