Ionis Pharmaceuticals Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-19125

Ionis Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)

Delaware		33-0336973
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2855 Gazelle Court, Carlsbad, California		92010
(Address of Principal Executive Offices)		(Zip Code)

760-931-9200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered		Trading symbol
Common Stock, $.001 Par Value		The Nasdaq Stock Market LLC		“IONS”

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☒	Accelerated Filer ☐

Non-accelerated Filer ☐	Smaller Reporting Company ☐
	Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒

The number of shares of voting common stock outstanding as of April 29, 2020 was 139,321,047.

IONIS PHARMACEUTICALS, INC.

FORM 10-Q

INDEX

PART I	FINANCIAL INFORMATION

ITEM 1:	Financial Statements:

	Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations:

	Overview	25

	Results of Operations	28

	Liquidity and Capital Resources	34

ITEM 3:	Quantitative and Qualitative Disclosures about Market Risk	36

ITEM 4:	Controls and Procedures	36

PART II	OTHER INFORMATION	37

ITEM 1:	Legal Proceedings	37

ITEM 1A:	Risk Factors	37

ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	51

ITEM 3:	Default upon Senior Securities	51

ITEM 4:	Mine Safety Disclosures	51

ITEM 5:	Other Information	51

ITEM 6:	Exhibits	51

SIGNATURES		53

TRADEMARKS

"Ionis," the Ionis logo, and other trademarks or service marks of Ionis Pharmaceuticals, Inc. appearing in this report are the property of Ionis Pharmaceuticals, Inc. "Akcea," the Akcea logo, and other trademarks or service marks appearing in this report, including TEGSEDI (inotersen) and WAYLIVRA (volanesorsen), are the property of Akcea Therapeutics, Inc. This report contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or TM symbols.

IONIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	March 31, 2020			December 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	486,195		$	683,287
Short-term investments		1,897,892			1,816,257
Contracts receivable		28,605			63,034
Inventories		22,885			18,180
Other current assets		122,468			139,839
Total current assets		2,558,045			2,720,597
Property, plant and equipment, net		163,952			153,651
Patents, net		26,750			25,674
Long-term deferred tax assets		309,614			305,557
Deposits and other assets		32,552			27,633
Total assets	$	3,090,913		$	3,233,112

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,174		$	16,067
Accrued compensation		16,437			37,357
Accrued liabilities		62,507			66,769
Income taxes payable		32,946			32,514
Current portion of long-term obligations and other current liabilities		4,150			2,026
Current portion of deferred contract revenue		120,811			118,272
Total current liabilities		258,025			273,005
Long-term deferred contract revenue		467,842			490,060
0.125 percent convertible senior notes		439,996			434,711
1 percent convertible senior notes		279,666			275,333
Long-term obligations, less current portion		15,043			15,543
Long-term mortgage debt		59,930			59,913
Total liabilities		1,520,502			1,548,565
Stockholders’ equity:
Common stock, $0.001 par value; 300,000,000 shares authorized, 139,282,168 and 140,339,615 shares issued and outstanding at March 31, 2020 (unaudited) and December 31, 2019, respectively		139			140
Additional paid-in capital		2,233,644			2,203,778
Accumulated other comprehensive loss		(27,235	)		(25,290	)
Accumulated deficit		(846,309	)		(707,534	)
Total Ionis stockholders’ equity		1,360,239			1,471,094
Noncontrolling interest in Akcea Therapeutics, Inc.		210,172			213,453
Total stockholders’ equity		1,570,411			1,684,547
Total liabilities and stockholders’ equity	$	3,090,913		$	3,233,112

See accompanying notes.

IONIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2020			2019
Revenue:
Commercial revenue:
SPINRAZA royalties	$	66,008		$	59,711
Product sales, net		15,159			6,754
Licensing and other royalty revenue		2,794			1,623
Total commercial revenue		83,961			68,088
Research and development revenue under collaborative agreements		49,406			229,126
Total revenue		133,367			297,214

Expenses:
Cost of products sold		2,548			1,041
Research, development and patent		116,952			106,417
Selling, general and administrative		74,994			68,221
Total operating expenses		194,494			175,679

Income (loss) from operations		(61,127	)		121,535

Other income (expense):
Investment income		10,479			12,142
Interest expense		(10,990	)		(11,599	)
Other expenses		(99	)		(147	)

Income (loss) before income tax benefit (expense)		(61,737	)		121,931

Income tax benefit (expense)		3,257			(31,047	)

Net income (loss)		(58,480	)		90,884

Net (income) loss attributable to noncontrolling interest in Akcea Therapeutics, Inc.		10,254			(6,441	)

Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders	$	(48,226	)	$	84,443

Basic net income (loss) per share	$	(0.35	)	$	0.63
Shares used in computing basic net income (loss) per share		139,429			138,582
Diluted net income (loss) per share	$	(0.35	)	$	0.62
Shares used in computing diluted net income (loss) per share		139,429			141,537

See accompanying notes.

IONIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2020			2019

Net income (loss)	$	(58,480	)	$	90,884
Unrealized gains (losses) on debt securities, net of tax		(1,954	)		4,324
Currency translation adjustment		9			84

Comprehensive income (loss)		(60,425	)		95,292

Comprehensive (income) loss attributable to noncontrolling interests		(10,254	)		6,441

Comprehensive income (loss) attributable to Ionis Pharmaceuticals, Inc. stockholders	$	(50,171	)	$	88,851

See accompanying notes.

IONIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2019 and 2020

(In thousands)

(Unaudited)

	Common Stock						Additional			Accumulated Other			Accumulated			Total Ionis Stockholders’			Noncontrolling Interest in Akcea			Total Stockholders’
Description	Shares			Amount			Paid in Capital			Comprehensive Loss			Deficit			Equity			Therapeutics, Inc.			Equity
Balance at December 31, 2018		137,929		$	138		$	2,047,250		$	(32,016	)	$	(967,293	)	$	1,048,079		$	139,081		$	1,187,160
Net income		—			—			—			—			84,443			84,443			—			84,443
Change in unrealized gains, net of tax		—			—			—			4,324			—			4,324			—			4,324
Foreign currency translation		—			—			—			84			—			84			—			84
Issuance of common stock in connection with employee stock plans		1,825			2			67,057			—			—			67,059			—			67,059
Stock-based compensation expense		—			—			45,505			—			—			45,505			—			45,505
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options		(130	)		—			(7,597	)		—			—			(7,597	)		—			(7,597	)
Noncontrolling interest in Akcea Therapeutics, Inc		—			—			(34,246	)		—			—			(34,246	)		40,688			6,442
Balance at March 31, 2019		139,624		$	140		$	2,117,969		$	(27,608	)	$	(882,850	)	$	1,207,651		$	179,769		$	1,387,420

Balance at December 31, 2019		140,340		$	140		$	2,203,778		$	(25,290	)	$	(707,534	)	$	1,471,094		$	213,453		$	1,684,547
Net loss		—			—			—			—			(48,226	)		(48,226	)		—			(48,226	)
Change in unrealized gains, net of tax		—			—			—			(1,954	)		—			(1,954	)		—			(1,954	)
Foreign currency translation		—			—			—			9			—			9			—			9
Issuance of common stock in connection with employee stock plans		606			—			7,652			—			—			7,652			—			7,652
Repurchases and retirements of common stock		(1,478	)		(1	)		—			—			(90,549	)		(90,550	)		—			(90,550	)
Stock-based compensation expense		—			—			40,790			—			—			40,790			—			40,790
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options		(186	)		—			(11,603	)		—			—			(11,603	)		—			(11,603	)
Noncontrolling interest in Akcea Therapeutics, Inc.		—			—			(6,973	)		—			—			(6,973	)		(3,281	)		(10,254	)
Balance at March 31, 2020		139,282		$	139		$	2,233,644		$	(27,235	)	$	(846,309	)	$	1,360,239		$	210,172		$	1,570,411

See accompanying notes.

IONIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2020			2019
Operating activities:
Net income (loss)	$	(58,480	)	$	90,884
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		3,233			3,073
Amortization of right-of-use operating lease assets		393			476
Amortization of patents		486			470
Amortization of premium (discount) on investments, net		1,062			(2,433	)
Amortization of debt issuance costs		595			474
Amortization of convertible senior notes discount		8,834			8,726
Stock-based compensation expense		40,790			45,505
Non-cash losses related to patents, licensing and property, plant and equipment and investments		(87	)		14
Provision for deferred income taxes		(3,437	)		13,549
Changes in operating assets and liabilities:
Contracts receivable		34,429			4,908
Inventories		(2,181	)		(2,475	)
Other current and long-term assets		9,532			1,326
Accounts payable		411			(17,191	)
Accrued compensation		(20,920	)		(13,004	)
Other current liabilities		(2,565	)		13,756
Deferred contract revenue		(19,679	)		(40,353	)
Net cash provided by (used in) operating activities		(7,584	)		107,705

Investing activities:
Purchases of short-term investments		(544,375	)		(492,781	)
Proceeds from sale of short-term investments		459,352			426,868
Purchases of property, plant and equipment		(9,080	)		(3,229	)
Acquisition of licenses and other assets, net		(904	)		(1,032	)
Net cash used in investing activities		(95,007	)		(70,174	)

Financing activities:
Proceeds from issuance of equity, net		7,652			67,057
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options		(11,603	)		(7,597	)
Repurchases and retirements of common stock		(90,550	)		—
Net cash provided by financing activities		(94,501	)		59,460

Net increase in cash and cash equivalents		(197,092	)		96,991
Cash and cash equivalents at beginning of period		683,287			278,820
Cash and cash equivalents at end of period	$	486,195		$	375,811

Supplemental disclosures of cash flow information:
Interest paid	$	601		$	667
Income taxes paid	$	3		$	—

Supplemental disclosures of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for lease liabilities	$	—		$	13,557
Amounts accrued for capital and patent expenditures	$	4,903		$	1,864

See accompanying notes.

IONIS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

1. Basis of Presentation

We prepared the unaudited interim condensed consolidated financial statements for the three months ended March 31, 2020 and 2019 on the same basis as the audited financial statements for the year ended December 31, 2019. We included all normal recurring adjustments in the financial statements, which we considered necessary for a fair presentation of our financial position at such dates and our operating results and cash flows for those periods. Our operating results for the interim periods may not be indicative of what our operating results will be for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC.

In the condensed consolidated financial statements, we included the accounts of Ionis Pharmaceuticals, Inc. and the consolidated results of our majority-owned affiliate, Akcea Therapeutics, Inc. and its wholly owned subsidiaries. We formed Akcea in December 2014. In July 2017, Akcea completed an initial public offering, or IPO. Since Akcea’s IPO, our ownership has ranged from 68 percent to 77 percent. At March 31, 2020, our ownership of Akcea was approximately 76 percent. We reflect changes in our ownership of Akcea in our financial statements in the period the change occurs. For example, we reflected an increase in our ownership when we received 6.9 million shares of Akcea common stock as payment for the sublicense fee Akcea owed us for Pfizer’s license of vupanorsen (formerly AKCEA-ANGPTL3-L_Rx)in the fourth quarter of 2019. Refer to the section titled “Noncontrolling Interest in Akcea” in Note 2, Significant Accounting Policies, for further information related to our accounting for our investment in Akcea.

Unless the context requires otherwise, “Ionis”, “Company,” “we,” “our,” and “us” refers to Ionis Pharmaceuticals, Inc. and its majority owned affiliate, Akcea Therapeutics, Inc. and its wholly owned subsidiaries.

2. Significant Accounting Policies

Revenue Recognition

Our Revenue Sources

We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our condensed consolidated balance sheet.

Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue

We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships.

Commercial Revenue: Product sales, net

We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 and we added product sales from WAYLIVRA to our commercial revenue in the third quarter of 2019. In the U.S., we distribute TEGSEDI through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Europe, prior to the third quarter of 2019 we distributed TEGSEDI through a non-exclusive distribution model with a 3PL that took title to TEGSEDI. The 3PL was our sole customer in Europe. The 3PL in Europe then distributed TEGSEDI to hospitals and pharmacies. In the third quarter of 2019, we entered into a distribution arrangement with a 3PL and began to sell both TEGSEDI and WAYLIVRA directly to hospitals and pharmacies in Europe.

