Business context and reporting period
Isis Pharmaceuticals, Inc. reported its fiscal year ended December 31, 2011; the filing also provides unaudited fourth-quarter data. The company develops antisense medicines and relies primarily on pharmaceutical collaborations, license fees, milestones, royalties and research funding. Its lead program was KYNAMRO (mipomersen), partnered with Genzyme, a Sanofi company, and the company had 26 drugs in development. Regulus Therapeutics was accounted for under the equity method rather than consolidated beginning in 2010.
Key financial metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $99.1 million | $108.5 million | Down 8.7% |
| Research and development expense | $157.4 million | $145.2 million | Up 8.4% |
| Total operating expenses | $170.2 million | $156.8 million | Up 8.5% |
| Loss from operations | $71.1 million | $48.4 million | Loss increased |
| Net loss attributable to common stockholders | $84.8 million | $61.3 million | Loss increased |
| Basic and diluted loss per share | $0.85 | $0.62 | Loss increased |
| Net cash used in operating activities | $114.8 million | $63.6 million | Use increased |
FY 2011 operating margin was approximately negative 71.7% and net margin was approximately negative 85.6%. Revenue was highly concentrated: Genzyme contributed $72.3 million, or 73% of total revenue, and GSK contributed $17.7 million, or 18%.
At December 31, 2011, cash, cash equivalents and short-term investments totaled $343.7 million, versus $472.4 million a year earlier. Working capital was $284.0 million versus $377.2 million. Cash and cash equivalents alone were $65.5 million. Stockholders’ equity was $171.4 million, and accumulated deficit was $841.5 million.
Total long-term obligations and related current obligations were $218.8 million, including $141.4 million carrying value of 2 5/8% convertible subordinated notes, $69.9 million of financing liability for the leased facility and $5.3 million of equipment financing. Contractual obligations totaled $357.3 million, including $149.5 million of new facility rent payments and $171.1 million of convertible-note principal and interest payments.
Fourth-quarter 2011 revenue was $32.4 million, operating expenses were $51.0 million, operating loss was $18.6 million and net loss was $20.0 million, or $0.20 per share. Fourth-quarter results included a $4.4 million gain on the sale of the company’s Excaliard investment to Pfizer.
Material changes versus the prior comparable period
- Revenue declined primarily because of timing-related differences in milestone payments and reduced amortization of certain upfront fees. GSK revenue increased to $17.7 million from $10.3 million, but this was more than offset by lower Bristol-Myers Squibb and Alnylam revenue.
- Research and development spending increased as the pipeline matured and more programs entered larger or later-stage studies. KYNAMRO spending declined to $13.7 million from $25.8 million as the Phase 3 program neared completion, while spending on other antisense development products increased to $47.4 million from $29.9 million.
- Operating cash use increased to $114.8 million, and cash, cash equivalents and short-term investments declined by $128.7 million.
- Debt and related obligations increased, primarily because of the $59.8 million increase in the financing liability associated with the new facility and additional non-cash amortization of the convertible-note discount.
- Beginning in 2011, Regulus was no longer treated as an operating segment. Isis recorded $3.6 million of equity-method loss from Regulus, compared with $2.2 million in 2010.
- The company recognized a $4.2 million net gain on investments in 2011, compared with a $713,000 net loss in 2010, primarily reflecting the Excaliard transaction.
Guidance, outlook, risks and unusual items
Management expected operating and drug-development expenses to be moderately higher in 2012 as additional pipeline programs advanced, although KYNAMRO development costs would be shared equally with Genzyme beginning in 2012. Genzyme planned to submit the U.S. KYNAMRO application for homozygous familial hypercholesterolemia in the first quarter of 2012, seek priority review if available, and prepare for potential U.S. and European launches in 2012. These plans were forward-looking and depended on regulatory approval.
KYNAMRO’s Phase 3 studies showed substantial LDL-C reductions, but frequently observed adverse events included injection-site reactions, flu-like symptoms and elevated liver transaminases. Persistent ALT elevations above three times the upper limit of normal occurred in 8% of treated patients in the Phase 3 experience. Competition included apheresis, existing lipid-lowering therapy and Aegerion’s lomitapide.
In January 2012, after year-end, Isis entered a Biogen Idec alliance for ISIS-SMNRx for spinal muscular atrophy. The transaction included a $29 million upfront payment, up to $270 million in additional license and milestone payments and potential double-digit royalties. The payment was not FY 2011 revenue.
Key risks included failure or delay in regulatory approval, clinical-trial setbacks, adverse safety findings, dependence on Genzyme and other partners, manufacturing and supply constraints, market acceptance and reimbursement, continued operating losses, reliance on additional collaboration or financing proceeds, patent challenges and litigation. Isis had filed a patent-infringement action against Santaris; Santaris denied infringement and sought summary judgment. Isis and Alnylam were also plaintiffs in Alnylam’s patent action against Tekmira.
The company had only one historically approved product, Vitravene, which its partner no longer marketed. Revenue recognition depended materially on estimated performance periods for collaboration agreements, including the remaining amortization of Genzyme-related deferred revenue through June 2012.
Investor verification checklist
- Verify the regulatory status, labeling, safety profile and commercial launch timing of KYNAMRO, including the impact of liver-enzyme and liver-fat findings.
- Reconcile the concentration and timing of collaboration revenue, particularly Genzyme and GSK payments, deferred revenue balances and milestone assumptions.
- Assess whether $343.7 million of liquidity is sufficient against operating cash use of $114.8 million, planned development spending and $357.3 million of contractual obligations.
- Review the maturity and potential repurchase or conversion of the 2 5/8% convertible notes, including the February 2014 holder repurchase date and approximately 11.1 million potential shares.
- Monitor partner commitment, termination rights and cost-sharing obligations under the Genzyme, GSK and Biogen Idec arrangements.
- Evaluate patent litigation, patent expiration and challenges to the antisense technology estate.
- Confirm the accounting effects of deconsolidating Regulus, the $4.4 million Excaliard investment gain and other non-cash items affecting reported earnings.