10-Q 1 form10q.htm IONIS PHARMACEUTICALS INC 10-Q 3-31-2022


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, 2022

OR

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

     

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 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 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.

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 13(a) of the Exchange 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 28, 2022 was 141,797,854.





IONIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX

PART I
FINANCIAL INFORMATION
 
     
ITEM 1:
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021
3
     
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 (unaudited)
4
     
 
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2022 and 2021 (unaudited)
5
     
 
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited)
6
     
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)
7
     
 
8
     
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
     
 
25
     
 
29
     
 
34
     
ITEM 3:
36
     
ITEM 4:
36
     
PART II
36
     
ITEM 1:
36
     
ITEM 1A:
37
     
ITEM 2:
55
     
ITEM 3:
55
     
ITEM 4:
55
     
ITEM 5:
55
     
ITEM 6:
56
     
57

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 of Akcea Therapeutics, Inc. appearing in this report are the property of Akcea Therapeutics, Inc., Ionis’ wholly owned subsidiary. 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,
2022
   
December 31,
2021
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
542,513
   
$
869,191
 
Short-term investments
   
1,509,880
     
1,245,782
 
Contracts receivable
   
26,122
     
61,896
 
Inventories
   
24,032
     
24,806
 
Other current assets
   
150,577
     
143,374
 
Total current assets
   
2,253,124
     
2,345,049
 
Property, plant and equipment, net
   
177,724
     
178,069
 
Patents, net
   
29,295
     
29,005
 
Deposits and other assets
   
58,949
     
59,567
 
Total assets
 
$
2,519,092
   
$
2,611,690
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
16,125
   
$
11,904
 
Accrued compensation
   
16,525
     
38,810
 
Accrued liabilities
   
99,256
     
88,560
 
Income taxes payable
   
901
     
36
 
Current portion of long-term obligations
   
4,206
     
3,526
 
Current portion of deferred contract revenue
   
91,437
     
97,714
 
Total current liabilities
   
228,450
     
240,550
 
Long-term deferred contract revenue
   
333,138
     
351,879
 
0 percent convertible senior notes, net
   
619,898
     
619,119
 
0.125 percent convertible senior notes, net
   
542,860
     
542,314
 
Long-term obligations, less current portion
   
25,710
     
26,378
 
Long-term mortgage debt
   
59,462
     
59,713
 
Total liabilities
   
1,809,518
     
1,839,953
 
Stockholders’ equity:
               
Common stock, $0.001 par value; 300,000,000 shares authorized, 141,753,122 and 141,210,015 shares issued and outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively
   
142
     
141
 
Additional paid-in capital
   
1,983,078
     
1,964,167
 
Accumulated other comprehensive loss
   
(48,578
)
   
(32,668
)
Accumulated deficit
   
(1,225,068
)
   
(1,159,903
)
Total stockholders’ equity
   
709,574
     
771,737
 
Total liabilities and stockholders’ equity
 
$
2,519,092
   
$
2,611,690
 


See accompanying notes.

3


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(Unaudited)

 
Three Months Ended
March 31,
 
   
2022
   
2021
 
             
Revenue:
           
Commercial revenue:
           
SPINRAZA royalties
 
$
53,818
   
$
59,986
 
TEGSEDI and WAYLIVRA revenue, net
   
6,160
     
19,838
 
Licensing and other royalty revenue
   
12,307
     
4,624
 
Total commercial revenue
   
72,285
     
84,448
 
Research and development revenue:
               
Collaborative agreement revenue
   
49,784
     
27,159
 
Eplontersen joint development revenue
   
19,850
     
 
Total research and development revenue
   
69,634
     
27,159
 
Total revenue
   
141,919
     
111,607
 
                 
Expenses:
               
Cost of sales
   
4,170
     
2,578
 
Research, development and patent
   
161,126
     
139,801
 
Selling, general and administrative
   
34,127
     
61,199
 
Total operating expenses
   
199,423
     
203,578
 
                 
Loss from operations
   
(57,504
)
   
(91,971
)
                 
Other income (expense):
               
Investment income
   
1,993
     
4,643
 
Interest expense
   
(2,122
)
   
(2,414
)
Loss on investments
   
(6,625
)
   
 
Other income
   
187
     
3
 
                 
Loss before income tax expense
   
(64,071
)
   
(89,739
)
                 
Income tax expense
   
(1,094
)
   
(130
)
                 
Net loss
 
$
(65,165
)
 
$
(89,869
)
                 
Basic and diluted net loss per share
 
$
(0.46
)
 
$
(0.64
)
Shares used in computing basic and diluted net loss per share
   
141,599
     
140,770
 


See accompanying notes.

