Company Quick10K Filing
Quick10K
Ionis Pharmaceuticals
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$58.37 138 $8,030
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-12-21 Officers, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-18 Officers, Exhibits
8-K 2018-10-10 Enter Agreement, Other Events, Exhibits
8-K 2018-09-25 Officers, Exhibits
8-K 2018-08-27 Other Events, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-06-19 Officers, Exhibits
8-K 2018-05-30 Shareholder Vote
8-K 2018-05-04 Earnings, Other Events, Exhibits
8-K 2018-04-20 Sale of Shares, Exhibits
8-K 2018-03-15 Enter Agreement, Exhibits
8-K 2018-02-27 Earnings, Exhibits
8-K 2018-01-16 Officers
ABBV AbbVie
SUPN Supernus Pharmaceuticals
RDUS Radius Health
RCKT Rocket Pharmaceuticals
VRCA Verrica Pharmaceuticals
NEOS Neos Therapeutics
SCYX Scynexis
LPCN Lipocine
CPHI China Pharma Holdings
SYN Synthetic Biologics
IONS 2018-09-30
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 ex10_1.htm
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm

Ionis Pharmaceuticals Earnings 2018-09-30

IONS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm IONIS PHARMACEUTICALS INC 10-Q 9-30-2018  

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 September 30, 2018

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 0-19125

     

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, CA
 
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
Common Stock, $.001 Par Value
 
The Nasdaq Stock Market, LLC

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 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. (Check one):

Large accelerated filer
Accelerated filer
   
Non-accelerated filer
Smaller reporting company
(Do not check if a 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 October 31, 2018 was 137,571,510.



IONIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX

PART I
FINANCIAL INFORMATION
 
     
ITEM 1:
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (unaudited) (as revised)
3
     
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited) (as revised)
4
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017 (unaudited) (as revised)
5
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited) (as revised)
6
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
7
     
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
     
 
Overview
31
     
 
Results of Operations
40
     
 
Liquidity and Capital Resources
45
     
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk
47
     
ITEM 4:
Controls and Procedures
47
     
PART II
OTHER INFORMATION
48
     
ITEM 1:
Legal Proceedings
48
 
ITEM 1A:
 
Risk Factors
48
 
ITEM 2:
 
Unregistered Sales of Equity Securities and Use of Proceeds
57
     
ITEM 3:
Default upon Senior Securities
57
     
ITEM 4:
Mine Safety Disclosures
57
     
ITEM 5:
Other Information
57
     
ITEM 6:
Exhibits
58
     
SIGNATURES
 
59

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.

2


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)

   
September 30,
2018
   
December 31,
2017
 
         
(as revised*)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
479,891
   
$
129,630
 
Short-term investments
   
1,479,098
     
893,085
 
Contracts receivable
   
14,732
     
62,955
 
Inventories
   
8,378
     
9,982
 
Other current assets
   
97,125
     
73,082
 
Total current assets
   
2,079,224
     
1,168,734
 
Property, plant and equipment, net
   
132,003
     
121,907
 
Patents, net
   
24,027
     
22,004
 
Deposits and other assets
   
12,659
     
10,129
 
Total assets
 
$
2,247,913
   
$
1,322,774
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
13,576
   
$
24,886
 
Accrued compensation
   
24,259
     
25,151
 
Accrued liabilities
   
50,786
     
66,618
 
Current portion of long-term obligations
   
14,472
     
1,621
 
Current portion of deferred contract revenue
   
157,145
     
125,336
 
Total current liabilities
   
260,238
     
243,612
 
Long-term deferred contract revenue
   
523,384
     
108,026
 
1 percent convertible senior notes
   
559,184
     
533,111
 
Long-term obligations, less current portion
   
5,138
     
12,974
 
Long-term mortgage debt
   
59,825
     
59,771
 
Total liabilities
   
1,407,769
     
957,494
 
Stockholders’ equity:
               
Common stock, $0.001 par value; 300,000,000 shares authorized, 137,506,203 and 124,976,373 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
   
138
     
125
 
Additional paid-in capital
   
2,030,313
     
1,553,681
 
Accumulated other comprehensive loss
   
(32,532
)
   
(31,759
)
Accumulated deficit
   
(1,287,369
)
   
(1,241,034
)
Total Ionis stockholders’ equity
   
710,550
     
281,013
 
   Noncontrolling interest in Akcea Therapeutics, Inc.
   
129,594
     
84,267
 
Total stockholders’ equity
   
840,144
     
365,280
 
Total liabilities and stockholders’ equity
 
$
2,247,913
   
$
1,322,774
 

* Our 2017 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

3


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

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2018
   
2017
   
2018
   
2017
 
Revenue:
       
(as revised*)
         
(as revised*)
 
Commercial revenue:
                       
SPINRAZA royalties
 
$
70,010
   
$
32,890
   
$
167,743
   
$
60,467
 
Licensing and other royalty revenue
   
12,746
     
1,727
     
14,232
     
5,639
 
Total commercial revenue
   
82,756
     
34,617
     
181,975
     
66,106
 
Research and development revenue under collaborative agreements
   
62,639
     
83,697
     
225,584
     
280,281
 
Total revenue
   
145,395
     
118,314
     
407,559
     
346,387
 
 
                               
Expenses:
                               
Research, development and patent
   
95,255
     
80,214
     
301,153
     
246,358
 
Selling, general and administrative
   
68,712
     
26,788
     
178,563
     
62,782
 
Total operating expenses
   
163,967
     
107,002
     
479,716
     
309,140
 
 
                               
Income (loss) from operations
   
(18,572
)
   
11,312
     
(72,157
)
   
37,247
 
 
                               
Other income (expense):
                               
Investment income
   
9,963
     
2,811
     
18,711
     
7,504
 
Interest expense
   
(11,282
)
   
(10,825
)
   
(33,332
)
   
(33,966
)
Loss on extinguishment of financing liability for leased facility
   
     
(7,689
)
   
     
(7,689
)
Other income (expenses)
   
(22
)
   
(2,141
)
   
(145
)
   
(3,528
)
 
                               
Loss before income tax expense
   
(19,913
)
   
(6,532
)
   
(86,923
)
   
(432
)
 
                               
Income tax expense
   
(452
)
   
(961
)
   
(824
)
   
(1,184
)
 
                               
Net loss
   
(20,365
)
   
(7,493
)
   
(87,747
)
   
(1,616
)
                                 
Net loss attributable to noncontrolling interest in Akcea Therapeutics, Inc.
   
15,806
     
4,882
     
41,412
     
4,882
 
                                 
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(4,559
)
 
$
(2,611
)
 
$
(46,335
)
 
$
3,266
 
                                 
Basic net income (loss) per share
 
$
(0.03
)
 
$
(0.02
)
 
$
(0.33
)
 
$
0.13
 
Shares used in computing basic net income (loss) per share
   
143,314
     
124,370
     
132,518
     
123,746
 
Diluted net income (loss) per share
 
$
(0.03
)
 
$
(0.02
)
 
$
(0.33
)
 
$
0.13
 
Shares used in computing diluted net income (loss) per share
   
143,314
     
124,370
     
132,518
     
125,858
 

* Our 2017 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 2, Significant Accounting Policies, for further information.

 See accompanying notes.

4


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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2018
   
2017
   
2018
   
2017
 
         
(as revised*)
         
(as revised*)
 
Net loss
 
$
(20,365
)
 
$
(7,493
)
 
$
(87,747
)
 
$
(1,616
)
Unrealized gains (losses) on debt securities, net of tax
   
133
     
215
     
(834
)
   
610
 
Reclassification adjustment for realized gains included in net income (loss)
   
     
     
     
(374
)
Currency translation adjustment
   
(28
)
   
(42
)
   
61
     
(77
)
 
                               
Comprehensive loss
   
(20,260
)
   
(7,320
)
   
(88,520
)
   
(1,457
)
                                 
Comprehensive loss attributable to noncontrolling interests
   
15,797
     
3,952
     
41,455
     
3,952
 
                                 
Comprehensive income (loss) attributable to Ionis Pharmaceuticals, Inc. stockholders
 
$
(4,463
)
 
$
(3,368
)
 
$
(47,065
)
 
$
2,495
 
 
* Our 2017 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

5


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

   
Nine Months Ended
September 30,
 
   
2018
   
2017
 
Operating activities:
       
(as revised*)
 
Net loss
 
$
(87,747
)
 
$
(1,616
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation
   
7,650
     
6,138
 
Amortization of patents
   
1,356
     
1,216
 
Amortization of premium on investments, net
   
791
     
5,227
 
Amortization of debt issuance costs
   
1,343
     
1,202
 
Amortization of convertible senior notes discount
   
24,781
     
22,963
 
Amortization of long-term financing liability for leased facility
   
     
3,659
 
Stock-based compensation expense
   
97,210
     
63,642
 
Gain on investment in Regulus Therapeutics, Inc.
   
     
(374
)
Loss on extinguishment of financing liability for leased facility
   
     
7,689
 
Non-cash losses related to patents, licensing and property, plant and equipment
   
482
     
(403
)
Changes in operating assets and liabilities:
               
Contracts receivable
   
48,223
     
65,119
 
Inventories
   
1,604
     
(962
)
Other current and long-term assets
   
(26,573
)
   
(34,866
)
Accounts payable
   
(13,606
)
   
(1,707
)
Accrued compensation
   
(892
)
   
(8,999
)
Accrued liabilities and deferred rent
   
(14,392
)
   
(5,251
)
Deferred contract revenue
   
447,168
     
31,071
 
Net cash provided by operating activities
   
487,398
     
153,748
 
                 
Investing activities:
               
Purchases of short-term investments
   
(1,156,335
)
   
(589,655
)
Proceeds from the sale of short-term investments
   
568,517
     
313,860
 
Purchases of property, plant and equipment
   
(12,221
)
   
(26,502
)
Acquisition of licenses and other assets, net
   
(3,317
)
   
(4,289
)
Proceeds from the sale of Regulus Therapeutics stock
   
     
2,507
 
Net cash used in investing activities
   
(603,356
)
   
(304,079
)
                 
Financing activities:
               
Proceeds from equity awards
   
18,254
     
17,672
 
Proceeds from the issuance of common stock from Akcea Therapeutics, Inc.’s initial public offering, net of underwriters’ discount
   
     
110,438
 
Proceeds from building mortgage debt, net of issuance costs
   
     
59,750
 
Proceeds from the issuance of common stock to Novartis
   
     
71,737
 
Proceeds from the issuance of common stock to Biogen
   
447,965
     
 
Offering costs paid
   
     
(1,057
)
Proceeds from the sale of Akcea Therapeutics, Inc. common stock to Novartis in a private placement
   
