Company Quick10K Filing
Quick10K
Ionis Pharmaceuticals
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$67.36 140 $9,410
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
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
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-10 Officers, Exhibits
8-K 2019-06-06 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-03-22 Officers, Exhibits
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
IRM Iron Mountain 8,880
GGB Gerdau 6,050
CASY Caseys General Stores 4,870
BSM Black Stone Minerals 3,660
APU Amerigas Partners 3,270
IRDM Iridium Communications 3,070
QUES Quest Solution 0
UEEC United Health Products 0
CLOW Cloudweb 0
BZYR Burzynski Research Institute 0
IONS 2019-03-31
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-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm

Ionis Pharmaceuticals Earnings 2019-03-31

IONS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm IONIS PHARMACEUTICALS INC 10-Q 3-31-2019  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q
(Mark One)

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

For the Quarterly Period Ended March 31, 2019

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
 
 
Trading symbol
Common Stock, $.001 Par Value
 
The Nasdaq Stock Market, LLC
 
“IONS”

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

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

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

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

Large accelerated filer
Accelerated filer
   
Non-accelerated filer
Smaller reporting company
 
Emerging growth company

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

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

The number of shares of voting common stock outstanding as of May 2, 2019 was 140,322,994.



IONIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX

PART I
FINANCIAL INFORMATION
 
     
ITEM 1:
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018
3
     
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited)
4
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018 (unaudited)
5
     
 
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018 (unaudited)
6
     
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)
7
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
8
     
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
     
 
Overview
25
     
 
Results of Operations
27
     
 
Liquidity and Capital Resources
33
     
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk
34
     
ITEM 4:
Controls and Procedures
35
     
PART II
OTHER INFORMATION
35
     
ITEM 1:
Legal Proceedings
35
 
ITEM 1A:
 
Risk Factors
35
 
ITEM 2:
 
Unregistered Sales of Equity Securities and Use of Proceeds
44
     
ITEM 3:
Default upon Senior Securities
44
     
ITEM 4:
Mine Safety Disclosures
39
     
ITEM 5:
Other Information
44
     
ITEM 6:
Exhibits
44
     
SIGNATURES
46

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)

   
March 31,
2019
   
December 31,
2018
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
375,811
   
$
278,820
 
Short-term investments
   
1,877,943
     
1,805,252
 
Contracts receivable
   
10,452
     
12,759
 
Inventories
   
11,057
     
8,582
 
Other current assets
   
98,686
     
102,473
 
Total current assets
   
2,373,949
     
2,207,886
 
Property, plant and equipment, net
   
133,519
     
132,160
 
Patents, net
   
25,220
     
24,032
 
Long-term deferred tax assets
   
277,247
     
290,796
 
Deposits and other assets
   
25,954
     
12,910
 
Total assets
 
$
2,835,889
   
$
2,667,784
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
13,332
   
$
28,660
 
Accrued compensation
   
16,264
     
29,268
 
Accrued liabilities
   
45,130
     
47,503
 
Income taxes payable
   
18,401
     
858
 
Current portion of long-term obligations
   
14,500
     
13,749
 
Current portion of deferred contract revenue
   
144,846
     
160,256
 
Total current liabilities
   
252,473
     
280,294
 
Long-term deferred contract revenue
   
542,416
     
567,359
 
1 percent convertible senior notes
   
577,415
     
568,215
 
Long-term obligations, less current portion
   
16,305
     
4,914
 
Long-term mortgage debt
   
59,860
     
59,842
 
Total liabilities
   
1,448,469
     
1,480,624
 
Stockholders’ equity:
               
Common stock, $0.001 par value; 300,000,000 shares authorized, 139,623,937 and 137,928,828 shares issued and outstanding at March 31, 2019 (unaudited) and December 31, 2018, respectively
   
140
     
138
 
Additional paid-in capital
   
2,117,969
     
2,047,250
 
Accumulated other comprehensive loss
   
(27,608
)
   
(32,016
)
Accumulated deficit
   
(882,850
)
   
(967,293
)
Total Ionis stockholders’ equity
   
1,207,651
     
1,048,079
 
   Noncontrolling interest in Akcea Therapeutics, Inc.
   
179,769
     
139,081
 
Total stockholders’ equity
   
1,387,420
     
1,187,160
 
Total liabilities and stockholders’ equity
 
$
2,835,889
   
$
2,667,784
 


See accompanying notes.