4


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)

 
Three Months Ended
March 31,
 
   
2022
   
2021
 
             
             
Net loss
 
$
(65,165
)
 
$
(89,869
)
Unrealized losses on debt securities, net of tax
   
(15,756
)
   
(3,006
)
Currency translation adjustment
   
(154
)
   
(126
)
                 
Comprehensive loss
 
$
(81,075
)
 
$
(93,001
)


See accompanying notes.

5


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended March 31, 2021 and 2022
(In thousands)
(Unaudited)

 
Common Stock
   
Additional
   
Accumulated Other
   
Accumulated
   
Total
Stockholders
 
Description
 
Shares
   
Amount
   
Paid in Capital
   
Comprehensive Loss
   
Deficit
   
Equity
 
Balance at December 31, 2020
   
140,366
   
$
140
   
$
1,895,519
   
$
(21,071
)
 
$
(1,131,306
)
 
$
743,282
 
Net loss
   
     
     
     
     
(89,869
)
   
(89,869
)
Change in unrealized losses, net of tax
   
     
     
     
(3,006
)
   
     
(3,006
)
Foreign currency translation
   
     
     
     
(126
)
   
     
(126
)
Issuance of common stock in connection with employee stock plans
   
809
     
1
     
7,758
     
     
     
7,759
 
Stock-based compensation expense
   
     
     
37,861
     
     
     
37,861
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(251
)
   
     
(15,337
)
   
     
     
(15,337
)
Balance at March 31, 2021
   
140,924
   
$
141
   
$
1,925,801
   
$
(24,203
)
 
$
(1,221,175
)
 
$
680,564
 
                                                 
Balance at December 31, 2021
   
141,210
   
$
141
   
$
1,964,167
   
$
(32,668
)
 
$
(1,159,903
)
 
$
771,737
 
Net loss
   
     
     
     
     
(65,165
)
   
(65,165
)
Change in unrealized losses, net of tax
   
     
     
     
(15,756
)
   
     
(15,756
)
Foreign currency translation
   
     
     
     
(154
)
   
     
(154
)
Issuance of common stock in connection with employee stock plans
   
847
     
1
     
1,848
     
     
     
1,849
 
Stock-based compensation expense
   
     
     
26,236
     
     
     
26,236
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(304
)
   
     
(9,173
)
   
     
     
(9,173
)
Balance at March 31, 2022
   
141,753
   
$
142
   
$
1,983,078
   
$
(48,578
)
 
$
(1,225,068
)
 
$
709,574
 


See accompanying notes.

6


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
Three Months Ended
March 31,
 
   
2022
   
2021
 
             
Operating activities:
           
Net loss
 
$
(65,165
)
 
$
(89,869
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
   
3,701
     
3,917
 
Amortization of right-of-use operating lease assets
   
602
     
394
 
Amortization of patents
   
592
     
544
 
Amortization of premium on investments, net
   
4,175
     
4,023
 
Amortization of debt issuance costs
   
1,343
     
860
 
Stock-based compensation expense
   
26,236
     
37,861
 
Gain on investments
   
(10
)
   
(13
)
Non-cash losses related to disposal of property, plant and equipment
   
527
     
 
Non-cash losses related to patents
   
110
     
221
 
Changes in operating assets and liabilities:
               
Contracts receivable
   
35,774
     
52,807
 
Inventories
   
774
     
(234
)
Other current and long-term assets
   
(7,222
)
   
16,481
 
Income taxes receivable
   
865
     
2
 
Accounts payable
   
2,878
     
(9,569
)
Accrued compensation
   
(22,285
)
   
(36,465
)
Accrued liabilities and other current liabilities
   
10,473
     
(11,905
)
Deferred contract revenue
   
(25,018
)
   
(23,717
)
Net cash used in operating activities
   
(31,650
)
   
(54,662
)
                 
Investing activities:
               
Purchases of short-term investments
   
(462,855
)
   
(330,051
)
Proceeds from sale of short-term investments
   
178,837
     
411,907
 
Purchases of property, plant and equipment
   
(2,705
)
   
(1,772
)
Acquisition of licenses and other assets, net
   
(826
)
   
(1,228
)
Net cash (used in) provided by investing activities
   
(287,549
)
   
78,856
 
                 
Financing activities:
               
Proceeds from equity, net
   
1,848
     
7,760
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(9,173
)
   
(15,337
)
Net cash used in financing activities
   
(7,325
)
   
(7,577
)
                 
Effects of exchange rates on cash
   
(154
)
   
(126
)
                 
Net (decrease) increase in cash and cash equivalents
   
(326,678
)
   
16,491
 
Cash and cash equivalents at beginning of period
   
869,191
     
397,664
 
Cash and cash equivalents at end of period
 
$
542,513
   
$
414,155
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid
 
$
594
   
$
594
 
Income taxes paid
 
$
2
   
$
2
 
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Amounts accrued for capital and patent expenditures
 
$
1,344
   
$
1,876
 

See accompanying notes.
7


IONIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(Unaudited)

1.  Basis of Presentation


We prepared the unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 on the same basis as the audited financial statements for the year ended December 31, 2021. 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, 2021 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC.


