Ionis Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Ionis develops RNA-targeted therapeutics and reports two segments: Ionis Core and majority-owned Akcea Therapeutics. Akcea completed its initial public offering in July 2017; Ionis retained approximately 68% ownership and continued consolidating Akcea, with a noncontrolling interest recognized thereafter.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $120.9 million | $110.9 million | $335.4 million | $186.3 million |
| Operating expenses | $107.0 million | $94.8 million | $309.1 million | $273.7 million |
| Income (loss) from operations | $13.9 million | $16.1 million | $26.2 million | $(87.5) million |
| Net income (loss) | $(4.9) million | $7.4 million | $(12.6) million | $(112.4) million |
| Net income (loss) attributable to Ionis stockholders | $(1.0) million | $7.4 million | $(8.7) million | $(112.4) million |
| Basic and diluted EPS | $(0.00) | $0.06 | $0.02 | $(0.93) |
Revenue increased approximately 9% year over year in Q3 and 80% in the first nine months. The nine-month operating margin was approximately 7.8%, compared with negative 47.0% in 2016; the Q3 operating margin was approximately 11.5%, compared with 14.5% in 2016. Revenue included SPINRAZA royalties of $32.9 million in Q3 and $60.5 million year to date, plus $269.9 million of nine-month research and development revenue under collaborations.
- Biogen generated 75% of Q3 revenue and 57% of nine-month revenue. Biogen revenue included $90 million of SPINRAZA milestones and $15 million for validating two neurological disease targets during the first nine months.
- Other significant collaboration revenue included Bayer revenue of $67.9 million year to date and Novartis revenue of $37.2 million year to date.
- Research, development and patent expense was $80.2 million in Q3 and $246.4 million year to date, including stock-based compensation of $16.2 million and $48.4 million, respectively.
- SG&A expense rose to $26.8 million in Q3 and $62.8 million year to date, primarily reflecting preparation to commercialize volanesorsen and inotersen, as well as SPINRAZA-related in-licensing fees.
- Stock-based compensation totaled $21.5 million in Q3 and $63.6 million year to date.
Net cash provided by operating activities was $153.7 million for the first nine months of 2017, compared with $85.3 million of cash used in 2016. Investing activities used $304.1 million, principally reflecting purchases of short-term investments and $26.5 million of capital expenditures. Financing activities provided $224.8 million, including $110.4 million from Akcea’s IPO, $71.7 million from the Novartis purchase of Ionis stock, $50.0 million from Novartis’s Akcea private placement, and $59.8 million of mortgage debt.
| Balance sheet metric | September 30, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $159.2 million | $84.7 million |
| Short-term investments | $851.6 million | $580.5 million |
| Cash, cash equivalents and short-term investments | Approximately $1.0 billion | $665.2 million |
| Working capital | $933.5 million | $664.1 million |
| Total stockholders’ equity | $397.7 million | $99.6 million |
| Total debt and other obligations | $758.5 million | $774.1 million |
Debt included $685.5 million principal amount of 1% convertible senior notes due 2021, $12.5 million outstanding under a revolving credit facility, and $60.4 million of building mortgages due in 2027. The company reported compliance with all credit facility covenants. Contractual obligations totaled $816.9 million, including $716.5 million of convertible-note principal and interest obligations.
Material changes versus the prior comparable period
- SPINRAZA began contributing commercial royalties in 2017, replacing the absence of such revenue in 2016.
- Nine-month revenue increased $149.1 million, driven by SPINRAZA royalties, Biogen milestones, the Bayer license amendment, and the Novartis collaboration.
- Nine-month net loss narrowed by $99.8 million, although Q3 moved from net income of $7.4 million to a net loss of $4.9 million.
- Akcea’s IPO reduced Ionis’s ownership to approximately 68% and created a $3.9 million Q3 net loss attributable to noncontrolling interests.
- Ionis purchased its primary research and development and manufacturing facilities for $79.4 million and $14.0 million, respectively. The transaction generated a noncash $7.7 million loss on extinguishment of the prior financing liability.
- Operating expenses increased 13% in Q3 and 13% year to date, led by commercialization preparation and higher Akcea expenses. Akcea’s year-to-date expenses also included a $48.4 million one-time sublicensing expense related to Novartis.
Guidance, outlook, commentary and risks
- Management projected that fourth-quarter 2017 operating expenses would increase from Q3 levels, primarily because of launch preparation for inotersen and volanesorsen.
- Akcea and Ionis filed for marketing authorization for volanesorsen in the U.S., EU and Canada. Ionis subsequently filed for inotersen in the U.S. and EU and indicated it was preparing for a potential 2018 launch if approved.
- GSK declined options on inotersen and IONIS-FB-LRx; Ionis stated it would continue advancing both programs independently.
- Revenue remains dependent on collaboration payments, milestones, royalties and partner performance. Timing and amount of collaboration revenue can fluctuate materially.
- Biogen represented a majority of revenue, and one significant partner represented approximately 94% of contracts receivable at September 30, 2017, creating concentration risk.
- Key operating risks include regulatory approval, clinical efficacy and safety, manufacturing capacity, reimbursement and market acceptance for SPINRAZA, volanesorsen and inotersen. Volanesorsen may require platelet monitoring, and inotersen may require renal monitoring.
- The company had an accumulated deficit of approximately $1.2 billion and cautioned that it may incur additional operating losses. Future funding could require additional equity, debt, refinancing, or collaboration transactions.
- Ionis and Merck continued patent litigation with Gilead concerning sofosbuvir. The jury previously upheld asserted claims and awarded four percent of $5 billion in past sales, but the trial court found the patents unenforceable under unclean hands; appeals were pending.
- Ionis planned to adopt the new revenue-recognition standard on January 1, 2018 using the full retrospective method. The overall effect had not yet been finalized.
Most important facts for investors to verify
- Whether SPINRAZA sales, royalties and geographic approvals continue to expand and how much revenue is recurring versus milestone-related.
- The regulatory outcomes, labeling requirements, launch timing and commercial uptake for volanesorsen and inotersen.
- The effect of Akcea’s 68% ownership structure, noncontrolling interest, cash needs and commercialization spending on Ionis’s results.
- The company’s ability to sustain approximately $1.0 billion of liquidity while funding clinical development, manufacturing and commercial launches.
- Exposure to the 2021 convertible notes, mortgage debt, potential dilution of approximately 10.3 million shares, and other contractual obligations.
- The outcome and potential financial impact of the Gilead patent appeal and other intellectual-property matters.
- The eventual retrospective impact of adopting the new revenue-recognition standard on collaboration revenue, deferred revenue and prior-period results.