     
50,000
 
Payment to settle financing liability for leased facility
   
     
(80,133
)
Principal payments on debt and capital lease obligations
   
     
(3,577
)
Net cash provided by financing activities
   
466,219
     
224,830
 
                 
Net increase in cash and cash equivalents
   
350,261
     
74,499
 
Cash and cash equivalents at beginning of period
   
129,630
     
84,685
 
Cash and cash equivalents at end of period
 
$
479,891
   
$
159,184
 
                 
                 
Supplemental disclosures of cash flow information:
               
Interest paid
 
$
5,434
   
$
4,020
 
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Amounts accrued for capital and patent expenditures
 
$
2,296
   
$
3,475
 
Purchases of property, plant and equipment included in long-term obligations
 
$
3,596
   
$
 
Unpaid deferred offering costs
 
$
   
$
638
 

* Our 2017 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

6

IONIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

1.  Basis of Presentation

We prepared the unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2018 and 2017 on the same basis as the audited financial statements for the year ended December 31, 2017. 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. Results for the interim periods are not necessarily indicative of the results 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, 2017 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, which we formed in December 2014. Prior to Akcea’s initial public offering, or IPO, in July 2017, we owned 100 percent of Akcea. From the closing of Akcea’s IPO in July 2017 through mid-April 2018, we owned approximately 68 percent of Akcea. In the second and third quarters of 2018, we received additional shares of Akcea’s stock related to our license of TEGSEDI and AKCEA-TTR-LRx to Akcea, increasing our ownership percentage to approximately 75 percent. We reflected the increase in our ownership in these financial statements. In October 2018, we received an additional 1.7 million shares of Akcea’s stock when TEGSEDI received marketing authorization in the U.S., increasing our ownership to approximately 76 percent. 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

Adoption of New Revenue Recognition Accounting Standard (Topic 606)

In May 2014, the FASB issued accounting guidance on the recognition of revenue from customers. This guidance supersedes the revenue recognition requirements we previously followed in Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, or Topic 605, and created a new Topic 606, Revenue from Contracts with Customers, or Topic 606. Under Topic 606, an entity will recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects what the entity expects to receive in exchange for the goods or services. Further, an entity will recognize revenue upon satisfying the performance obligation(s) under the related contract. We adopted Topic 606 on January 1, 2018 under the full retrospective approach, which required us to revise our prior period revenue. Under Topic 606, we were required to review all of our ongoing collaboration agreements in which we recognized revenue after January 1, 2016. We were required to assess what our revenue would have been for the period from January 1, 2016 to December 31, 2017 under Topic 606. As a result of this analysis, we determined that the cumulative revenue we would have recognized under Topic 606 decreased by $53.6 million. We recorded this amount as a cumulative adjustment to our accumulated deficit as of December 31, 2017. We have labeled our prior period financial statements “as revised” to indicate the change required under the accounting rules.

The following tables summarize the adjustments we were required to make to amounts we originally reported in 2017 to adopt Topic 606 (in thousands, except per share amounts):

Condensed Consolidated Balance Sheet

   
At December 31, 2017
 
   
As Previously
Reported under
Topic 605
   
Topic 606
Adjustment
   
As Revised
 
Current portion of deferred revenue
 
$
106,465
   
$
18,871
   
$
125,336
 
Long-term portion of deferred revenue
 
$
72,708
   
$
35,318
   
$
108,026
 
Accumulated deficit
 
$
(1,187,398
)
 
$
(53,636
)
 
$
(1,241,034
)
   Noncontrolling interest in Akcea Therapeutics, Inc.
 
$
87,847
   
$
(3,580
)
 
$
84,267
 
Total stockholders’ equity
 
$
418,719
   
$
(53,439
)
 
$
365,280
 

7

Condensed Consolidated Statement of Operations

   
Three Months Ended September 30, 2017
 
   
As Previously
Reported under
Topic 605
   
Topic 606
Adjustment
   
As Revised
 
Revenue:
                 
Commercial revenue:
                 
SPINRAZA royalties
 
$
32,890
   
$
   
$
32,890
 
Licensing and other royalty revenue
   
879
     
848
     
1,727
 
Total commercial revenue
   
33,769
     
848
     
34,617
 
Research and development revenue under collaborative agreements
   
87,142
     
(3,445
)
   
83,697
 
Total revenue
 
$
120,911
   
$
(2,597
)
 
$
118,314
 
Income (loss) from operations
 
$
13,909
   
$
(2,597
)
 
$
11,312
 
Net income (loss)
 
$
(4,896
)
 
$
(2,597
)
 
$
(7,493
)
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(976
)
 
$
(1,635
)
 
$
(2,611
)
Net income (loss) per share, basic and diluted
 
$
0.00
   
$
(0.02
)
 
$
(0.02
)

   
Nine Months Ended September 30, 2017
 
   
As Previously
Reported under
Topic 605
   
Topic 606
Adjustment
   
As Revised
 
Revenue:
                 
Commercial revenue:
                 
SPINRAZA royalties
 
$
60,467
   
$
   
$
60,467
 
Licensing and other royalty revenue
   
4,983
     
656
     
5,639
 
Total commercial revenue
   
65,450
     
656
     
66,106
 
Research and development revenue under collaborative agreements
   
269,917
     
10,364
     
280,281
 
Total revenue
 
$
335,367
   
$
11,020
   
$
346,387
 
Income from operations
 
$
26,227
   
$
11,020
   
$
37,247
 
Net income (loss)
 
$
(12,636
)
 
$
11,020
   
$
(1,616
)
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(8,716
)
 
$
11,982
   
$
3,266
 
Net income (loss) per share, basic
 
$
0.02
   
$
0.11
   
$
0.13
 
Net income (loss) per share, diluted
 
$
0.02
   
$
0.11
   
$
0.13
 

Condensed Consolidated Statement of Cash Flows

   
Nine Months Ended September 30, 2017
 
   
As Previously
Reported under
Topic 605
   
Topic 606
Adjustment
   
As Revised
 
Net income (loss)
 
$
(12,636
)
 
$
11,020
   
$
(1,616
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Deferred contract revenue
 
$
42,091
   
$
(11,020
)
 
$
31,071
 
Cash and cash equivalents at beginning of period
 
$
84,685
   
$
   
$
84,685
 
Cash and cash equivalents at end of period
 
$
159,184
   
$
   
$
159,184
 

Under Topic 606, compared to Topic 605, our revenue decreased $2.6 million for the three months ended September 30, 2017, and increased $11.0 million for the nine months ended September 30, 2017. The change in our revenue was primarily due to:

A change in how we recognize milestone payments: Topic 606 requires us to amortize more of the milestone payments we achieve, rather than recognizing the milestone payments in full in the period in which we achieved the milestone event as we did under Topic 605. This change resulted in an increase of $0.5 million and $27.9 million for the three and nine months ended September 30, 2017, respectively.

A change in how we calculate revenue for payments we are recognizing into revenue over time: Under Topic 605, we amortized payments into revenue evenly over the period of our obligations. When we made a change to our estimated completion period, we recognized that change on a prospective basis. Under Topic 606, we are required to use an input method to determine the amount we amortize each reporting period. Each period, we review our “inputs” such as our level of effort expended, including the time we estimate it will take us to complete the activities, or costs incurred relative to the total expected inputs to satisfy the performance obligation. For certain collaborations, such as Bayer, Janssen and Novartis, the input method resulted in a change to the revenue we had previously recognized using a straight-line amortization method. This change resulted in a decrease of $4.0 million and $17.5 million for the three and nine months ended September 30, 2017, respectively.

8


Our updated revenue recognition policy reflecting Topic 606 is as follows:

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 expect to add product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 as a result of TEGSEDI’s approval in the U.S., EU and Canada. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships.

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.

Our collaboration agreements are detailed in Note 6, Collaborative Arrangements and Licensing Agreements. Under each collaboration note we discuss our specific revenue recognition conclusions, including our significant performance obligations under each collaboration.

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:

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 is probable.

2.
Identify the performance obligations

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

Often times when we enter into a collaboration agreement in which we provide our partner with an option to license a drug 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 drug in the future or to provide additional goods and services as requested by our partner are not material rights. These items are contingent upon future events that may not occur. When a partner exercises its option to license a drug 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 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. 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.

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 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 on future product sales;
Contractual milestone payments;
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.

We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.

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.

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 in the period in which the counterparty sells the related product, which in certain cases may require us to estimate our royalty revenue. We recognize royalties from SPINRAZA sales in the period Biogen records the sale of SPINRAZA. Our accounting for SPINRAZA royalties did not change as a result of adopting Topic 606.

10


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 new SMA collaboration with Biogen, we received a $25 million upfront payment in December 2017. We allocated the upfront payment to our single performance obligation, R&D services. We are amortizing the $25 million upfront payment using an input method over the estimated period of time we are providing R&D services. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, for further discussion. Under Topic 605, we amortized upfront payments evenly over the period of our obligation.

Milestone Payments

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 under our collaboration agreements. Similarly, we include approval milestone payments in the transaction price once the drug is approved by the applicable regulator. We will recognize sales based milestone payments in the period 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 third quarter of 2017, we initiated a Phase 1/2a clinical study of IONIS-MAPTRx in patients with mild Alzheimer’s disease. We earned a $10 million milestone payment from Biogen related to the initiation of this study. Under Topic 606, we allocated this payment to our R&D services performance obligation. We are recognizing revenue from this milestone payment over our estimated period of performance. Under Topic 605, this milestone payment was recognized in full in the third quarter of 2017, which was the period in which we achieved the milestone event.

Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event. For example, in the third quarter of 2018, we earned a $10 million milestone payment when AstraZeneca initiated a Phase 1 study of IONIS-AZ4-2.5-LRx. Our revenue recognition of milestone payments we earn based on our partners’ activities did not change as a result of adopting Topic 606.

License Fees

We generally recognize as revenue the total amount we determine to be the 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 third quarter of 2018, we earned a $12 million license fee when our majority-owned affiliate, Akcea, entered into an exclusive license agreement with PTC Therapeutics to commercialize TEGSEDI and WAYLIVRA in Latin America. Our recognition of license fees did not change as a result of adopting Topic 606.

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 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 standalone 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-FXIRx 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-FXIRx 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-FXIRx and to initiate development of IONIS-FXI-LRx, 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-FXIRx and IONIS-FXI-LRx. 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-LRx, 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, for further discussion of our accounting treatment for our Bayer collaboration. Our allocation of the consideration we received for the Bayer amendment did not change as a result of adopting Topic 606. However, the method in which we are recognizing revenue related to our R&D services performance obligation did change. We are amortizing revenue related to our R&D services performance obligation using the input method under Topic 606.