In our condensed consolidated financial statements, we included the accounts of Ionis Pharmaceuticals, Inc. and the consolidated results of our wholly owned subsidiary, Akcea Therapeutics, Inc. and its wholly owned subsidiaries (“we”, “us” or “our”).

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.


At contract inception, we analyze our collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements, or ASC 808. ASC 808 does not address the recognition and measurement of collaborative arrangements and instead refers companies to use other authoritative accounting literature. If there is no appropriate analogous authoritative accounting literature, ASC 808 suggests companies consistently apply a reasonable and rational accounting policy election. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, we first determine which elements of the collaboration reflect a vendor-customer relationship and therefore are within the scope of ASC 606, Revenue from Contracts with Customers. When we determine elements of a collaboration do not reflect a vendor-customer relationship, we consistently apply the reasonable and rational policy election we made by analogizing to authoritative accounting literature.


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 sales milestone payments and royalties we earn under our other partnerships.


Commercial Revenue: TEGSEDI and WAYLIVRA revenue, net


In January 2021 and April 2021, we entered into distribution agreements with Swedish Orphan Biovitrum AB, or Sobi, in which Sobi began commercializing TEGSEDI and WAYLIVRA in Europe and TEGSEDI in North America, respectively. Under our agreements, we are responsible for supplying finished goods inventory to Sobi and Sobi is responsible for selling each medicine to the end customer. As a result of these agreements, we earn a distribution fee on net sales from Sobi for each medicine.


Prior to the second quarter of 2021 in North America, we sold TEGSEDI through exclusive distribution agreements with third-party logistics companies, or 3PLs, that took title to TEGSEDI. The 3PLs then distributed TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distributed TEGSEDI to health care providers and patients. In the United States, or U.S., we had a single 3PL as our sole customer and in Canada we also had a single 3PL as our sole customer. Prior to 2021 in Europe, we sold TEGSEDI and WAYLIVRA to hospitals and pharmacies, which were our customers, using 3PLs as distributors.
8



Under our collaboration agreement with PTC Therapeutics International Limited, or PTC, PTC is responsible for commercializing TEGSEDI and WAYLIVRA in Latin America and Caribbean countries. Under our agreement, we started receiving royalties from PTC for TEGSEDI sales in December 2021.


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.


See Note 6, Collaborative Arrangements and Licensing Agreements, for collaborations with substantive changes that occurred in 2022. Additionally, see 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, 2021 for a summary of each of our material collaborative agreements.


Steps to Recognize Revenue


For elements of our contractual relationships that we account for under ASC 606, 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:

1.
Identify the contract


Accounting rules require us to first 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.

2.
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.


Often 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 and are not priced at a significant discount. 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.

3.
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.
9



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/or are usually based on scientific progress which is inherently uncertain. For example, in the first quarter of 2022, we earned a $10 million milestone payment from Biogen when Biogen advanced the Phase 1/2 study for ION859, an investigational antisense medicine targeting leucine rich repeat kinase 2, or LRRK2, in patients with Parkinson’s disease. We did not consider the milestone payment probable until Biogen achieved the milestone event because advancing ION859 was contingent on Biogen advancing a Phase 1/2 study and 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.

4.
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;
Estimated expenses we may incur;
Estimated 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 estimated number of internal hours 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.

5.
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.
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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: TEGSEDI and WAYLIVRA revenue, net


Under our distribution agreements with Sobi we concluded that our performance obligation is to provide services to Sobi over the term of the agreement, which includes supplying finished goods inventory to Sobi. We are also responsible for maintaining the marketing authorization for TEGSEDI and WAYLIVRA in major markets and for leading the global commercial strategy for each medicine. We view this performance obligation as a series of distinct activities that are substantially the same. Therefore, we recognize as revenue the price Sobi pays us for the inventory when we deliver the finished goods inventory to Sobi. We also recognize distribution fee revenue based on Sobi’s net sales of TEGSEDI and WAYLIVRA. Under our agreements with Sobi, Sobi does not generally have a right of return.


Prior to our distribution agreements with Sobi, we recognized TEGSEDI and WAYLIVRA commercial revenue in the period when our customer obtained control of our products, which occurred at a point in time upon transfer of title to the customer. We classified payments to customers or other parties in the distribution channel for services that were distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. We classified payments to customers or other parties in the distribution channel that did not meet those criteria as a reduction of revenue, as discussed further below. We excluded from revenues taxes collected from customers relating to TEGSEDI and WAYLIVRA commercial revenue and remitted these amounts to governmental authorities.