Research and development revenue under collaborative agreements

We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services.

In Note 6, Collaborative Arrangements and Licensing Agreements, we have included our collaborations with substantive changes during the first three months of 2020 from those included in Note 6 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Steps to Recognize Revenue

We use a five-step process to determine the amount of revenue we should recognize and when we should recognize it. The five-step process is as follows:

Identify the contract

First we determine if we have a contract with our partner, including confirming that we have met each of the following criteria:

●

We and our partner approved the contract and we are both committed to perform our obligations;

●

We have identified our rights, our partner’s rights and the payment terms;

●

We have concluded that the contract has commercial substance, meaning that the risk, timing, or amount of our future cash flows is expected to change as a result of the contract; and

●

We believe collectability of the consideration is probable.

Identify the performance obligations

We next identify our performance obligations, which represent the distinct goods and services we are required to provide under the contract. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services.

Often times we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights because these items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item.

In some cases, we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.

Determine the transaction price

We then determine the transaction price by reviewing the amount of consideration we are eligible to earn under the collaboration agreement, including any variable consideration. Under our collaboration agreements, consideration typically includes fixed consideration in the form of an upfront payment and variable consideration in the form of potential milestone payments, license fees and royalties. At the start of an agreement, our transaction price usually consists of only the upfront payment. We do not typically include any payments we may receive in the future in our initial transaction price because the payments are not probable and are contingent on certain future events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price.

Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the first quarter of 2020, we earned a $10 million milestone payment from AstraZeneca when AstraZeneca advanced ION532 targeting APOL1 for the treatment of kidney disease under our cardiovascular, renal and metabolic diseases collaboration. We did not consider the milestone payment probable until AstraZeneca achieved the milestone event because advancing ION532 was a contingent event that was not within our control. We recognized the milestone payment in full in the period the milestone event was achieved because we did not have any remaining performance obligations related to the milestone payment.

Allocate the transaction price

Next, we allocate the transaction price to each of our performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.

We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:

●

Estimated future product sales;

●

Estimated royalties we may receive from future product sales;

●

Estimated contractual milestone payments we may receive;

●

Expenses we expect to incur;

●

Income taxes; and

●

A discount rate.

We typically estimate the selling price of R&D services by using our internal estimates of the cost to perform the specific services. The significant inputs we use to determine the selling price of our R&D services include:

●

The number of internal hours we estimate we will spend performing these services;

●

The estimated cost of work we will perform;

●

The estimated cost of work that we will contract with third parties to perform; and

●

The estimated cost of API we will use.

For purposes of determining the stand-alone selling price of the R&D services we perform and the API we will deliver, accounting guidance requires us to include a markup for a reasonable profit margin.

Recognize revenue

We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner.

For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods. For example, in the third quarter of 2019, we updated our estimate of the total effort we expected to expend to satisfy our performance obligation under our 2013 Strategic Neurology collaboration with Biogen. As of September 30, 2019, we had completed a significant portion of the research and development services. We expect to complete the remainder of our services in 2020. As a result of our change in estimate, in the third quarter of 2019, we recorded a cumulative catch up adjustment of $16.5 million to decrease revenue. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the cumulative catch up adjustment we made.

The following are examples of when we typically recognize revenue based on the types of payments we receive.

Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue

We recognize royalty revenue, including royalties from SPINRAZA sales, in the period in which the counterparty sells the related product and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue.

Commercial Revenue: Product sales, net

We recognize product sales in the period when our customer obtains control of our products, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. Otherwise, payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues taxes collected from customers relating to product sales and remitted to governmental authorities.

Reserves for Product sales

We record product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as a reduction of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment. In certain cases, our estimates include a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net product sales in the respective period.