11


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. Refer to Note 6, Collaborative Arrangements and Licensing Agreements for further discussion of the accounting treatment for the 2018 strategic neurology collaboration with Biogen.

Contracts Receivable

Our contracts receivable balance represents the amounts we have billed our partners for goods we have delivered or services we have performed that are due to us unconditionally. When we bill our partners 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. Our contracts receivable balance as of December 31, 2017 did not change when we adopted Topic 606.

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. Our unbilled SPINRAZA royalties as of December 31, 2017 did not change when we adopted Topic 606.

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 and nine months ended September 30, 2018, we recognized $37.2 million and $80.4 million of revenue from amounts that were in our beginning deferred revenue balances for those periods, respectively. During the three and nine months ended September 30, 2017, we recognized $31.6 million and $84.4 million of revenue from amounts that were in our beginning deferred revenue balances for those periods, respectively. Refer to our revenue recognition policy above detailing how we recognize revenue for further discussion.

The following table summarizes the adjustments we were required to make to our deferred revenue amounts to adopt Topic 606 (in thousands):

 
At December 31, 2017
 
 
As Previously
Reported under
Topic 605
 
Topic 606
Adjustment
 
As Revised
 
Current portion of deferred revenue
 
$
106,465
   
$
18,871
   
$
125,336
 
Long-term portion of deferred revenue
   
72,708
     
35,318
     
108,026
 
Total deferred revenue
 
$
179,173
   
$
54,189
   
$
233,362
 

Our deferred revenue balance increased $54.2 million at December 31, 2017 under Topic 606, compared to Topic 605. The increase was primarily related to the change in the accounting for certain milestone payments and the way in which we amortize payments. Under Topic 605, we previously recognized the majority of the milestone payments we earned in the period we achieved the milestone event, which did not impact our deferred revenue balance. Under Topic 606 we are now amortizing more milestone payments over the period of our performance obligation, which adds to our deferred revenue balance. Additionally, under Topic 605 we amortized payments evenly over the period of our obligation. Under Topic 606, we are required to use an input method to determine the amount we amortize each reporting period. The increase in deferred revenue relates to agreements with the following partners:

$24.2 million from Biogen;
$15.9 million from AstraZeneca;
$11.8 from Novartis; and
$2.3 million from other partners.

12


Noncontrolling Interest in Akcea Therapeutics, Inc.

Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. From the closing of Akcea’s IPO in July 2017 through mid-April 2018, we owned approximately 68 percent of Akcea. In the second and third quarters of 2018, we received additional shares of Akcea’s stock related to our license of TEGSEDI and AKCEA-TTR-LRx to Akcea, increasing our ownership percentage to approximately 75 percent. We reflected this increase in our ownership percentage in these financial statements as an adjustment to noncontrolling interest. In October 2018, we received an additional 1.7 million shares of Akcea’s stock when TEGSEDI received marketing authorization in the U.S., increasing our ownership to approximately 76 percent. The shares third parties own represent an interest in Akcea’s equity that is not controlled by us. 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 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 September 30, 2018, we held an equity investment in one publicly held company, Antisense Therapeutics Limited, or ATL. We also held equity investments in four privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd.

In January 2018, we adopted the amended accounting guidance related to the recognition, measurement, presentation, and disclosure of certain financial instruments. The amended guidance requires us to measure and record our equity investments at fair value. Additionally, the amended accounting guidance requires us to recognize the changes in fair value in our consolidated statement of operations, instead of through accumulated other comprehensive income. Prior to 2018, we accounted for our equity investments in privately held companies under the cost method of accounting. Under the amended guidance 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. Our adoption of this guidance did not have an impact on our results.

Inventory valuation

We reflect our inventory on our 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 drugs because until we use these raw materials they have alternative future uses. We include in inventory raw material costs for drugs 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 drug. For example, if one of our drugs failed, we could use the raw materials for that drug to manufacture our other drugs. We expense these costs as R&D expenses when we begin to manufacture API for a particular drug if the drug has not been approved for marketing by a regulatory agency.

We obtained the first regulatory approval for TEGSEDI in July 2018. At September 30, 2018 and December 31, 2017, our physical inventory for TEGSEDI included API that we produced prior to when we obtained regulatory approval and accordingly 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 drugs and historical write-offs. We did not record any inventory write-offs for the nine months ended September 30, 2018 and 2017.

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.

13


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 United States 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. We evaluate patents and patent applications that we are not actively pursuing and write off any associated costs.

Long-lived assets

We evaluate long-lived assets, which include property, plant and equipment and patent costs acquired from third parties, 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 United States requires 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 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 and nine months ended September 30, 2018 and 2017 considered our net income for Ionis on a stand-alone basis plus our share of Akcea’s net loss for the period. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s 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 September 30, 2018, was calculated as follows (in thousands, except per share amounts):

Three months ended September 30, 2018
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Income (Loss)
Per Share
   
Ionis’ Portion of
Akcea’s Net Loss
 
                   
Common shares
   
65,538
   
$
(0.73
)
 
$
(47,843
)
Akcea’s net loss attributable to our ownership
                 
$
(47,843
)
Ionis’ stand-alone net income
                   
43,226
 
Net loss available to Ionis common stockholders
                 
$
(4,616
)
Weighted average shares outstanding
                   
143,314
 
Basic net loss per share
                 
$
(0.03
)


Akcea’s net loss per share calculation for the nine months ended September 30, 2018 included two components: (1) Akcea’s net loss from its statement of operations and (2) deemed distributions related to the license of TEGSEDI in the second quarter of 2018. Because we own more than 50 percent of Akcea, we and Akcea are under common control. As such, Akcea accounted for the TEGSEDI transaction using common control guidance. Accordingly, Akcea recorded the license we granted to them at carrying value. In addition, Akcea recorded the consideration it paid to us in excess of the carrying value as a deemed distribution. Accounting rules required Akcea to include these deemed distributions in their net loss per share calculation as if Akcea had paid us a dividend.      

Our basic net loss per share for the nine months ended September 30, 2018, was calculated as follows (in thousands, except per share amounts):

Nine months ended September 30, 2018
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Loss
Per Share
   
Ionis’ Portion of
Akcea’s Net Loss
 
                   
Common shares
   
57,347
   
$
(1.93
)
 
$
(110,680
)
Akcea’s net loss attributable to our ownership
                 
$
(110,680
)
Ionis’ stand-alone net income
                   
67,517
 
Net income available to Ionis common stockholders
                 
$
(43,162
)
Weighted average shares outstanding
                   
132,518
 
Basic net loss per share
                 
$
(0.33
)

14


Prior to Akcea’s IPO in July 2017, we owned Akcea series A convertible preferred stock, which included a six percent cumulative dividend. Upon completion of Akcea’s IPO in July 2017, our preferred stock was converted into common stock on a 1:1 basis. The preferred stock dividend was not paid at the IPO because the IPO was not a liquidation event or a change in control. During the three and nine months ended September 30, 2017, Akcea used a two-class method to compute its net income (loss) per share because it had both common and preferred shares outstanding during the periods. The two-class method required Akcea to calculate its net income (loss) per share for each class of stock by dividing total distributable losses applicable to preferred and common stock, including the six percent cumulative dividend contractually due to series A convertible preferred shareholders, by the weighted-average of preferred and common shares outstanding during the requisite period. Since Akcea used the two-class method, accounting rules required us to include our portion of Akcea's net income (loss) per share for both Akcea's common and preferred shares that we owned in our calculation of basic and diluted net income (loss) per share for three and nine months ended September 30, 2017.

Our basic net income per share for the three months ended September 30, 2017, was calculated as follows (in thousands, except per share amounts):

Three months ended September 30, 2017
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Loss
Per Share
   
Ionis’ Portion of
Akcea’s Net Loss
 
                   
Common shares
   
36,556
   
$
(0.33
)
 
$
(12,063
)
Preferred shares
   
5,651
     
(0.01
)
   
(57
)
Akcea’s net loss attributable to our ownership
                 
$
(12,120
)
Ionis’ stand-alone net income
                   
10,144
 
Net loss available to Ionis common stockholders
                 
$
(1,976
)
Weighted average shares outstanding
                   
124,370
 
Basic net income per share
                 
$
(0.02
)

Our basic net income per share for the nine months ended September 30, 2017, was calculated as follows (in thousands, except per share amounts):

Nine months ended September 30, 2017
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Loss
Per Share
   
Ionis’ Portion of
Akcea’s Net Loss
 
                   
Common shares
   
12,319
   
$
(3.12
)
 
$
(38,435
)
Preferred shares
   
21,055
     
(2.16
)
   
(45,479
)
Akcea’s net loss attributable to our ownership
                 
$
(83,914
)
Ionis’ stand-alone net income
                   
100,235
 
Net income available to Ionis common stockholders
                 
$
16,321
 
Weighted average shares outstanding
                   
123,746
 
Basic net income per share
                 
$
0.13
 

Dilutive net income (loss per share)

For the three and nine months ended September 30, 2018 and for the three months ended September 30, 2017, 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:

1 percent convertible senior notes;
2¾ percent convertible senior notes;
Dilutive stock options;
Unvested restricted stock units; and
Employee Stock Purchase Plan, or ESPP.

For the nine months ended September 30, 2017, we had net income available to Ionis common stockholders. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during those periods. Diluted common equivalent shares for the nine months ended September 30, 2017 consisted of the following (in thousands except per share amounts):

Nine months ended September 30, 2017
 
Income
(Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
 
                   
Net income available to Ionis common stockholders
 
$
16,321
     
123,746
   
$
0.13
 
Effect of dilutive securities:
                       
Shares issuable upon exercise of stock options
   
     
1,658
         
Shares issuable upon restricted stock award issuance
   
     
430
         
Shares issuable related to our ESPP
   
     
24
         
Income available to Ionis common stockholders, plus assumed conversions
 
$
16,321
     
125,858
   
$
0.13
 

15


For the nine months ended September 30, 2017, the calculation excluded the 1 percent and 2¾ percent notes because the effect on diluted earnings per share was anti-dilutive.