Reserves for TEGSEDI and WAYLIVRA commercial revenue


Under our distribution agreements with Sobi, Sobi is responsible for any applicable reserves.


Prior to our distribution agreements with Sobi, we recorded TEGSEDI and WAYLIVRA commercial revenue at our net sales price, or transaction price. We included in our transaction price estimated reserves for discounts, returns, chargebacks, rebates and other allowances that we offered within contracts between us and our customers, wholesalers, distributors, health care providers and other indirect customers. We estimated our reserves using the amounts we have earned or we could claim on the associated sales. We classified our reserves as a reduction of accounts receivable when we were not required to make a payment or as a current liability when we were required to make a payment. In certain cases, our estimates included a range of possible outcomes that were 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 reflected our best estimates under the terms of our respective contracts. When calculating our reserves and related TEGSEDI and WAYLIVRA commercial revenue, we only recognized amounts to the extent that we considered it probable that we would not have to reverse a significant amount of the cumulative sales we previously recognized in a future period. Under our agreements with Sobi, we transferred all reserves to Sobi. See our revenue recognition policy in Note 1, Organization and Significant Accounting Policies, of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional details regarding how we accounted for the reserves related to TEDSEDI and WAYLIVIRA product sales prior to our agreements with Sobi.


Research and development revenue under collaboration agreements:


Upfront payments


When we enter into a collaboration agreement and receive 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-LRx 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.
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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 typically 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 fourth quarter of 2021, we achieved a $7.5 million milestone payment from Biogen when we advanced a target under our 2018 strategic collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation. 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 2022, we recognized $18 million in milestone payments when Biogen advanced two targets under our 2013 strategic collaboration. We concluded that the milestone payments were not related to our R&D services performance obligation. Therefore, we recognized the milestone payments in full in the first quarter of 2022.


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 2021, we earned a $60 million license fee from Biogen when Biogen licensed ION306, an investigational medicine in development to treat SMA.


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 fourth quarter of 2020, we earned a $41.2 million sublicense fee from Alnylam Pharmaceuticals for its sublicense of our technology to Sanofi Genzyme.


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:

1)
If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and
2)
If the goods and/or services are sold 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 are sold at a 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.


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.
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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.


Eplontersen Collaboration with AstraZeneca


In December 2021, we entered into a joint development and commercialization agreement with AstraZeneca to develop and commercialize eplontersen for the treatment of transthyretin amyloidosis, or ATTR. We are jointly developing and preparing to commercialize eplontersen with AstraZeneca in the U.S. We granted AstraZeneca exclusive rights to commercialize eplontersen outside the U.S., except certain countries in Latin America. Under the terms of the agreement, we received a $200 million upfront payment in 2021.


We evaluated our eplontersen collaboration under ASC 808 and identified four material components: (i) the license we granted to AstraZeneca in 2021, (ii) the co-development activities that we and AstraZeneca are performing, (iii) the co-commercialization activities that we and AstraZeneca are performing and (iv) the co-medical affairs activities that we and AstraZeneca are performing.


We determined that we had a vendor-customer relationship within the scope of ASC 606 for the license we granted to AstraZeneca and as a result we had one performance obligation.  For our sole performance obligation, we determined the transaction price was the $200 million upfront payment we received. We recognized the upfront payment in full in 2021 because we did not have any remaining performance obligations after we delivered the license to AstraZeneca.


We also concluded that the co-development activities, the co-commercialization activities and the co-medical affairs activities are within the scope of ASC 808 because we and AstraZeneca are active participants exposed to the risks and benefits of the activities under the collaboration and therefore do not have a vendor-customer relationship. AstraZeneca is responsible for 55 percent of the costs associated with the ongoing global Phase 3 development program. As we continue to lead the Phase 3 development program, we made an accounting policy election to recognize as non-customer revenue the cost-share funding from AstraZeneca in the same period we incur the related development expenses. As AstraZeneca is responsible for the majority of the commercial and medical affairs costs in the U.S. and all costs associated with bringing eplontersen to market outside the U.S., we made an accounting policy election to recognize cost-share funding we receive from AstraZeneca related to commercial and medical affairs activities as reductions of our SG&A expense and R&D expense, respectively. Refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for further details on the financial statement impacts of our eplontersen collaboration with AstraZeneca.


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 contracts receivable to be unconditional. We typically receive payment within one quarter of billing our partner or customer.


As of March 31, 2022, approximately 82.2 percent of our contracts receivables were from two significant customers. As of December 31, 2021, approximately 93.8 percent of our contracts receivables were from two significant customers.


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.
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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, 2022 and 2021, we recognized $26.2 million and $26.0 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 Sales


Our cost of sales 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 sales.