The following are the components of variable consideration related to product sales:

Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We also estimate the amount of chargebacks related to our estimated product remaining in the distribution channel at the end of the reporting period that we expect our customer to sell to healthcare providers in future periods. We record these reserves as an accrued liability on our condensed consolidated balance sheet for the chargebacks related to product sales to our U.S. customer during the reporting period.

Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S. and we record reserves for government rebates based on statutory discount rates and estimated utilization. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability-weighted for the estimated payer mix. We record these reserves as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.

Managed care rebates: We are subject to rebates in connection with value-based agreements with certain of our commercial payers. We record these rebates as an accrual on our condensed consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate.

Trade discounts: We provide customary invoice discounts on product sales to our U.S. customer for prompt payment. We record this discount as a reduction of product sales in the period in which we recognize the related product revenue.

Distribution services: We receive and pay for various distribution services from our U.S. and EU customers and wholesalers in the U.S.. We classify the costs for services we receive that are either not distinct from the sale of the product or for which we cannot reasonably estimate the fair value as a reduction of product sales. To the extent that the services we receive are distinct from the sale of the product, we classify the costs for such services as SG&A expenses.

Product returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that our customer may return. We record our return estimate as an accrued refund liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Based on our distribution model for product sales, contractual inventory limits with our customer and wholesalers and the price of the product, we have had minimal returns to date and we believe we will continue to have minimal returns. Our EU customers only take title to the product after they receive an order from a hospital or pharmacy and therefore they do not maintain excess inventory levels of our products. Accordingly, we have limited return risk in the EU and we do not estimate returns in the EU.

Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale.

Research and development revenue under collaboration agreements:

Upfront payments

When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our collaboration agreement with Roche to develop IONIS-FB-L_Rx for the treatment of complement-mediated diseases, we received a $75 million upfront payment in the fourth quarter of 2018. We allocated the upfront payment to our single performance obligation, R&D services. We are amortizing the $75 million upfront payment using an input method over the estimated period of time we are providing R&D services.

Milestone payments

We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules.

We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the first quarter of 2020, we achieved a $7.5 million milestone payment from Biogen when we advanced IONIS-MAPT_Rxunder our 2012 neurology collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation for IONIS-MAPT_Rx. We are recognizing revenue related to this milestone payment over our estimated period of performance.

Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the first quarter of 2020, we recognized a $10 million milestone payment when AstraZeneca advanced ION532 targeting APOL1 for the treatment of kidney disease under our cardiovascular, renal and metabolic diseases collaboration agreement. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized the milestone payment in full in the first quarter of 2020.

License fees

We generally recognize as revenue the total amount we determine to be the relative stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the fourth quarter of 2019, we earned a $45 million license fee when Biogen licensed IONIS-MAPT_Rx from us. We also recognized $246 million of license fee revenue related to Akcea’s license of vupanorsen to Pfizer in the fourth quarter of 2019.

Sublicense fees

We recognize sublicense fee revenue in the period in which a party, who has already licensed our technology, further licenses the technology to another party because we do not have any performance obligations related to the sublicense. For example, in the second quarter of 2019, we earned a $20 million sublicense fee when Alnylam Pharmaceuticals sublicensed our technology to Regeneron Pharmaceuticals.

Amendments to Agreements

From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:

If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and

If the goods and/or services are at a stand-alone selling price.

If we conclude the goods and/or services in the amendment are distinct from the performance obligations in the original agreement and at a stand-alone selling price, we account for the amendment as a separate agreement. If we conclude the goods and/or services are not distinct and at their stand-alone selling price, we then assess whether the remaining goods or services are distinct from those already provided. If the goods and/or services are distinct from what we have already provided, then we allocate the remaining transaction price from the original agreement and the additional transaction price from the amendment to the remaining goods and/or services. If the goods and/or services are not distinct from what we have already provided, we update the transaction price for our single performance obligation and recognize any change in our estimated revenue as a cumulative adjustment.