Accumulated other comprehensive loss

We include unrealized gains and losses on investments, net of taxes, in accumulated other comprehensive income (loss) along with adjustments we make to reclassify realized gains and losses on investments from other accumulated comprehensive income (loss) to our condensed consolidated statement of operations. The following table summarizes changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2018
   
2017
   
2018
   
2017
 
Beginning balance accumulated other comprehensive loss
 
$
(32,637
)
 
$
(30,372
)
 
$
(31,759
)
 
$
(30,358
)
Unrealized gains (losses) on securities (1)
   
133
     
215
     
(834
)
   
610
 
Amounts reclassified from accumulated other comprehensive loss
   
     
     
     
(374
)
Currency translation adjustment
   
(28
)
   
(42
)
   
61
     
(77
)
Net current period other comprehensive income (loss)
   
105
     
173
     
(773
)
   
159
 
Ending balance accumulated other comprehensive loss
 
$
(32,532
)
 
$
(30,199
)
 
$
(32,532
)
 
$
(30,199
)

(1)
There was no income tax expense or benefit related to elements of other comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017.

Convertible debt

We account for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. We determine the carrying amount of the liability component by measuring the fair value of similar debt instruments that do not have the conversion feature. If no similar debt instrument exists, we estimate fair value by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. To determine the fair value of the debt component we are required to use accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense.

We assigned a value to the debt component of our convertible notes equal to the estimated fair value of similar debt instruments without the conversion feature, which resulted in us recording our debt at a discount. We are amortizing our debt issuance costs and debt discount over the life of the convertible notes as additional non-cash interest expense utilizing the effective interest method.

Segment information

We have two operating segments, our Ionis Core segment and Akcea Therapeutics, our majority owned affiliate. Akcea is a biopharmaceutical company focused on developing and commercializing drugs to treat patients with rare and serious diseases. We provide segment financial information and results for our Ionis Core segment and our Akcea Therapeutics segment based on the segregation of revenues and expenses that our chief decision maker reviews to assess operating performance and to make operating decisions. We allocate a portion of Ionis’ development, R&D support and general and administrative expenses to Akcea for work Ionis performs on behalf of Akcea.

Stock-based compensation expense

We measure stock-based compensation expense for equity-classified awards, principally related to stock options, restricted stock units, or RSUs, 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. The expected term of stock options granted represents the period of time that we expect them to be outstanding. We estimate the expected term of options granted based on historical exercise patterns. For the nine months ended September 30, 2018 and 2017, we used the following weighted-average assumptions in our Black-Scholes calculations:

Employee Stock Options:
 
Nine Months Ended
September 30,
 
2018
 
2017
Risk-free interest rate
 
2.3%
   
1.8%
Dividend yield
 
0.0%
   
0.0%
Volatility
 
63.1%
   
66.1%
Expected life
 
4.6 years
   
4.5 years

16



Board of Director Stock Options:
 
Nine Months Ended
September 30,
 
2018
 
2017
Risk-free interest rate
 
2.8 %
   
2.2 %
Dividend yield
 
0.0 %
   
0.0 %
Volatility
 
61.5 %
   
61.2 %
Expected life
 
6.6 years
   
6.6 years

ESPP:
 
Nine Months Ended
September 30,
 
2018
 
2017
Risk-free interest rate
 
1.8%
   
0.8%
Dividend yield
 
0.0%
   
0.0%
Volatility
 
47.3%
   
59.9%
Expected life
 
6 months
   
6 months

The fair value of RSUs is based on the market price of our common stock on the date of grant. RSUs vest annually over a four-year period. The weighted-average grant date fair value of RSUs granted to employees and members of our board of directors for the nine months ended September 30, 2018 was $51.83 and $42.88 per share, respectively.

The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2018 and 2017 (in thousands). Our consolidated non-cash stock-based compensation expense includes $12.7 million and $4.7 million of stock-based compensation expense for Akcea for the three months ended September 30, 2018 and 2017, respectively, and $31.2 million and $11.8 million for the nine months ended September 30, 2018 and 2017, respectively.

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
Research, development and patent
 
$
18,780
   
$
16,181
   
$
57,698
   
$
48,443
 
Selling, general and administrative
   
16,103
     
5,291
     
39,512
     
15,199
 
Total non-cash stock-based compensation expense
 
$
34,883
   
$
21,472
   
$
97,210
   
$
63,642
 

As of September 30, 2018, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options and RSUs was $139.5 million and $32.6 million, respectively. We will adjust total unrecognized compensation cost for future forfeitures. We expect to recognize the cost of non-cash stock-based compensation expense related to non-vested stock options and RSUs over a weighted average amortization period of 1.3 years and 1.6 years, respectively.

Impact of recently issued accounting standards

In February 2016, the FASB issued amended accounting guidance related to lease accounting, which will require us to record all leases with a term longer than one year on our balance sheet. When we record leases on our balance sheet under the new guidance, we will record a liability with a value equal to the present value of payments we will make over the life of the lease and an asset representing the underlying leased asset. The new accounting guidance requires us to determine if our leases are operating or financing leases. We will record expense for operating leases on a straight-line basis as an operating expense. If we determine a lease is a financing lease, we will record both interest and amortization expense and generally the expense will be higher in the earlier periods of the lease. The new lease standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. We will adopt this guidance on January 1, 2019. We can choose from two methods of adoption. The first method requires us to reflect our leases on our balance sheet in the earliest comparative period presented in our financial statements. The second method requires us to reflect the impact of adoption on the date we adopt the new guidance and recognize a cumulative-effect adjustment to the opening balance of our accumulated deficit in that period. We are currently determining the method we will use to adopt the new guidance and assessing the effects the new guidance will have on our consolidated financial statements and disclosures.

In June 2016, the FASB issued guidance that changes the measurement of credit losses for most financial assets and certain other instruments. If we have credit losses, this updated guidance requires us to record allowances for these instruments under a new expected credit loss model. This model requires us to estimate the expected credit loss of an instrument over its lifetime, which represents the portion of the amortized cost basis we do not expect to collect. The new guidance requires us to remeasure our allowance in each reporting period we have credit losses. The new standard is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. When we adopt the new standard, we will make any adjustments to beginning balances through a cumulative-effect adjustment to accumulated deficit on that date. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our consolidated financial statements and disclosures.

17


In December 2017, the SEC staff issued guidance to address how companies should account for the Tax Act of 2017, or the Tax Act, when an entity does not have the necessary information to complete the accounting for the Tax Act and gives entities up to one year from the enactment of the Tax Act to finalize their amounts. We recognized provisional amounts in our 2017 financial statements and in these financial statements. The ultimate impact may differ materially from these provisional amounts due to, among other things, additional analysis, changes in our interpretations and assumptions, additional regulatory guidance that may be issued, and other actions we may take resulting from the Tax Act. We will assess and update our provisional amounts and disclosures, as necessary, at year end 2018.

In February 2018, the FASB issued updated guidance for reclassification of tax effects from accumulated other comprehensive income (loss). The updated guidance gives entities an option to reclassify amounts included in accumulated other comprehensive income (loss) that under the Tax Act do not have a way to be relieved, and allows a one-time reclassification to retained earnings. The updated guidance is effective for all entities for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Early adoption is permitted, and adoption is optional. We are currently assessing the effects this updated guidance could have on our consolidated financial statements and timing of potential adoption.

In June 2018, the FASB issued updated guidance to simplify the accounting for stock-based compensation expense for nonemployees. Specifically, we are now expensing grants to nonemployees in a similar manner as grants to employees and our Board of Directors. Previously, we had to re-value these grants at each reporting period to reflect the current fair value. Under the amended guidance, we value grants to nonemployees when we grant them and we will not adjust their value for future changes. We adopted this guidance in the second quarter of 2018 on a prospective basis. The updated guidance did not have a material impact to our financial results.

In August 2018, the FASB issued clarifying guidance on how to account for implementation costs related to cloud-servicing arrangements. The guidance states that if these fees qualify to be capitalized and amortized over the service period, they need to be expensed in the same line item as the service expense and recognized in the same balance sheet category. The update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The updated guidance is effective for fiscal years beginning after December 31, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently assessing the effects this updated guidance could have on our consolidated financial statements and timing of adoption.

In August 2018, the FASB updated its disclosure requirements related to Level 1, 2 and 3 fair value measurements. The update included deletion and modification of certain disclosure requirements and additional disclosure related to Level 3 measurements. The guidance is effective for fiscal years beginning after December 31, 2019 and early adoption is permitted. We anticipate we will adopt this updated guidance on January 1, 2019 and we do not expect it to have a significant impact on our disclosures.

3.  Investments

As of September 30, 2018, we had invested our excess cash primarily in debt instruments of the U.S. Treasury, financial institutions, corporations, and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody’s, Standard & Poor’s, or S&P, or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.

The following table summarizes the contract maturity of the available-for-sale securities we held as of September 30, 2018:

One year or less
80%
After one year but within two years
15%
After two years but within three years
5%
Total
100%

As illustrated above, at September 30, 2018, 95 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.

At September 30, 2018, we had an ownership interest of less than 20 percent in four private companies and one public company with which we conduct business. The privately-held companies are Atlantic Pharmaceuticals Limited, Dynacure SAS, Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd. The publicly-traded company is Antisense Therapeutics Limited.
18




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

     
Gross Unrealized
     
September 30, 2018
 
Cost (1)
   
Gains
   
Losses
   
Estimated Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities (2)
 
$
841,397
   
$
23
   
$
(1,264
)
 
$
840,156
 
Debt securities issued by U.S. government agencies
   
143,008
     
2
     
(169
)
   
142,841
 
Debt securities issued by the U.S. Treasury (2)
   
154,280
     
     
(89
)
   
154,191
 
Debt securities issued by states of the U.S. and political subdivisions of the states (2)
   
49,873
     
     
(330
)
   
49,543
 
Total securities with a maturity of one year or less
   
1,188,558
     
25
     
(1,852
)
   
1,186,731
 
Corporate debt securities
   
240,208
     
16
     
(1,420
)
   
238,804
 
Debt securities issued by U.S. government agencies
   
32,435
     
     
(109
)
   
32,326
 
Debt securities issued by the U.S. Treasury
   
9,872
     
     
(10
)
   
9,862
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
31,666
     
     
(551
)
   
31,115
 
Total securities with a maturity of more than one year
   
314,181
     
16
     
(2,090
)
   
312,107
 
Total available-for-sale securities
 
$
1,502,739
   
$
41
   
$
(3,942
)
 
$
1,498,838
 

     
Gross Unrealized
     
December 31, 2017
 
Cost (1)
   
Gains
   
Losses
   
Estimated Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities
 
$
500,599
   
$
2
   
$
(752
)
 
$
499,849
 
Debt securities issued by U.S. government agencies
   
83,926
     
     
(212
)
   
83,714
 
Debt securities issued by the U.S. Treasury
   
29,428
     
     
(17
)
   
29,411
 
Debt securities issued by states of the U.S. and political subdivisions of the states (2)
   
29,240
     
4
     
(122
)
   
29,122
 
Total securities with a maturity of one year or less
   
643,193
     
6
     
(1,103
)
   
642,096
 
Corporate debt securities
   
148,663
     
8
     
(1,059
)
   
147,612
 
Debt securities issued by U.S. government agencies
   
52,779
     
     
(168
)
   
52,611
 
Debt securities issued by the U.S. Treasury
   
1,409
     
     
(2
)
   
1,407
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
65,550
     
     
(740
)
   
64,810
 
Total securities with a maturity of more than one year
   
268,401
     
8
     
(1,969
)
   
266,440
 
Total available-for-sale securities
 
$
911,594
   
$
14
   
$
(3,072
)
 
$
908,536
 

(1)
Our available-for-sale securities are held at amortized cost.