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 in our condensed consolidated statement of operations. 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, 2022, we held equity investments in three publicly held companies, Antisense Therapeutics Limited, or ATL, Bicycle Therapeutics plc, or Bicycle, and ProQR Therapeutics N.V., or ProQR. We also held equity investments in seven privately held companies, Aro Biotherapeutics, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Flamingo Therapeutics BV, YourBio Health, Inc. (formerly 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. For example, during 2020, we revalued our investments in three privately held companies, Dynacure, Suzhou-Ribo and Aro Biotherapeutics because the companies sold additional equity securities that were similar to the equity we own. As a result of these observable price changes, we recognized a total gain of $14.8 million on our investments in these companies in our condensed consolidated statement of operations during 2020 because the sales were at higher prices compared to our recorded value.


Inventory Valuation


We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or net realizable 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. Our raw materials - commercial inventory includes API for our commercial medicines. We capitalize material, labor and overhead costs as part of our raw materials - commercial inventory.


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 recorded an immaterial amount of inventory write-offs for the three months ended March 31, 2022 and 2021.
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Our inventory consisted of the following (in thousands):

 
March 31, 2022
   
December 31, 2021
 
Raw materials:
           
Raw materials- clinical
 
$
15,764
   
$
14,507
 
Raw materials- commercial
   
2,165
     
4,139
 
Total raw materials
   
17,929
     
18,646
 
Work in process
   
5,637
     
5,770
 
Finished goods
   
466
     
390
 
Total inventory
 
$
24,032
   
$
24,806
 


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 determine the lease term at the inception of each 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. When we exercise a lease option that was not previously included in the initial lease term, we reassess our right-of-use asset and lease liabilities for the new lease term.


As our 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), as of the lease inception date or at the lease option extension 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.


In January 2022, we entered into a sublease agreement for our office space located in Boston, Massachusetts. The sublease commenced in January 2022 when the office space was ready for our tenant’s occupancy. We are subleasing this space under a non-cancelable operating sublease with a sublease term ending in November 2028 with no option to extend the sublease. Under the sublease agreement we provided a seven-month free rent period, which commenced in January 2022. We will receive lease payments over the sublease term totaling $9.6 million. We are recognizing sublease payments as other income on a straight-line, gross basis over the term of our sublease.

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.
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We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50 percent likely to be realized upon ultimate settlement.


We are required to use significant judgment in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, we can provide no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. We adjust these reserves for changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which we make such determination.


We are also required to use significant judgment in determining any valuation allowance recorded against our deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including scheduled reversal of deferred tax liabilities, past operating results, the feasibility of tax planning strategies and estimates of future taxable income. We base our estimates of future taxable income on assumptions that are consistent with our plans. The assumptions we use represent our best estimates and involve inherent uncertainties and the application of our judgment. Should actual amounts differ from our estimates, the amount of our tax expense and liabilities we recognize could be materially impacted. We record a valuation allowance to reduce the balance of our net deferred tax assets to the amount we believe is more-likely-than-not to be realized.


We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries.


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


We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. that require us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ from our estimates.


Basic and Diluted Net Loss Per Share


Basic net loss per share


We calculated our basic net loss per share for the three months ended March 31, 2022 and 2021 by dividing our net loss by our weighted-average number of common shares outstanding during the period. Our basic net loss per share for the three months ended March 31, 2022 and 2021 were $0.46 and $0.64, respectively.


Diluted net loss per share


For the three months ended March 31, 2022 and 2021, we incurred a net loss; therefore, we did not include dilutive common equivalent shares in the computation of diluted net loss per share because the effect would have been anti-dilutive. Common stock from the following would have had an anti-dilutive effect on net loss per share:

0.125 percent convertible senior notes, or 0.125% Notes;
Note hedges related to the 0.125% Notes;
Dilutive stock options;
Unvested restricted stock units, or RSUs;
Unvested performance restricted stock units, or PRSUs; and
Employee Stock Purchase Plan, or ESPP.
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For the three months ended March 31, 2021, common stock from our 1 percent convertible senior notes, or 1% Notes, would also have had an anti-dilutive effect on net loss per share.


For the three months ended March 31, 2022, common stock from the following would also have had an anti-dilutive effect on net loss per share:

0 percent convertible senior notes, or 0% Notes; and
Note hedges related to the 0% Notes.


Additionally as of March 31, 2022, we had warrants related to our 0% and 0.125% Notes outstanding. We will include the shares issuable under these warrants in our calculation of diluted earnings per share when the average market price per share of our common stock for the reporting period exceeds the strike price of the warrants.


