Business Context and Reporting Period
Isis Pharmaceuticals, Inc. (now Ionis Pharmaceuticals, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2012. The company operated as a single-segment antisense drug discovery and development business, funded primarily through collaboration agreements, licensing and royalty revenue, equity issuances and debt.
Key programs included KYNAMRO, partnered with Genzyme, and ISIS-SMN Rx, partnered with Biogen Idec for spinal muscular atrophy. The company reported 100.2 million common shares outstanding as of May 3, 2012.
Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $23.2 million | $21.1 million | Up 9.9% |
| Research and development expense | $38.7 million | $34.2 million | Up 13.1% |
| General and administrative expense | $3.0 million | $3.0 million | Essentially flat |
| Loss from operations | $(18.5) million | $(16.1) million | Worsened $2.3 million |
| Net loss | $(24.0) million | $(20.0) million | Worsened $4.0 million |
| Net loss per share | $(0.24) | $(0.20) | Worsened $0.04 |
| Operating margin | (79.4%) | (76.2%) | Down 3.2 percentage points |
| Net margin | (103.3%) | (94.5%) | Down 8.8 percentage points |
| Cash flow from operations | $(6.7) million | $(39.8) million | Improved $33.1 million |
Research and development revenue under collaborations increased to $21.8 million from $20.0 million, primarily reflecting amortization of the $29 million Biogen Idec upfront payment. Licensing and royalty revenue increased to $1.4 million from $1.1 million.
At March 31, 2012, cash and cash equivalents were $56.4 million, short-term investments were $277.6 million, and total cash, cash equivalents and short-term investments were approximately $333.9 million. Working capital was $285.9 million, compared with $284.0 million at December 31, 2011.
Total assets were $470.8 million and stockholders’ equity was $150.9 million. The accumulated deficit was $865.5 million. Debt and other obligations totaled approximately $220.3 million, including $143.7 million carrying value of the 2 5/8 percent convertible subordinated notes and a $70.0 million long-term financing liability related to the leased facility. Contractual obligations totaled $350.1 million, including $166.8 million of principal and interest on the convertible notes and $148.1 million of new facility rent payments.
Investing activities used $0.5 million, while financing activities used $1.9 million. Cash and cash equivalents declined by $9.1 million during the quarter, ending at $56.4 million. The company held 93 percent of its available-for-sale debt securities with maturities of less than two years.
Material Changes Versus the Prior Comparable Period
- Revenue increased $2.1 million, driven mainly by the Biogen Idec collaboration.
- Total operating expenses increased $4.4 million, primarily because of higher costs for the maturing drug pipeline.
- Non-cash interest expense increased, primarily because of the long-term liability associated with the new facility, contributing to the larger net loss.
- Operating cash burn improved materially, from $39.8 million to $6.7 million, mainly reflecting collaboration-related cash receipts, including the Biogen Idec upfront payment.
- KYNAMRO development expense decreased as Genzyme and Isis shared development costs equally after Isis satisfied its $125 million development funding obligation in 2011.
- Interest income declined to $0.6 million from $0.7 million because of lower average invested balances and market yields.
- The company began granting restricted stock units in January 2012; total stock-based compensation expense was $2.3 million, down from $2.7 million.
Guidance, Outlook, Commentary and Risks
Management expected 2012 antisense drug discovery costs to be modestly higher than in 2011. Development costs were expected to fluctuate with clinical-stage progression and the allocation of resources across programs. The filing does not provide a formal full-year revenue or earnings forecast.
Genzyme submitted the U.S. marketing application for KYNAMRO in March 2012 for homozygous familial hypercholesterolemia, with European review also underway. Management anticipated FDA acceptance of the filing in the second quarter of 2012, which would result in a $25 million milestone if achieved. This was a forward-looking expectation and not a guarantee.
The January 2012 Biogen Idec agreement provided a $29 million upfront payment, up to $45 million in pre-license development milestones, up to $150 million in regulatory milestones, and potential double-digit royalties. The upfront payment was being recognized over an estimated four-year performance period; $27.2 million remained deferred at March 31, 2012.
Principal risks include failure or delay in regulatory approval of KYNAMRO and other drugs, clinical-trial failures, dependence on Genzyme and other partners, uncertain market acceptance and reimbursement, manufacturing and supply constraints, intellectual-property litigation, reliance on additional partnering or financing, significant accumulated losses, and volatility in biotechnology markets.
The company was pursuing patent litigation against Santaris Pharma and was also a co-plaintiff with Alnylam in litigation against Tekmira concerning certain technology. The filing does not provide a clear estimate of any potential financial exposure or recovery from these matters.
Management concluded that disclosure controls and procedures were effective as of March 31, 2012, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether KYNAMRO received FDA acceptance and ultimately obtained U.S. and European marketing approval.
- Whether the expected $25 million KYNAMRO milestone was achieved and recognized.
- The pace and cost of ISIS-SMN Rx development and whether Biogen Idec exercised its licensing option.
- The company’s ability to sustain collaboration revenue and convert deferred revenue into cash-generating milestones or royalties.
- Future operating cash burn relative to approximately $333.9 million of cash, cash equivalents and short-term investments.
- Required payments, repurchase rights and potential dilution associated with the convertible notes, including approximately 11.1 million potentially issuable shares.
- Outcomes and costs of the Santaris and Alnylam-related patent litigation.
- Clinical, regulatory, manufacturing and commercialization risks affecting KYNAMRO and the broader pipeline.