For example, in May 2015, we entered into an exclusive license agreement with Bayer to develop and commercialize IONIS-FXI_Rx for the prevention of thrombosis. As part of the agreement, Bayer paid us a $100 million upfront payment. At the onset of the agreement, we were responsible for completing a Phase 2 study of IONIS-FXI_Rx in people with end-stage renal disease on hemodialysis and for providing an initial supply of API. In February 2017, we amended our agreement with Bayer to advance IONIS-FXI_Rx and to initiate development of IONIS-FXI-L_Rx, which Bayer licensed. As part of the 2017 amendment, Bayer paid us $75 million. We are also eligible to receive milestone payments and tiered royalties on gross margins of IONIS-FXI_Rx and IONIS-FXI-L_Rx. Under the 2017 amendment, we concluded we had a new agreement with three performance obligations. These performance obligations were to deliver the license of IONIS-FXI-L_Rx, to provide R&D services and to deliver API. We allocated the $75 million transaction price to these performance obligations. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the Bayer collaboration.

Multiple agreements

From time to time, we may enter into separate agreements at or near the same time with the same partner. We evaluate such agreements to determine whether we should account for them individually as distinct arrangements or whether the separate agreements should be combined and accounted for together. We evaluate the following to determine the accounting for the agreements:

●

Whether the agreements were negotiated together with a single objective;

●

Whether the amount of consideration in one contract depends on the price or performance of the other agreement; or

●

Whether the goods and/or services promised under the agreements are a single performance obligation.

Our evaluation involves significant judgment to determine whether a group of agreements might be so closely related that accounting guidance requires us to account for them as a combined arrangement.

For example, in the second quarter of 2018, we entered into two separate agreements with Biogen at the same time: a new strategic neurology collaboration agreement and a stock purchase agreement, or SPA. We evaluated the Biogen agreements to determine whether we should treat the agreements separately or combine them. We considered that the agreements were negotiated concurrently and in contemplation of one another. Based on these facts and circumstances, we concluded that we should evaluate the provisions of the agreements on a combined basis.

Contracts Receivable

Our contracts receivable balance represents the amounts we have billed our partners or customers and that are due to us unconditionally for goods we have delivered or services we have performed. When we bill our partners or customers with payment terms based on the passage of time, we consider the contract receivable to be unconditional. We typically receive payment within one quarter of billing our partner or customer.

Unbilled SPINRAZA Royalties

Our unbilled SPINRAZA royalties represent our right to receive consideration from Biogen in advance of when we are eligible to bill Biogen for SPINRAZA royalties. We include these unbilled amounts in other current assets on our condensed consolidated balance sheet.

Deferred Revenue

We are often entitled to bill our customers and receive payment from our customers in advance of our obligation to provide services or transfer goods to our partners. In these instances, we include the amounts in deferred revenue on our condensed consolidated balance sheet. During the three months ended March 31, 2020 and 2019, we recognized $28.0 million and $40.3 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above.

Cost of Products Sold

Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of our products. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval of TEGSEDI in July 2018 and WAYLIVRA in May 2019, we expensed as research and development expenses a significant portion of the costs we incurred to produce the initial commercial launch supply for each medicine. We previously expensed $0.6 million and $0.3 million of costs to produce our products related to the product sales revenue we recognized in the three months ended March 31, 2020 and 2019, respectively.

Noncontrolling Interest in Akcea Therapeutics, Inc.

Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. Since Akcea’s IPO, our ownership has ranged from 68 percent to 77 percent. At March 31, 2020, our ownership was approximately 76 percent. We reflect changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurs. During 2019, we received the following additional shares of Akcea common stock:

●

2.8 million shares in the first quarter of 2019 as payment for the sublicense fee Akcea owed us for Novartis’s license of AKCEA-APO(a)-L_Rx, and

●

6.9 million shares in the fourth quarter of 2019 as payment for the sublicense fee Akcea owed us for Pfizer’s license of vupanorsen.

The shares third parties own represent an interest in Akcea’s equity that we do control. However, as we continue to maintain overall control of Akcea through our voting interest, we reflect the assets, liabilities and results of operations of Akcea in our condensed consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized.

Cash, Cash Equivalents and Investments

We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold.

We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At March 31, 2020, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in five privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd.