Convertible Debt


We account for each of our convertible debt instruments as a single unit of accounting, a liability, because we concluded that the conversion features do not require bifurcation as a derivative under ASC 815-15 and our convertible debt instruments were not issued at a substantial premium. We record the entire debt issuance costs as a contra-liability on our condensed consolidated balance sheet at issuance and we amortize them over the contractual term using an updated effective interest rate. As such, the ending balances for our 0% and 0.125% Notes represent the principal balance of each convertible debt instrument less debt issuance costs. We amortize debt issuance costs for our 0% and 0.125% Notes over the respective contractual term using an effective interest rate of 0.5 percent for each note. Refer to Note 7, Convertible Debt, for further details on our convertible debt instruments.


Call Spread


In conjunction with the issuance of our 0% Notes and 0.125% Notes in April 2021 and December 2019, respectively, we entered into call spread transactions, which were comprised of purchasing note hedges and selling warrants. We account for the note hedges and warrants as separate freestanding financial instruments and treat each instrument as a separate unit of accounting. We determined that the note hedges and warrants do not meet the definition of a liability using the guidance contained in ASC Topic 480, therefore we account for the note hedges and warrants using the Derivatives and Hedging – Contracts in Entity’s Own Equity accounting guidance contained in ASC Topic 815. We determined that the note hedges and warrants meet the definition of a derivative, are indexed to our stock and meet the criteria to be classified in shareholders’ equity. We recorded the aggregate amount paid for the note hedges and the aggregate amount received for the warrants as additional paid-in capital in our condensed consolidated balance sheet. We reassess our ability to continue to classify the note hedges and warrants in shareholders’ equity at each reporting period.


Segment Information


We operate as a single segment, Ionis operations, because our chief decision maker reviews operating results on an aggregate basis and manages our operations as a single operating segment.


Stock-based Compensation Expense


We measure stock-based compensation expense for equity-classified awards, principally related to stock options, RSUs, PRSUs and stock purchase rights under our ESPP based on the estimated fair value of the award on the date of grant. We recognize the value of the portion of the award that we ultimately expect to vest as stock-based compensation expense over the requisite service period in our condensed consolidated statements of operations. We reduce stock-based compensation expense for estimated forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates. We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under our ESPP.


On the grant date, we use our stock price and assumptions regarding a number of variables to determine the estimated fair value of stock-based payment awards. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.


We recognize compensation expense for stock options granted, RSUs, PRSUs and stock purchase rights under the ESPP using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), we recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.
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In December 2020, we amended and restated the Akcea 2015 equity plan, including renaming the plan as the Ionis Pharmaceuticals, Inc. 2020 Equity Incentive Plan, or 2020 Plan. As a result, all employees are now under an Ionis stock plan and subject to the same Black-Scholes assumptions.


For the three months ended March 31, 2022 and 2021, we used the following weighted-average assumptions in our Black-Scholes calculations:


Employee Stock Options:
 
Three Months Ended
March 31,
 
   
2022
   
2021
 
Risk-free interest rate
   
1.7
%
   
0.5
%
Dividend yield
   
0.0
%
   
0.0
%
Volatility
   
55.2
%
   
55.1
%
Expected life*
 
6.3 years
   
4.9 years
 

*
In 2021, our Compensation Committee approved an amendment to the 2011 Equity Incentive Plan, or 2011 Plan, and 2020 Plan, that increased the contractual term of stock options granted under these plans from seven years to ten years for stock options granted on January 1, 2022 and thereafter. We determined that we are unable to rely on our historical exercise data as a basis for estimating the expected life of stock options granted to employees following this change because the contractual term changed and we have no other means to reasonably estimate future exercise behavior. We therefore used the simplified method for determining the expected life of stock options granted to employees in the three months ended March 31, 2022. Under the simplified method, we calculate the expected term as the average of the time-to-vesting and the contractual life of the options. As we gain additional historical information, we will transition to calculating our expected term based on our historical exercise patterns.


ESPP:
 
Three Months Ended
March 31,
 
   
2022
   
2021
 
Risk-free interest rate
   
0.6
%
   
0.1
%
Dividend yield
   
0.0
%
   
0.0
%
Volatility
   
50.2
%
   
39.1
%
Expected life
 
6 months
   
6 months
 


RSU’s:


The fair value of RSUs is based on the market price of our common stock on the date of grant. The RSUs we have granted to employees vest annually over a four-year period. The RSUs we granted to our board of directors prior to June 2020 vest annually over a four-year period. RSUs granted after June 2020 to our board of directors fully vest after one year. The weighted-average grant date fair value of RSUs granted to employees for the three months ended March 31, 2022 was $33.08 per share.