(2)
Includes investments classified as cash equivalents on our condensed consolidated balance sheet.

The following is a summary of our investments we consider to be temporarily impaired at September 30, 2018. 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
 
 (In thousands)
 
Number of
Investments
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
 
Corporate debt securities
   
495
   
$
889,172
   
$
(1,687
)
 
$
83,706
   
$
(997
)
 
$
972,878
   
$
(2,684
)
Debt securities issued by U.S. government agencies
   
51
     
132,231
     
(139
)
   
26,862
     
(139
)
   
159,093
     
(278
)
Debt securities issued by the U.S. Treasury
   
32
     
164,053
     
(99
)
   
     
     
164,053
     
(99
)
Debt securities issued by states of the U.S. and political subdivisions of the states
   
48
     
25,687
     
(191
)
   
51,747
     
(690
)
   
77,434
     
(881
)
Total temporarily impaired securities
   
626
   
$
1,211,143
   
$
(2,116
)
 
$
162,315
   
$
(1,826
)
 
$
1,373,458
   
$
(3,942
)

19

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 the majority 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. During the nine months ended September 30, 2018, there were no transfers between our Level 1 and Level 2 investments. When we recognize transfers between levels of the fair value hierarchy, we recognize the transfer on the date the event or change in circumstances that caused the transfer occurs.

The following tables present the major security types we held at September 30, 2018 and December 31, 2017 that are regularly measured and carried at fair value. At September 30, 2018 and December 31, 2017, we did not have any financial instruments that we valued using Level 3 inputs. The 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):

   
At
September 30, 2018
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
 
Cash equivalents (1)
 
$
395,649
   
$
395,649
   
$
 
Corporate debt securities (2)
   
1,078,960
     
     
1,078,960
 
Debt securities issued by U.S. government agencies (3)
   
175,167
     
     
175,167
 
Debt securities issued by the U.S. Treasury (3)
   
164,053
     
164,053
     
 
Debt securities issued by states of the U.S. and political subdivisions of the states (3)
   
80,658
     
     
80,658
 
Total
 
$
1,894,487
   
$
559,702
   
$
1,334,785
 

   
At
December 31, 2017
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
 
Cash equivalents (1)
 
$
86,262
   
$
86,262
   
$
 
Corporate debt securities (3)
   
647,461
     
     
647,461
 
Debt securities issued by U.S. government agencies (3)
   
136,325
     
     
136,325
 
Debt securities issued by the U.S. Treasury (3)
   
30,818
     
30,818
     
 
Debt securities issued by states of the U.S. and political subdivisions of the states (4)
   
93,932
     
     
93,932
 
Total
 
$
994,798
   
$
117,080
   
$
877,718
 

(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet.

(2)
At September 30, 2018, $19.7 million was included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

(3)
Included in short-term investments on our condensed consolidated balance sheet.

(4)
At December 31, 2017, $3.5 million was included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

Other Fair Value Disclosures

Novartis Future Stock Purchase

In January 2017, we and Akcea entered into a SPA with Novartis. As part of the SPA, Novartis was required to purchase $50 million of Akcea’s common stock at the IPO price or our common stock at a premium if an IPO did not occur by April 2018. Therefore, at the inception of the SPA, we recorded a $5.0 million asset representing the fair value of the potential future premium we could have received if Novartis purchased our common stock. We determined the fair value of the future premium by calculating the value based on the stated premium in the SPA and estimating the probability of an Akcea IPO. We also included a lack of marketability discount when we determined the fair value of the premium because we would have issued unregistered shares to Novartis if they had purchased our common stock. We measured this asset using Level 3 inputs and recorded it in other assets on our consolidated balance sheet. Because Akcea completed its IPO before April 2018, Novartis did not purchase additional shares of Ionis stock. Therefore, we wrote-off the remaining balance to other expenses in the third quarter of 2017 because this asset no longer had any value.

20


The following is a reconciliation of the potential premium we would have received if Akcea had not completed its IPO, measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017 (in thousands):
       
Beginning balance of Level 3 instruments at January 1, 2017
 
$
 
Value of the potential premium we would have received from Novartis at inception of the SPA (January 2017)
   
5,035
 
Recurring fair value adjustment during the nine months ended September 30, 2017
   
(5,035
)
Ending balance of Level 3 instruments at September 30, 2017
 
$
 

Convertible Notes

Our 1 percent notes had a fair value of $725.7 million at September 30, 2018. We determine the fair value of our notes based on quoted market prices for these notes, which are Level 2 measurements because the notes do not trade regularly.

5.  Other Obligations

Line of Credit Arrangement

In June 2015, we entered into a five-year revolving line of credit agreement with Morgan Stanley Private Bank, National Association, or Morgan Stanley. We amended the credit agreement in February 2016 to increase the amount available for us to borrow. Under the amended credit agreement, we can borrow up to a maximum of $30 million of revolving credit for general working capital purposes. Under the credit agreement interest is payable monthly in arrears on the outstanding principal at a borrowing rate based on our option of:

(i)
a floating rate equal to the one-month London Interbank Offered Rate, or LIBOR, in effect plus 1.25 percent per annum;
(ii)
a fixed rate equal to LIBOR plus 1.25 percent for a period of one, two, three, four, six, or twelve months as elected by us; or
(iii)
a fixed rate equal to the LIBOR swap rate during the period of the loan.

Additionally, we pay 0.25 percent per annum, payable quarterly in arrears, for any amount unused under the credit facility. As of September 30, 2018 we had $12.5 million in outstanding borrowings under the credit facility with a 2.31 percent fixed interest rate and a maturity date of September 2019, which we used to fund our capital equipment needs consistent with our historical practice to finance these costs.

The credit agreement includes customary affirmative and negative covenants and restrictions. We are in compliance with all covenants of the credit agreement.

Research and Development and Manufacturing Facilities

In July 2017, we purchased the building that houses our primary R&D facility and the building that houses our manufacturing facility for $79.4 million and $14.0 million, respectively. We financed the purchase of our primary R&D facility and our manufacturing facility, with mortgage debt of $51.3 million and $9.1 million, respectively. Our primary R&D facility mortgage has an interest rate of 3.88 percent. Our manufacturing facility has an interest rate of 4.20 percent. During the first five years of both mortgages, we are only required to make interest payments. Both mortgages mature in August 2027.

6.  Collaborative Arrangements and Licensing Agreements

Below, we have included all of our significant collaborations because we adopted Topic 606 on January 1, 2018. We have included new disclosures for each of our collaborations as required under Topic 606.

Strategic Partnership

Biogen

We have several strategic collaborations with Biogen focused on using antisense technology to advance the treatment of neurological disorders. These collaborations combine our expertise in creating antisense drugs with Biogen's expertise in developing therapies for neurological disorders. We developed and licensed to Biogen SPINRAZA, our approved drug to treat people with spinal muscular atrophy, or SMA. In December 2017, we entered into a collaboration with Biogen to identify new antisense drugs for the treatment of SMA. Additionally, we and Biogen are currently developing six other drugs to treat neurodegenerative diseases under these collaborations, including IONIS-SOD1Rx for ALS, IONIS-MAPTRx for Alzheimer’s disease, IONIS-C9Rx for ALS, and IONIS-BIIB6Rx, IONIS-BIIB7Rx and IONIS-BIIB8Rx to treat undisclosed neurodegenerative diseases. In addition to these drugs, we and Biogen are evaluating numerous additional targets to develop drugs to treat neurological diseases. Most recently, in April 2018, we entered into a new strategic collaboration for the treatment of neurological diseases with Biogen. From inception through September 2018, we have received over $1.9 billion from our Biogen collaborations, including $1 billion we received from Biogen in the second quarter of 2018 when we entered into the 2018 strategic neurology collaboration.

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SPINRAZA

In January 2012, we entered into a collaboration agreement with Biogen to develop and commercialize SPINRAZA, an RNA-targeted therapy for the treatment of SMA. In December 2016, the FDA approved SPINRAZA for the treatment of SMA in pediatric and adult patients.

From inception through September 2018, we earned $717 million in total revenue under our SPINRAZA collaboration, including $281 million in revenue from SPINRAZA royalties and $436 million in R&D revenue. We are receiving tiered royalties ranging from 11 percent to 15 percent on any sales of SPINRAZA. We have exclusively in-licensed patents related to SPINRAZA from Cold Spring Harbor Laboratory and the University of Massachusetts. We pay Cold Spring Harbor Laboratory and the University of Massachusetts a low single digit royalty on sales of SPINRAZA. Biogen is responsible for all further global development, regulatory and commercialization activities and costs for SPINRAZA.

Over the course of our SPINRAZA collaboration, we identified two performance obligations, which were to perform R&D services and to deliver the SPINRAZA license to Biogen. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance through December 2016. We recognized the $75 million license fee for SPINRAZA as revenue when we delivered the license to Biogen in July 2016 because Biogen had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after we delivered it to Biogen.

We also earned additional milestone payments subsequent to delivering the license to Biogen that we recognized in full in the period each milestone payment became probable because we did not have a performance obligation related to each milestone payment. For example, we received $90 million of milestone payments for the approval of SPINRAZA in the EU and Japan in 2017 and recognized the full amounts into revenue in the period Biogen achieved the milestone events.

Neurology

In December 2012, we and Biogen entered into a collaboration agreement to develop and commercialize novel antisense drugs to up to three targets to treat neurodegenerative diseases. We are responsible for the development of each of the drugs through the completion of the initial Phase 2 clinical study for such drug. Biogen has the option to license a drug from each of the three programs through the completion of the first Phase 2 study for each program. We are currently advancing IONIS-MAPTRx for Alzheimer’s disease under this collaboration. If Biogen exercises its option for a drug, it will assume all further global development, regulatory and commercialization responsibilities and costs for that drug. 