We are required to measure and record our equity investments at fair value and to recognize the changes in fair value in our condensed consolidated statement of operations. We account for our equity investments in privately held companies at their cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

Inventory Valuation

We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. We capitalize the costs of raw materials that we purchase for use in producing our medicines because until we use these raw materials, they have alternative future uses, which we refer to as clinical raw materials. We include in inventory raw material costs for medicines that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We can use each of our raw materials in multiple products and, as a result, each raw material has future economic value independent of the development status of any single medicine. For example, if one of our medicines failed, we could use the raw materials for that medicine to manufacture our other medicines. We expense these costs as R&D expenses when we begin to manufacture API for a particular medicine if the medicine has not been approved for marketing by a regulatory agency.

We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At March 31, 2020, our physical inventory for TEGSEDI and WAYLIVRA included API that we produced prior to when we obtained regulatory approval. As such, this API has no cost basis as we had previously expensed the costs as R&D expenses.

We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of our inventory, alternative uses for our medicines in development and historical write-offs. We did not record any material inventory write-offs for the three months ended March 31, 2020. Total inventory was $22.9 million and $18.2 million as of March 31, 2020 and December 31, 2019, respectively, and consisted of the following (in thousands):

	March 31, 2020		December 31, 2019
Raw materials:
Raw materials- clinical	$	9,162	$	9,363
Raw materials- commercial		10,476		6,520
Total raw materials		19,638		15,883
Work in process		2,645		2,039
Finished goods		602		258
Total inventory	$	22,885	$	18,180

Leases

We determine if an arrangement contains a lease at inception. We currently only have operating leases. We recognize a right-of-use operating lease asset and associated short- and long-term operating lease liability on our condensed consolidated balance sheet for operating leases greater than one year. Our right-of-use assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments arising from the lease arrangement. We recognize our right-of-use operating lease assets and lease liabilities based on the present value of the future minimum lease payments we will pay over the lease term. We determined the lease term at the inception of the lease, and in certain cases our lease term could include renewal options if we concluded we were reasonably certain that we will exercise the renewal option.

As our current leases do not provide an interest rate implicit in the lease, we used our incremental borrowing rate, based on the information available on the date we adopted Topic 842 (January 2019) or as of the lease inception date in determining the present value of future payments. We recognize rent expense for our minimum lease payments on a straight-line basis over the expected term of our lease. We recognize period expenses, such as common area maintenance expenses, in the period we incur the expense.

Research, Development and Patent Expenses

Our research and development expenses include wages, benefits, facilities, supplies, external services, clinical trial and manufacturing costs and other expenses that are directly related to our research and development operations. We expense research and development costs as we incur them. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our condensed consolidated balance sheet and we expense them as the services are provided.

We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the U.S. Patent and Trademark Office, or foreign equivalent, issues the patent. We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. When we identify patents and patent applications that we are not actively pursuing, we write off any associated costs.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. We record a valuation allowance when necessary to reduce our net deferred tax assets to the amount expected to be realized.

Long-lived Assets

We evaluate long-lived assets, which include property, plant and equipment and patent costs, for impairment on at least a quarterly basis and whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of such assets.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share

We compute basic net income (loss) per share by dividing the total net income (loss) attributable to our common stockholders by our weighted-average number of common shares outstanding during the period.

The calculation of total net income (loss) attributable to our common stockholders for the three months ended March 31, 2020 and 2019 considered our net income (loss) for Ionis on a stand-alone basis plus our share of Akcea’s net income (loss) for the period. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s net income (loss) per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income (loss) available to Ionis common stockholders for the calculation of net income (loss) per share is different than net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders in the condensed consolidated statements of operations.

