Business Context and Reporting Period
Isis Pharmaceuticals, Inc. filed its Form 10-K for the fiscal year ended December 31, 2010. The company develops antisense and RNA-based therapeutics and funds operations primarily through pharmaceutical collaborations, licensing fees, milestones, royalties and equity or debt financing. The filing also reports fourth-quarter 2010 results.
The lead program was mipomersen, partnered with Genzyme, which completed four positive Phase 3 studies and was expected to support U.S. and European marketing applications in 2011. Isis reported 24 drugs in development, with partners developing 11 of them. Regulus Therapeutics, in which Isis held 46%, was deconsolidated beginning in 2010 and accounted for under the equity method.
Financial Results and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $108.5 million | $121.6 million | Down 10.8% |
| Research and development expense | $145.2 million | $134.6 million | Up 7.8% |
| General and administrative expense | $11.7 million | $14.5 million | Down 19.6% |
| Operating loss | $48.4 million | $27.5 million | Loss increased |
| Net loss from continuing operations | $61.3 million | $35.0 million | Loss increased |
| Net loss attributable to common stockholders | $61.3 million | Net income of $155.1 million | Prior year included Ibis sale gain |
| Basic and diluted loss per share | $0.62 | Income of $1.58 | Unfavorable change |
| Cash flow from operating activities | $(63.6) million | $(108.4) million | Lower cash use |
Calculated margins were approximately 54.5% operating expense as a percentage of revenue, an operating margin of (44.6%), and a net margin of (56.5%) in 2010. Revenue consisted primarily of collaborative research and development revenue of $102.9 million and licensing and royalty revenue of $5.6 million.
Revenue concentration remained high: Genzyme-related revenue represented 62% of 2010 revenue, and Bristol-Myers Squibb-related revenue represented 11%. The filing states that Genzyme-related revenue included amortization of upfront consideration and the premium on Genzyme’s equity investment, rather than product sales.
At December 31, 2010, cash and cash equivalents were $70.1 million and short-term investments were $402.3 million, for total cash, cash equivalents and short-term investments of $472.4 million. Working capital was $377.2 million, down from $484.7 million. Total assets were $550.5 million and stockholders’ equity was $244.5 million.
Total debt and other obligations were approximately $144.3 million, including $132.9 million carrying value of 2 5/8% convertible subordinated notes, $9.4 million of equipment financing and $10.1 million of long-term financing obligation. The notes have $162.5 million principal outstanding, mature in 2027, are convertible into approximately 11.1 million shares at $14.63 per share, and may be put by holders beginning in 2014. Total contractual obligations were $222.2 million, excluding certain purchase orders and the estimated maximum future payments of $154.8 million under the new research-facility lease.
Fourth-quarter 2010 revenue was $26.4 million, operating expenses were $42.3 million, operating loss was $15.9 million, and net loss attributable to common stockholders was $14.0 million, or $0.14 per share.
Material Changes Versus the Prior Comparable Period
- Revenue declined $13.1 million, primarily because OMJP revenue ended in 2009, 2009 included $10 million of OncoGenex sublicensing revenue, and Regulus revenue was no longer consolidated.
- Research and development spending increased $10.5 million, reflecting mipomersen regulatory preparation, pipeline expansion and development of generation 2.5 chemistry.
- Operating loss widened by $20.8 million, while the net loss from continuing operations increased by $26.3 million.
- 2010 results did not include the $185.6 million after-tax gain from the Ibis sale that drove 2009 net income.
- Operating cash use improved to $63.6 million from $108.4 million, but cash and short-term investments declined by $102.0 million, partly because Regulus’ $30.7 million of cash was no longer consolidated.
- Regulus was deconsolidated under new variable-interest-entity accounting guidance. Isis recorded $2.2 million of equity-method loss, partly offset by a $4.7 million gain from sanofi-aventis’ investment in Regulus.
- Isis entered a GSK alliance worth up to nearly $1.5 billion, receiving $35 million upfront and a $5 million milestone payment. Regulus also entered a sanofi-aventis alliance potentially worth more than $750 million.
- Bristol-Myers Squibb discontinued BMS-PCSK9 Rx after stopping its Phase 1 study, but extended the collaboration to seek a more potent PCSK9 drug.
- Alnylam terminated the ssRNAi research program; Isis recognized $4.9 million of previously deferred revenue and lost associated future ssRNAi milestones, royalties and sublicensing rights under that agreement.
Guidance, Outlook, Risks and Unusual Items
- Genzyme planned to file for mipomersen approval in the United States and Europe in 2011, initially targeting homozygous familial hypercholesterolemia; the European filing could also include severe heterozygous familial hypercholesterolemia.
- Isis expected to contribute up to the first $125 million of mipomersen development costs, anticipated to be reached in 2011, after which development costs would be shared equally with Genzyme until the program becomes profitable.
- Management expected continued revenue amortization from the GSK and Genzyme collaborations, but revenue remained dependent on the timing and achievement of milestones, licensing events and partner performance.
- Clinical and regulatory approval remained uncertain. Mipomersen adverse events included injection-site reactions, flu-like symptoms, elevated liver transaminases and moderate median increases in liver fat. Competition included Aegerion’s lomitapide and other lipid-lowering therapies.
- The company had an accumulated deficit of approximately $756.7 million and stated that it could incur additional losses and require additional funding if commercialization, licensing or partnering objectives were not achieved.
- Unusual 2010 items included a $4.9 million ssRNAi revenue acceleration, a $4.7 million Regulus valuation gain, a $713,000 net investment loss, including an $880,000 ATL impairment, and $7.8 million of non-cash amortization of the convertible-debt discount.
- The company was defending litigation brought by Bruker Daltonics related to Ibis manufacturing and commercialization obligations. The filing stated that no loss was recorded because the amount and outcome could not be reasonably predicted.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2010.
Most Important Facts to Verify
- Whether mipomersen obtained regulatory approval, the approved label and any required post-approval studies or restrictions.
- Actual Genzyme and Isis development spending, commercialization responsibilities, manufacturing supply arrangements and profit-sharing economics.
- The sustainability and composition of collaboration revenue, particularly the 62% concentration in Genzyme-related revenue and the amount of deferred revenue remaining.
- Cash burn, investment maturities, debt put dates, potential conversion dilution and the company’s need for additional financing.
- The effect of Regulus’ deconsolidation, including the 46% ownership interest, equity-method losses and guarantees of Regulus obligations.
- The status and financial exposure of the Bruker litigation and other partner or licensing disputes.
- Whether clinical results for the broader pipeline translate into regulatory approvals and commercially meaningful royalty, milestone or profit-sharing revenue.