Under the terms of the agreement, we received an upfront payment of $30 million. Over the term of the collaboration, we are eligible to receive up to $210 million in a license fee and milestone payments per program, plus a mark-up on the cost estimate of the Phase 1 and 2 studies. The $210 million per program consists of up to $10 million in development milestone payments, plus a mark-up on the cost estimate of the Phase 1 and 2 studies and up to $130 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on sales of any drugs resulting from each of the three programs. From inception through September 2018, we have received $58 million in milestone payments and upfront fees under this collaboration. We will achieve the next payment of $7.5 million if we continue to advance IONIS-MAPTRx.

At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. At inception, we determined the transaction price to be the $30 million upfront payment we received and allocated it to our single performance obligation. As we achieve milestone payments for our R&D services, we include these amounts in our transaction price for our R&D services performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in December 2020. From inception through September 2018, we have included $40 million in total payments in the transaction price for our R&D services performance obligation.

2013 Strategic Neurology

In September 2013, we and Biogen entered into a long-term strategic relationship focused on applying antisense technology to advance the treatment of neurodegenerative diseases. As part of the collaboration, Biogen gained exclusive rights to the use of our antisense technology to develop therapies for neurological diseases and has the option to license drugs resulting from this collaboration. The exclusivity for neurological diseases will last through September 2019, and may be extended for any drug development programs Biogen is pursuing under the collaboration. We will usually be responsible for drug discovery and early development of antisense drugs and Biogen will have the option to license antisense drugs after Phase 2 proof of concept. In October 2016, we expanded our collaboration to include additional research activities we will perform. If Biogen exercises its option for a drug, it will assume all further global development, regulatory and commercialization responsibilities and costs for that drug. We are currently advancing five drugs, IONIS-SOD1Rx, IONIS-C9Rx, IONIS-BIIB6Rx, IONIS-BIIB7Rx and IONIS-BIIB8Rx under this collaboration. Biogen will be responsible for all of the drug discovery and development activities for drugs using other modalities.

22


Under the terms of the agreement, we received an upfront payment of $100 million and are eligible to receive milestone payments, license fees and royalty payments for all drugs developed through this collaboration, with the specific amounts dependent upon the modality of the molecule advanced by Biogen. For each antisense molecule that is chosen for drug discovery and development under this collaboration, we are eligible to receive up to approximately $260 million in a license fee and milestone payments per program. The $260 million per program consists of approximately $60 million in development milestones, including amounts related to the cost of clinical trials, and up to $130 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on sales from any antisense drugs developed under this collaboration. If Biogen chooses to advance drugs using other modalities, such as small molecules or monoclonal antibodies, we are eligible to receive up to $90 million in milestone payments per program. The $90 million per program consists of up to $35 million in development milestone payments and up to $55 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive tiered single-digit royalties on sales from any drugs using non-antisense modalities developed under this collaboration. From inception through September 2018, we have received over $170 million in upfront fees, milestone payments and other payments under this collaboration, not including a $10 million milestone payment we earned in the third quarter of 2018 for Biogen’s initiation of a Phase 1 study for IONIS-C9Rx which we received in the fourth quarter of 2018. We will achieve the next payment of up to $10 million if we advance a program under this collaboration.

At the commencement of our strategic neurology collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. At inception, we determined the transaction price to be the $100 million upfront payment we received and allocated it to our single performance obligation. As we achieve milestone payments for our R&D services, we include these amounts in our transaction price for our R&D services performance obligation. We are recognizing revenue for our R&D services performance obligation based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in September 2019. From inception through September 2018, we have included $145 million in total payments in the transaction price for our R&D services performance obligation. In the third quarter of 2018, we earned a $10 million milestone payment when Biogen initiated a Phase 1 study of IONIS-C9Rx. We recognized this milestone payment in full in the third quarter because we do not have any performance obligations related to this milestone payment. Additionally, we concluded that the payment is not related to our R&D services performance obligation.

New antisense drugs for the treatment of SMA

In December 2017, we entered into a collaboration agreement with Biogen to identify new antisense drugs for the treatment of SMA. Biogen will have the option to license therapies arising out of this collaboration following the completion of preclinical studies. Upon licensing, Biogen will be responsible for all further global development, regulatory and commercialization activities and costs for such therapies. Under the collaboration agreement, we received a $25 million upfront payment in December 2017. We will receive development and regulatory milestone payments from Biogen if new drugs advance towards marketing approval. In total over the term of our collaboration, we are eligible to receive up to $1.2 billion in license fees, milestone payments and other payments, including up to $80 million for the achievement of development milestones, up to $180 million for the achievement of commercialization milestones and up to $800 million for the achievement of sales milestones. In addition, we are eligible to receive tiered royalties from the mid-teens to mid-20 percent range on net sales. We will achieve the next payment of up to $60 millionfor the license of a drug under this collaboration.

At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. We determined the transaction price to be the $25 million upfront payment we received when we entered into the collaboration. We allocated the transaction price to our single performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in December 2020.

2018 Strategic Neurology Collaboration

In April 2018, we and Biogen entered into a new strategic collaboration to develop novel antisense drugs for a broad range of neurological diseases and entered into a SPA. As part of the collaboration, Biogen gained exclusive rights to the use of our antisense technology to develop therapies for these diseases for 10 years. We are responsible for the identification of antisense drug candidates based on selected targets, while Biogen will have the option to license therapies arising out of this collaboration and will be responsible for and pay for non-clinical studies, clinical development, manufacturing, and commercialization.

In the second quarter of 2018, we received $1 billion from Biogen, comprised of $625 million to purchase our stock at a 25 percent cash premium and $375 million in an upfront payment. We are eligible to receive up to $270 million for each drug that achieves marketing approval. In addition, we are eligible to receive tiered royalties up to the 20 percent range on net sales. We will achieve the next payment of $7.5 million if Biogen designates a target under this collaboration.

At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. We determined our transaction price to be $552 million, comprised of $375 million from the upfront payment and $177 million for the premium paid by Biogen for its purchase of our common stock. We determined the fair value of the premium we received by using the stated premium in the SPA and applying a lack of marketability discount. We included a lack of marketability discount in our valuation of the premium because Biogen received restricted shares. We allocated the transaction price to our single performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in June 2028.

23


During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with Biogen (in millions, except percentage amounts):

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2018
   
2017
   
2018
   
2017
 
SPINRAZA royalties (commercial revenue)
 
$
70.0
   
$
32.9
   
$
167.7
   
$
60.5
 
R&D revenue
   
34.8
     
54.9
     
66.9
     
137.1
 
Total revenue from our relationship with Biogen
   
104.8
     
87.8
     
234.6
     
197.6
 
Percentage of total revenue
   
72
%
   
74
%
   
58
%
   
57
%

Our condensed consolidated balance sheet at September 30, 2018 and December 31, 2017 included deferred revenue of $593.6 million and $93.6 million, respectively, related to our relationship with Biogen.

Research, Development and Commercialization Partners

AstraZeneca

Cardiac, Renal and Metabolic Diseases Collaboration

In July 2015, we and AstraZeneca formed a collaboration to discover and develop antisense therapies for treating cardiac, renal and metabolic diseases. Under our collaboration AstraZeneca has licensed three drugs from us. As part of the agreement, we granted AstraZeneca an exclusive license to IONIS-AZ4-2.5-LRx, a drug we designed to treat cardiovascular disease and our first drug that combines our Generation 2.5 and LIgand-Conjugated Antisense, or LICA, technology. We also granted AstraZeneca the option to license a drug for each additional target advanced under this research collaboration. In February 2018, AstraZeneca licensed a second drug under our collaboration, IONIS-AZ5-2.5Rx, a drug we designed to treat a genetically associated form of kidney disease. In March 2018, AstraZeneca licensed a third drug under our collaboration, IONIS-AZ6-2.5-LRx, a drug we designed to inhibit an undisclosed target to treat patients with nonalcoholic steatohepatitis, or NASH. AstraZeneca is responsible for all further global development, regulatory and commercialization activities and costs for IONIS-AZ4-2.5-LRx, IONIS-AZ5-2.5Rx and IONIS-AZ6-2.5-LRx and any other future drugs AstraZeneca licenses.

Under the terms of the agreement, we received a $65 million upfront payment. We are eligible to receive license fees and milestone payments of up to more than $4 billion as drugs under this collaboration advance, including up to $1.1 billion for the achievement of development milestones and up to $2.9 billion for regulatory milestones. In addition, we are eligible to receive tiered royalties up to the low teens on sales from any product that AstraZeneca successfully commercializes under this collaboration agreement. From inception through September 2018, we have received over $165 million in upfront fees, license fees, milestone payments, and other payments under this collaboration, including a $10 million milestone payment we earned in the third quarter of 2018 when AstraZeneca initiated a Phase 1 trial for IONIS-AZ4-2.5-LRx. We will achieve the next payment of $10 million under this collaboration if we advance a drug under this collaboration.

At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for AstraZeneca. We determined the transaction price to be the $65 million upfront payment we received and we allocated it to our single performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy this performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy this performance obligation in August 2021. As we achieve milestone payments for our R&D services, we include these amounts in our transaction price for our R&D services performance obligation. From inception through September 2018, we have included $90 million in payments in the transaction price for our R&D services performance obligation.

We identified separate performance obligations upon AstraZeneca’s license of IONIS-AZ5-2.5Rx and IONIS-AZ6-2.5-LRx in the first quarter of 2018 because the licenses are distinct from our other performance obligation and each other. We recognized each $30 million license fee in the first quarter of 2018 because AstraZeneca had full use of the licenses without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the licenses after we delivered them to AstraZeneca.

In the third quarter of 2018, we earned a $10 million milestone payment when AstraZeneca initiated a Phase 1 study of IONIS-AZ4-2.5-LRx. We recognized this milestone payment in full in the third quarter because we do not have any performance obligations related to this milestone payment. Additionally, we concluded that the payment is not related to our R&D services performance obligation.