Our basic net loss per share for the three months ended March 31, 2020, was calculated as follows (in thousands, except per share amounts):

Three months ended March 31, 2020	Weighted Average Shares Owned in Akcea		Akcea’s Net Loss Per Share			Ionis’ Portion of Akcea’s Net Loss
Common shares		77,095	$	(0.42	)	$	(32,674	)
Akcea’s net loss attributable to our ownership						$	(32,674	)
Ionis’ stand-alone net loss							(15,630	)
Net loss available to Ionis common stockholders						$	(48,304	)
Weighted average shares outstanding							139,429
Basic net loss per share						$	(0.35	)

Our basic net income per share for the three months ended March 31, 2019, was calculated as follows (in thousands, except per share amounts):

Three months ended March 31, 2019	Weighted Average Shares Owned in Akcea		Akcea’s Net Income Per Share		Ionis’ Portion of Akcea’s Net Income
Common shares		68,582	$	0.35	$	23,846
Akcea’s net income attributable to our ownership					$	23,846
Ionis’ stand-alone net income						63,697
Net income available to Ionis common stockholders					$

Price	61.25	EPS	3
Shares	143	P/E	20
MCap	8,784	P/FCF	130
Net Debt	-248	EBIT	481
TEV	8,536	TEV/EBIT	18
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-06
10-K	2019-12-31	Filed 2020-03-02
10-Q	2019-09-30	Filed 2019-11-06
10-Q	2019-06-30	Filed 2019-08-08
10-Q	2019-03-31	Filed 2019-05-09
10-K	2018-12-31	Filed 2019-03-01
10-Q	2018-09-30	Filed 2018-11-06
10-Q	2018-06-30	Filed 2018-08-07
10-Q	2018-03-31	Filed 2018-05-07
10-K	2017-12-31	Filed 2018-02-28
10-Q	2017-09-30	Filed 2017-11-07
10-Q	2017-06-30	Filed 2017-08-09
10-Q	2017-03-31	Filed 2017-05-09
10-K	2016-12-31	Filed 2017-03-01
10-Q	2016-09-30	Filed 2016-11-09
10-Q	2016-06-30	Filed 2016-08-09
10-Q	2016-03-31	Filed 2016-05-05
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-09-30	Filed 2015-11-09
10-Q	2015-06-30	Filed 2015-08-05
10-Q	2015-03-31	Filed 2015-05-05
10-K	2014-12-31	Filed 2015-03-02
10-Q	2014-09-30	Filed 2014-11-07
10-Q	2014-06-30	Filed 2014-08-04
10-Q	2014-03-31	Filed 2014-05-06
10-K	2013-12-31	Filed 2014-03-03
10-Q	2013-09-30	Filed 2013-11-05
10-Q	2013-06-30	Filed 2013-08-06
10-Q	2013-03-31	Filed 2013-05-07
10-K	2012-12-31	Filed 2013-02-28
10-Q	2012-06-30	Filed 2012-08-06
10-Q	2012-03-31	Filed 2012-05-09
10-K	2011-12-31	Filed 2012-02-29
10-Q	2011-09-30	Filed 2011-11-08
10-Q	2011-06-30	Filed 2011-08-08
10-Q	2011-03-31	Filed 2011-05-06
10-K	2010-12-31	Filed 2011-03-01
10-Q	2010-09-30	Filed 2010-11-05
10-Q	2010-06-30	Filed 2010-08-09
10-Q	2010-03-31	Filed 2010-05-07
10-K	2009-12-31	Filed 2010-03-01

8-K	2020-06-04
8-K	2020-05-06
8-K	2020-02-26
8-K	2020-01-15
8-K	2020-01-09
8-K	2019-12-19
8-K	2019-12-11
8-K	2019-12-11
8-K	2019-11-06
8-K	2019-09-27
8-K	2019-08-07
8-K	2019-06-10
8-K	2019-06-06
8-K	2019-05-09
8-K	2019-03-22
8-K	2019-02-27
8-K	2018-12-21
8-K	2018-11-06
8-K	2018-10-18
8-K	2018-10-10
8-K	2018-09-25
8-K	2018-08-27
8-K	2018-08-07
8-K	2018-06-19
8-K	2018-05-30
8-K	2018-05-04
8-K	2018-04-20
8-K	2018-03-15
8-K	2018-02-27
8-K	2018-01-16

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EX-31.2	ex31_2.htm
EX-32.1	ex32_1.htm

IONS 10Q Quarterly Report

Ionis Pharmaceuticals Earnings 2020-03-31