PRSU’s:


Beginning in 2020, we added PRSU awards to the compensation for our Chief Executive Officer, Dr. Brett Monia. Beginning in 2022, we added PRSU awards to the compensation for our other executive officers. Under the terms of the grants, one third of the PRSUs may vest at the end of three separate performance periods spread over the three years following the date of grant (i.e., the one-year period commencing on the date of grant and ending on the first anniversary of the date of grant; the two-year period commencing on the date of grant and ending on the second anniversary of the date of grant; and the three-year period commencing on the date of grant and ending on the third anniversary of the date of grant) based on our relative total shareholder return, or TSR, as compared to a peer group of companies, and as measured, in each case, at the end of the applicable performance period. Under the terms of the grants no number of PRSUs is guaranteed to vest and the actual number of PRSUs that will vest at the end of each performance period may be anywhere from zero percentto 150 percent of the target number depending on our relative TSR.
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We determined the fair value of the PRSUs using a Monte Carlo model because the performance target is based on our relative TSR, which represents a market condition. We are recognizing the grant date fair value of these awards as stock-based compensation expense using the accelerated multiple-option approach over the vesting period. The weighted-average grant date fair value of PRSUs granted to our executive officers for the three months ended March 31, 2022 and 2021 were $42.28 and $77.17 per share, respectively.


The following table summarizes stock-based compensation expense for the three months ended March 31, 2022 and 2021 (in thousands).


 
Three Months Ended
March 31,
 
   
2022
   
2021
 
Cost of sales
 
$
160
   
$
182
 
Research, development and patent expense
   
19,082
     
25,899
 
Selling, general and administrative expense
   
6,994
     
11,780
 
Total
 
$
26,236
   
$
37,861
 


As of March 31, 2022, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options, RSUs and PRSUs was $67.7 million, $69.2 million and $5.4 million, respectively. Our actual expenses may differ from these estimates because we will adjust our unrecognized non-cash stock-based compensation expense for future forfeitures. We expect to recognize the cost of non-cash stock-based compensation expense related to our non-vested stock options, RSUs and PRSUs over a weighted average amortization period of 1.4 years, 1.7 years and 1.6 years, respectively.


Impact of Recently Issued Accounting Standards


We do not expect any recently issued accounting standards to have a material impact to our financial results.

3.  Investments


The following table summarizes the contract maturity of the available-for-sale securities we held as of March 31, 2022:

One year or less
   
63
%
After one year but within two years
   
30
%
After two years but within three and a half years
   
7
%
Total
   
100
%


As illustrated above, at March 31, 2022, 93 percent of our available-for-sale securities had a maturity of less than two years.


All of our available-for-sale securities are available to us for use in our current operations. As a result, we categorize all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.


We invest in available-for-sale securities with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Standard & Poor’s, or S&P, Moody’s or Fitch, respectively.


At March 31, 2022, we had an ownership interest of less than 20 percent in seven private companies and three public companies with which we conduct business. The privately held companies are Aro Biotherapeutics, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Flamingo Therapeutics BV, YourBio Health, Inc. and Suzhou-Ribo Life Science Co, Ltd. The publicly traded companies are Antisense Therapeutics Ltd., Bicycle and ProQR.
19



The following is a summary of our investments (in thousands):

 
Amortized
   
Gross Unrealized
   
Estimated
 
March 31, 2022
 
Cost
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities (1)
 
$
420,081
   
$
131
   
$
(1,766
)
 
$
418,446
 
Debt securities issued by U.S. government agencies
   
34,407
     
     
(49
)
   
34,358
 
Debt securities issued by the U.S. Treasury (1)
   
330,358
     
1
     
(1,133
)
   
329,226
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
158,548
     
1
     
(376
)
   
158,173
 
Other municipal debt securities
   
6,419
     
     
(99
)
   
6,320
 
Total securities with a maturity of one year or less
   
949,813
     
133
     
(3,423
)
   
946,523
 
Corporate debt securities
   
345,813
     
24
     
(10,275
)
   
335,562
 
Debt securities issued by U.S. government agencies
   
72,844
     
     
(1,974
)
   
70,870
 
Debt securities issued by the U.S. Treasury
   
164,040
     
70
     
(2,544
)
   
161,566
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
34,995
     
     
(818
)
   
34,177
 
Total securities with a maturity of more than one year
   
617,692
     
94
     
(15,611
)
   
602,175
 
Total available-for-sale securities
 
$
1,567,505
   
$
227
   
$
(19,034
)
 
$
1,548,698
 
Equity securities:
                               
Total equity securities included in other current assets (2)
 
$
11,897
   
$
3,946
   
$
(4,274
)
 
$
11,569
 
Total equity securities included in deposits and other assets (3)
   
23,115
     
16,707
     
     
39,822
 
Total equity securities
   
35,012
     
20,653
     
(4,274
)
   
51,391
 
Total available-for-sale and equity securities
 
$
1,602,517
   
$
20,880
   
$
(23,308
)
 