Oncology Collaboration

In December 2012, we entered into a collaboration agreement with AstraZeneca to discover and develop antisense drugs to treat cancer. As part of the agreement, we granted AstraZeneca an exclusive license to develop and commercialize danvatirsen (formerly IONIS-STAT3-2.5Rx) for the treatment of cancer. AstraZeneca is now responsible for all global development, regulatory and commercialization activities for danvatirsen. We and AstraZeneca have evaluated danvatirsen in people with head and neck cancer, advanced lymphoma and advanced metastatic hepatocellular carcinoma. AstraZeneca is evaluating danvatirsen in combination with Imfinzi (durvalumab), AstraZeneca’s programmed death ligand, or PD-L1, blocking drug, in people with head and neck cancer, metastatic bladder cancer and metastatic non-small cell lung cancer. In addition, we and AstraZeneca established an oncology research program. AstraZeneca has the option to license drugs resulting from the program, and if AstraZeneca exercises its option for a drug, it will be responsible for all further global development, regulatory and commercialization activities and costs for such drug.



Under the terms of this agreement, we received $31 million in upfront payments. We are eligible to receive milestone payments and license fees from AstraZeneca as programs advance in development. If AstraZeneca successfully develops danvatirsen and another drug under the research program, we could receive license fees and milestone payments of up to more than $450 million, including up to $152 million for the achievement of development milestones and up to $275 million for the achievement of regulatory milestones. In addition, we are eligible to receive tiered royalties up to the low to mid-teens on sales from any drugs resulting from these programs. From inception through September 2018, we have received $97.8 million in upfront fees, milestone payments, and other payments under this oncology collaboration, not including nearly $30 million in milestone payments we achieved when AstraZeneca advanced two programs in the fourth quarter of 2018. We will achieve the next payment of up to $25.0 million if we advance a drug under our cancer research program with AstraZeneca.

At the commencement of this collaboration, we identified four performance obligations. We determined the transaction price to be the $31 million in upfront payments we received. We allocated the transaction price based on the estimated stand-alone selling price of each of our performance obligations and recognized the associated revenue over the period of our performance. We recognized revenue for three of our obligations over our period of performance, concluding in March 2014. Our remaining performance obligation was to perform R&D services. We allocated $7.6 million to this performance obligation and recognized the associated revenue over the period of our performance, which ended in February 2018. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation.

During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with AstraZeneca (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
14.2
   
$
4.8
   
$
86.5
   
$
14.8
 
Percentage of total revenue
   
10
%
   
4
%
   
21
%
   
4
%

Our condensed consolidated balance sheet at September 30, 2018 and December 31, 2017 included deferred revenue of $44.9 million and $57.7 million, respectively, related to our relationship with AstraZeneca.

Bayer

In May 2015, we entered into an exclusive license agreement with Bayer to develop and commercialize IONIS-FXIRx for the prevention of thrombosis. We were responsible for completing a Phase 2 study of IONIS-FXIRx in people with end-stage renal disease on hemodialysis. Under the terms of the agreement, we received a $100 million upfront payment in the second quarter of 2015. In February 2017, we amended our agreement with Bayer to advance IONIS-FXIRx and to initiate development of IONIS-FXI-LRx, which Bayer licensed. In conjunction with the decision to advance these programs, we received a $75 million payment from Bayer. We are conducting a Phase 2b study evaluating IONIS-FXIRx in people with end-stage renal disease on hemodialysis to finalize dose selection. Additionally, we plan to develop IONIS-FXI-LRx through Phase 1. Following these studies and Bayer's decision to further advance these programs, Bayer will be responsible for all global development, regulatory and commercialization activities and costs for both drugs. 

We are eligible to receive additional milestone payments as each drug advances toward the market. In total over the term of this collaboration, we are eligible to receive up to $385 million in license fees, milestone payments and other payments, including up to $125 million for the achievement of development milestones and up to $110 million for the achievement of commercialization milestones. In addition, we are eligible to receive tiered royalties in the low to high 20 percent range on gross margins of both drugs combined. From inception through September 2018, we have received over $175 million from our Bayer collaboration. We will achieve the next payment of $10 million if a program advances under this collaboration.

At the commencement of this collaboration, we identified three performance obligations. We determined the transaction price to be the $100 million in upfront payment we received. We allocated the transaction price based on the relative stand-alone selling prices of each of our performance obligations and recognized the associated revenue as follows:

We recognized $91.2 million for the exclusive license of IONIS-FXIRx in May 2015 because Bayer had full use of the license without any continuing involvement from us.
We recognized $4.3 million for the R&D services for IONIS-FXIRx over the period of our performance, which ended in November 2016.
We allocated $4.5 million for API, which we are recognizing into revenue as we deliver the API.

In February 2017, when we amended our collaboration with Bayer, we identified two new performance obligations, one for the license of IONIS-FXI-LRx and one for R&D services. We determined the transaction price to be the $75 million payment. We allocated $64.9 million to the license of IONIS-FXI-LRx based on its estimated stand-alone selling price and recognized the associated revenue upon our delivery of the license in the first quarter of 2017. We allocated $10.1 million to our R&D services performance obligation based on an estimated stand-alone selling price. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our R&D services performance obligation in May 2019.

25


During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with Bayer (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
1.9
   
$
0.4
   
$
3.3
   
$
66.0
 
Percentage of total revenue
   
1
%
   
0
%
   
1
%
   
19
%

Our condensed consolidated balance sheet at September 30, 2018 and December 31, 2017 included deferred revenue of $6.0 million and $9.3 million, respectively, related to our relationship with Bayer.

Janssen Biotech, Inc.

In December 2014, we entered into a collaboration agreement with Janssen Biotech, Inc. to discover and develop antisense drugs that can be locally administered, including oral delivery, to treat autoimmune disorders of the gastrointestinal tract. Janssen has the option to license drugs from us through the designation of a development candidate for up to three programs. Prior to option exercise we are responsible for the discovery activities to identify a development candidate. If Janssen exercises an option for one of the programs, it will be responsible for the global development, regulatory and commercial activities under that program. Under the terms of the agreement, we received $35 million in upfront payments. We are eligible to receive up to more than $800 million in license fees and milestone payments for these programs, including up to $175 million for the achievement of development milestones, up to $440 million for the achievement of regulatory milestones and up to $180 million for the achievement of commercialization milestones. From inception through September 2018, we have received $75 million, including $15 million in license fees when Janssen licensed IONIS-JBI1-2.5Rx and IONIS-JBI2-2.5Rx from us in 2016 and 2017, respectively. We also received $5 million in January 2018 for the initiation of a Phase 1 study of IONIS-JBI1-2.5Rx in late 2017. In addition, we are eligible to receive tiered royalties up to the near teens on sales from any drugs resulting from this collaboration. We will achieve the next payment of $5 million if Janssen continues to advance a target under this collaboration.

At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Janssen. We determined the transaction price to be the $35 million upfront payments we received. We allocated the $35 million to our single performance obligation. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance, through November 2017.

We identified separate performance obligations each time Janssen licensed one of our drugs under our collaboration because the licenses we granted to Janssen were distinct from our other performance obligations. We recognized the $10 million license fee for IONIS-JBI1-2.5Rx in July 2016 and $5 million for the license of IONIS-JBI2-2.5Rx in November 2017, because Janssen had full use of the licenses without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the licenses after we delivered them to Janssen.

During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with Janssen (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
0.9
   
$
3.4
   
$
6.6
   
$
18.1
 
Percentage of total revenue
   
1
%
   
3
%
   
2
%
   
5
%

We did not have any deferred revenue from our relationship with Janssen at September 30, 2018 or December 31, 2017.

Roche

Huntington's Disease

In April 2013, we formed an alliance with Hoffman-La Roche Inc. and F. Hoffmann-La Roche Ltd., collectively Roche, to develop treatments for Huntington's disease, or HD, based on our antisense technology. Roche had the option to license the drugs from us through the completion of the first Phase 1 trial. Under the agreement, we are responsible for the discovery and development of an antisense drug targeting huntingtin, or HTT, protein. We evaluated a drug targeting HTT, IONIS-HTTRx, in a Phase 1/2a clinical study in people with early stage HD.

In December 2017, upon completion of the Phase 1/2a study, Roche exercised its option to license IONIS-HTTRx and is now responsible for the global development, regulatory and commercialization activities for IONIS-HTTRx. Under the terms of the agreement, we received an upfront payment of $30 million in April 2013. In December 2016, we updated development activities for IONIS-HTTRx and as a result we were eligible for an additional $3 million payment, which we achieved in 2017. We are eligible to receive up to $365 million in a license fee and milestone payments including up to $70 million for the achievement of development milestones, up to $170 million for the achievement of regulatory milestones and up to $80 million for the achievement of commercialization milestones. In addition, we are eligible to receive up to $136.5 million in milestone payments for each additional drug successfully developed. We are also eligible to receive tiered royalties up to the mid-teens on any sales of any product resulting from this alliance. From inception through September 2018, we have received over $110 million in upfront fees, milestone payments and license fees for advancing IONIS-HTTRx, including the $45 million license fee we received in January 2018 for IONIS-HTTRx. We will achieve the next payment of $35 million if Roche initiates a pivotal study for IONIS-HTTRx.

26


At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Roche. We determined the transaction price to be the $30 million upfront payment we received and allocated it to our single performance obligation. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance, through September 2017.

We identified a second performance obligation upon Roche’s license of IONIS-HTTRx in the fourth quarter of 2017 because the license we granted to Roche is distinct from our other performance obligation. We recognized the $45 million license fee for IONIS-HTTRx as revenue at that time because Roche had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after we delivered it to Roche.

We do not have any remaining performance obligations related to IONIS-HTTRx under this collaboration with Roche, however we can still earn additional payments and royalties as Roche advances IONIS-HTTRx.

IONIS-FB-LRx for Complement-Mediated Diseases

In October 2018, we entered into a collaboration agreement with Roche to develop IONIS-FB-LRx for the treatment of complement-mediated diseases. The first indication we plan to pursue is the treatment of patients with Geographic Atrophy, or GA, the advanced stage of dry age-related macular degeneration, or AMD. We are responsible for conducting a Phase 2 study in patients with dry AMD. In addition, we are exploring the drug in a severe and rare renal indication. Roche has the option to license IONIS-FB-LRx at the completion of these studies. Upon licensing, Roche will be responsible for all further global development, regulatory and commercialization activities and costs.

Under this new collaboration agreement, we received a $75 million upfront payment in October 2018. We are eligible to receive up to $684 million in development, regulatory and sales milestone payments and license fees. In addition, we are also eligible to receive tiered royalties from the high teens to twenty percent on net sales. We will achieve the next payment of $20 million when we advance the Phase 2 study in patients with dry AMD.

During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with Roche (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
1.8
   
$
4.5
   
$
5.4
   
$
5.9
 
Percentage of total revenue
   
1
%
   
4
%
   
1
%
   
2
%

We did not have any deferred revenue from our relationship with Roche at September 30, 2018 or December 31, 2017.

GSK

In March 2010, we entered into an alliance with GSK using our antisense drug discovery platform to discover and develop new drugs against targets for rare and serious diseases, including infectious diseases and some conditions causing blindness. Under the terms of the agreement, we received upfront payments of $35 million.

GSK is advancing two drugs targeting hepatitis B virus, or HBV, under our collaboration: IONIS-HBVRx and IONIS-HBV-LRx. GSK is currently conducting Phase 2 studies for both of these drugs, which we designed to reduce the production of viral proteins associated with HBV infection. In March 2016, we and GSK amended the development plan for IONIS-HBVRx to allow GSK to conduct all further development activities for this program. GSK has the exclusive option to license the drugs resulting from this alliance at Phase 2 proof-of-concept for a license fee.

Under our agreement, if GSK successfully develops these drugs and achieves pre-agreed sales targets, we could receive license fees and milestone payments of $262 million, including up to $47.5 million for the achievement of development milestones, up to $120 million for the achievement of regulatory milestones and up to $70 million for the achievement of commercialization milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on sales from any product that GSK successfully commercializes under this alliance. From inception through September 2018, we have received more than $162 million in payments under this alliance with GSK. We will achieve the next payment of up to $25 million if GSK licenses a drug under this program.

At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for GSK. We determined the transaction price to be the $35 million upfront payment we received and allocated it to our single performance obligation. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance, through March 2015. We do not have any remaining performance obligations under our collaboration with GSK, however we can still earn additional payments and royalties as GSK advances these drugs.

27


During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with GSK (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
0.1
   
$
4.6
   
$
1.5
   
$
14.4
 
Percentage of total revenue
   
0
%
   
4
%
   
0
%
   
4
%

Our revenue for the nine months ended September 30, 2017, was from our work on the programs under our collaboration with GSK. We did not have any deferred revenue from our relationship with GSK at September 30, 2018 or December 31, 2017.

Akcea Collaborations

The following collaboration agreements relate to Akcea, our majority owned affiliate. Our consolidated results include all the revenue earned and cash received under these collaboration agreements. 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.

Novartis

In January 2017, we and Akcea initiated a collaboration with Novartis to develop and commercialize AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Under the collaboration agreement, Novartis has an exclusive option to further develop and commercialize AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Akcea is responsible for completing a Phase 2 program, conducting an end-of-Phase 2 meeting with the FDA and providing initial quantities of API for each drug. If Novartis exercises an option for one of these drugs, Novartis will be responsible for all further global development, regulatory and co-commercialization activities and costs for such drug.

Akcea received a $75 million upfront payment in the first quarter of 2017, of which it retained $60 million and paid us $15 million as a sublicense fee. If Novartis exercises its option for a drug, Novartis will pay Akcea a license fee equal to $150 million for each drug it licenses. In addition, for AKCEA-APO(a)-LRx, Akcea is eligible to receive up to $600 million in milestone payments, including $25 million for the achievement of a development milestone, up to $290 million for the achievement of regulatory milestones and up to $285 million for the achievement of commercialization milestones. In addition, for AKCEA-APOCIII-LRx, Akcea is eligible to receive up to $530 million in milestone payments, including $25 million for the achievement of a development milestone, up to $240 million for the achievement of regulatory milestones and up to $265 million for the achievement of commercialization milestones. Akcea is also eligible to receive tiered royalties in the mid-teens to low 20 percent range on net sales of AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Novartis will reduce these royalties upon the expiration of certain patents or if a generic competitor negatively impacts the product in a specific country. Akcea will pay 50 percent of these license fees, milestone payments and royalties to us as a sublicense fee. Akcea plans to co-commercialize any licensed drug commercialized by Novartis in selected markets under terms and conditions that we plan to negotiate with Novartis in the future, through its specialized sales force.

In conjunction with this collaboration, we and Akcea entered into a SPA with Novartis. As part of the SPA, Novartis purchased 1.6 million shares of our common stock for $100 million in the first quarter of 2017. As part of the SPA, Novartis was required to purchase $50 million of Akcea’s common stock at the IPO price or our common stock at a premium if an IPO did not occur by April 2018. Under the SPA, in July 2017, Novartis purchased $50 million of Akcea’s common stock in a separate private placement concurrent with the completion of its IPO at a price per share equal to the IPO price.

At the commencement of this collaboration, we identified four separate performance obligations:

R&D services for AKCEA-APO(a)-LRx;
R&D services for AKCEA-APOCIII-LRx;
API for AKCEA-APO(a)-LRx; and
API for AKCEA-APOCIII-LRx.

We determined that the R&D services for each drug and the API for each drug were distinct from our other performance obligations.

We determined our transaction price to be $108.4 million, comprised of the following:

$75 million from the upfront payment;
$28.4 million for the premium paid by Novartis for its purchase of our common stock at a premium in the first quarter of 2017; and
$5.0 million for the potential premium Novartis would have paid if they purchased our common stock in the future.

We allocated the transaction price based on the estimated stand-alone selling price of each performance obligation as follows:

$64.0 million for the R&D services for AKCEA-APO(a)-LRx;
$40.1 million for the R&D services for AKCEA-APOCIII-LRx;
$1.5 million for the delivery of AKCEA-APO(a)-LRx API; and
$2.8 million for the delivery of AKCEA-APOCIII-LRx API.

28


We are recognizing revenue related to the R&D services for the AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx performance obligations as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy the significant portion of our performance obligation for AKCEA-APO(a)-LRx by December 2018 with the remainder by the end of March 2019. We currently estimate we will satisfy the significant portion of our performance obligation for AKCEA-APOCIII-LRx by June 2019 with the remainder by the end of December 2019. We recognized the amount attributed to the API supply for AKCEA-APO(a)-LRx when we delivered it to Novartis in 2017. We recognized the amount attributed to the API supply for AKCEA-APOCIII-LRx when we delivered it to Novartis in May 2018.

Akcea is responsible for the development activities under this collaboration. As such, Akcea is recognizing the associated revenue in its statement of operations, and we reflect all of Akcea’s revenue in our consolidated results. Akcea pays us sublicense fees for payments that it receives under the collaboration and we recognize those fees as revenue in our Ionis Core operating segment results and Akcea recognizes the fees as R&D expense. In our consolidated results, we eliminate this sublicense revenue and expense. Any cash Akcea receives is included in our consolidated balance sheet.

During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with Novartis (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
7.2
   
$
9.9
   
$
42.7
   
$
21.7
 
Percentage of total revenue
   
5
%
   
8
%
   
10
%
   
6
%

Our condensed consolidated balance sheet at September 30, 2018 and December 31, 2017 included deferred revenue of $34.8 million and $70.7 million, respectively, related to our relationship with Novartis.

PTC Therapeutics

In August 2018, Akcea entered into an exclusive license agreement with PTC Therapeutics to commercialize TEGSEDI and WAYLIVRA in Latin America. Under the license agreement, Akcea will receive up to $26 million of payments, including $12 million which it received in the third quarter of 2018, $6 million upon the earlier of FDA or EMA approval of WAYLIVRA and up to $8 million of regulatory milestone payments. Akcea will receive royalties from PTC in the mid-20 percent range on net sales in Latin America for each drug. PTC's obligation to pay Akcea royalties begins on the earlier of 12 months after the first commercial sale of a product in Brazil or the date that PTC recognizes revenue of at least $10 million in Latin America. These royalties may be reduced upon expiration of certain patents or if a generic competitor negatively impacts PTC’s market share. Consistent with the agreements between Ionis and Akcea, the companies will share all payments, including royalties.

At the commencement of this collaboration, we identified two performance obligations, which were the licenses Akcea granted to PTC to commercialize TEGSEDI and WAYLIVRA in Latin America in the third quarter of 2018. Akcea recognized $12 million in license fee revenue at that time because PTC had full use of both licenses without any continuing involvement from Akcea. Akcea does not have any remaining performance obligations under its collaboration with PTC. Akcea can still earn additional payments and royalties as PTC commercializes the drugs.

Akcea is responsible for the activities under this collaboration. As such, Akcea is recognizing the associated revenue in its statement of operations, and we reflect all of Akcea’s revenue in our consolidated results. Akcea pays us sublicense fees for payments that it receives under the collaboration and we recognize those fees as revenue in our Ionis Core operating segment results and Akcea recognizes the fees as SG&A expense. For example, during the third quarter of 2018, we recognized $7.2 million of sublicense revenue in our Ionis Core operating segment results related to our portion of the PTC license fee Akcea paid us. In our consolidated results, we eliminate this sublicense revenue and expense. Any cash Akcea receives is included in our consolidated balance sheet.

During the three and nine months ended September 30, 2018 and 2017, we earned the following revenue from our relationship with PTC (in millions, except percentage amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
R&D revenue
 
$
12.0
   
$
0.0
   
$
12.0
   
$
0.0
 
Percentage of total revenue
   
8
%
   
     
3
%
   
 

Our condensed consolidated balance sheet at September 30, 2018 and December 31, 2017 did not include any deferred revenue related to our relationship with PTC.

29


7.  Segment Information and Concentration of Business Risk

We have two reportable segments Ionis Core and Akcea Therapeutics. At September 30, 2018 we owned approximately 75 percent of Akcea. In October 2018, we received an additional 1.7 million shares of Akcea’s stock when TEGSEDI was approved by the FDA, increasing our ownership percentage to 76 percent. Segment income (loss) from operations includes revenue less operating expenses attributable to each segment.

In our Ionis Core segment we are exploiting our antisense technology to generate a broad pipeline of first-in-class and/or best-in-class drugs for us and our partners. Our Ionis Core segment generates revenue from a multifaceted partnering strategy.

Akcea is a biopharmaceutical company focused on developing and commercializing drugs to treat patients with rare and serious diseases.

The following tables show our segment revenue and income (loss) from operations for the three and nine months ended September 30, 2018 and 2017 (in thousands), respectively.

Three Months Ended September 30, 2018
 
Ionis Core
   
Akcea Therapeutics
   
Elimination of
Intercompany Activity
   
Total
 
Revenue:
                       
Commercial revenue:
                       
SPINRAZA royalties
 
$
70,010
   
$
   
$
   
$
70,010
 
Licensing and other royalty revenue
   
7,946
     
12,000
     
(7,200
)
   
12,746
 
Total commercial revenue
   
77,956
     
12,000
     
(7,200
)
   
82,756
 
R&D revenue under collaborative agreements
   
100,105
     
7,241
     
(44,707
)
   
62,639
 
Total segment revenue
 
$
178,061
   
$
19,241
   
$
(51,907
)