$
1,600,089
 

 
Amortized
   
Gross Unrealized
   
Estimated
 
December 31, 2021
 
Cost
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities (1)
 
$
383,870
   
$
728
   
$
(226
)
 
$
384,372
 
Debt securities issued by U.S. government agencies
   
48,493
     
19
     
(18
)
   
48,494
 
Debt securities issued by the U.S. Treasury (1)
   
45,424
     
     
(64
)
   
45,360
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
134,770
     
45
     
(37
)
   
134,778
 
Total securities with a maturity of one year or less
   
612,557
     
792
     
(345
)
   
613,004
 
Corporate debt securities
   
382,000
     
331
     
(2,644
)
   
379,687
 
Debt securities issued by U.S. government agencies
   
72,935
     
     
(561
)
   
72,374
 
Debt securities issued by the U.S. Treasury
   
137,635
     
139
     
(500
)
   
137,274
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
39,909
     
1
     
(224
)
   
39,686
 
Other municipal debt securities
   
6,136
     
     
(37
)
   
6,099
 
Total securities with a maturity of more than one year
   
638,615
     
471
     
(3,966
)
   
635,120
 
Total available-for-sale securities
 
$
1,251,172
   
$
1,263
   
$
(4,311
)
 
$
1,248,124
 
Equity securities:
                               
Total equity securities included in other current assets (2)
 
$
11,897
   
$
7,145
   
$
(837
)
 
$
18,205
 
Total equity securities included in deposits and other assets (3)
   
15,615
     
16,707
     
     
32,322
 
Total equity securities
   
27,512
     
23,852
     
(837
)
   
50,527
 
Total available-for-sale and equity securities
 
$
1,278,684
   
$
25,115
   
$
(5,148
)
 
$
1,298,651
 

(1)
Includes investments classified as cash equivalents on our condensed consolidated balance sheet.

(2)
Our equity securities included in other current assets consisted of our investments in two publicly traded companies, ProQR and Bicycle, which we classify as Level 1 and Level 3 investments, respectively. We recognize publicly traded equity securities at fair value. In the three months ended March 31, 2022, we recognized a $3.4 million and a $3.2 million unrealized loss on our condensed consolidated statement of operations related to our investments in ProQR and Bicycle, respectively. In the three months ended March 31, 2021, our equity securities included in other current assets only consisted of ProQR.

(3)
Our equity securities included in deposits and other assets consisted of our investments in privately held companies. We recognize our private company equity securities at 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.
20



The following is a summary of our investments we consider to be temporarily impaired at March 31, 2022 (in thousands, except for number of investments). We believe that the decline in value of these securities is temporary and is primarily related to the change in market interest rates since purchase. We believe it is more likely than not that we will be able to hold our debt securities to maturity. Therefore, we anticipate full recovery of our debt securities’ amortized cost basis at maturity.

       
Less than 12 Months of
Temporary Impairment
   
More than 12 Months of
Temporary Impairment
   
Total Temporary
Impairment
 
   
Number of
Investments
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
 
Corporate debt securities
   
337
   
$
647,390
   
$
(11,694
)
 
$
11,300
   
$
(347
)
 
$
658,690
   
$
(12,041
)
Debt securities issued by U.S. government agencies
   
14
     
95,543
     
(1,697
)
   
9,685
     
(326
)
   
105,228
     
(2,023
)
Debt securities issued by the U.S. Treasury
   
44
     
406,747
     
(3,539
)
   
4,860
     
(138
)
   
411,607
     
(3,677
)
Debt securities issued by states of the U.S. and political subdivisions of the states
   
619
     
173,537
     
(1,096
)
   
5,455
     
(98
)
   
178,992
     
(1,194
)
Other municipal debt securities
   
3
     
1,315
     
(16
)
   
5,005
     
(83
)
   
6,320
     
(99
)
Total temporarily impaired securities
   
1,017
   
$
1,324,532
   
$
(18,042
)
 
$
36,305
   
$
(992
)
 
$
1,360,837
   
$
(19,034
)

4.  Fair Value Measurements


We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities and our investment in equity securities in publicly held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. We classify most of our securities as Level 2. We obtain the fair value of our Level 2 investments from our custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by understanding the pricing model used by the custodian banks or professional pricing service provider and comparing that fair value to the fair value based on observable market prices.


The following tables present the major security types we held at March 31, 2022 and December 31, 2021 that we regularly measure and carry at fair value. As of March 31, 2022 and December 31, 2021, our Bicycle investment was subject to trading restrictions that extend to the third quarter of 2022; as a result, we included a lack of marketability discount in valuing this investment, which is a Level 3 input. The following tables segregate each security type by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities’ fair value (in thousands):