3


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

 
 
Three Months Ended
March 31,
 
 
 
2019
   
2018
 
Revenue:
           
Commercial revenue:
           
SPINRAZA royalties
 
$
59,711
   
$
41,081
 
TEGSEDI product sales, net
   
6,754
     
 
Licensing and other royalty revenue
   
1,623
     
942
 
Total commercial revenue
   
68,088
     
42,023
 
Research and development revenue under collaborative agreements
   
229,126
     
102,396
 
Total revenue
   
297,214
     
144,419
 
 
               
Expenses:
               
Cost of products sold
   
1,041
     
 
Research, development and patent
   
106,417
     
104,067
 
Selling, general and administrative
   
68,221
     
43,653
 
Total operating expenses
   
175,679
     
147,720
 
 
               
Income (loss) from operations
   
121,535
     
(3,301
)
 
               
Other income (expense):
               
Investment income
   
12,142
     
3,610
 
Interest expense
   
(11,599
)
   
(10,938
)
Other expenses
   
(147
)
   
(168
)
 
               
Income (loss) before income tax expense
   
121,931
     
(10,797
)
 
               
Income tax expense
   
(31,047
)
   
(15
)
 
               
Net income (loss)
   
90,884
     
(10,812
)
                 
Net (income) loss attributable to noncontrolling interest in Akcea Therapeutics, Inc.
   
(6,441
)
   
9,392
 
                 
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
84,443
   
$
(1,420
)
                 
Basic net income (loss) per share
 
$
0.63
   
$
(0.01
)
Shares used in computing basic net income (loss) per share
   
138,582
     
125,330
 
Diluted net income (loss) per share
 
$
0.62
   
$
(0.01
)
Shares used in computing diluted net income (loss) per share
   
141,537
     
125,330
 


See accompanying notes.

4


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

   
Three Months Ended
March 31,
 
 
 
2019
   
2018
 
             
Net income (loss)
 
$
90,884
   
$
(10,812
)
Unrealized gains (losses) on debt securities, net of tax
   
4,324
     
(1,530
)
Currency translation adjustment
   
84
     
55
 
 
               
Comprehensive income (loss)
   
95,292
     
(12,287
)
                 
Comprehensive (income) loss attributable to noncontrolling interests
   
6,442
     
(9,399
)
                 
Comprehensive income (loss) attributable to Ionis Pharmaceuticals, Inc. stockholders
 
$
88,850
   
$
(2,888
)


See accompanying notes.

5


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended March 31, 2018 and 2019
(In thousands)
(Unaudited)

   
Common Stock
   
Additional Paid in
   
Accumulated
Other
Comprehensive
   
Accumulated
   
Total Ionis
Stockholders
   
Noncontrolling
Interest in Akcea
   
Total
Stockholders
 
Description
 
Shares
   
Amount
   
Capital
   
Loss
   
Deficit
   
Equity
   
Therapeutics, Inc.
   
Equity
 
Balance at December 31, 2017
   
124,976
   
$
125
   
$
1,553,681
   
$
(31,759
)
 
$
(1,241,034
)
 
$
281,013
   
$
84,267
   
$
365,280
 
Net loss
   
     
     
     
     
(1,420
)
   
(1,420
)
   
     
(1,420
)
Change in unrealized gains (losses), net of tax
   
     
     
     
(1,530
)
   
     
(1,530
)
   
     
(1,530
)
Foreign currency translation
   
     
     
     
55
     
     
55
     
     
55
 
Issuance of common stock in connection with employee stock plans
   
473
     
     
5,664
     
     
     
5,664
     
     
5,664
 
Stock-based compensation expense
   
     
     
28,451
     
     
     
28,451
     
     
28,451
 
Noncontrolling interest in Akcea Therapeutics, Inc
   
     
     
(10,842
)
   
     
     
(10,842
)
   
1,443
     
(9,399
)
Balance at March 31, 2018
   
125,449
   
$
125
   
$
1,576,954
   
$
(33,234
)
 
$
(1,242,454
)
 
$
301,391
   
$
85,710
   
$
387,101
 
                                                                 
Balance at December 31, 2018
   
137,929
   
$
138
   
$
2,047,250
   
$
(32,016
)
 
$
(967,293
)
 
$
1,048,079
   
$
139,081
   
$
1,187,160
 
Net income
   
     
     
     
     
84,443
     
84,443
     
     
84,443
 
Change in unrealized gains (losses), net of tax
   
     
     
     
4,324
     
     
4,324
     
     
4,324
 
Foreign currency translation
   
     
     
     
84
     
     
84
     
     
84
 
Issuance of common stock in connection with employee stock plans
   
1,825
     
2
     
67,057
     
     
     
67,059
     
     
67,059
 
Stock-based compensation expense
   
     
     
45,505
     
     
     
45,505
     
     
45,505
 
Payments of tax withholdings related to vesting of employee stock awards
   
(130
)
   
     
(7,597
)
   
     
     
(7,597
)
   
     
(7,597
)
Noncontrolling interest in Akcea Therapeutics, Inc.
   
     
     
(34,246
)
   
     
     
(34,246
)
   
40,688
     
6,442
 
Balance at March 31, 2019
   
139,624
   
$
140
   
$
2,117,969
   
$
(27,608
)
 
$
(882,850
)
 
$
1,207,651
   
$
179,769
   
$
1,387,420
 


See accompanying notes.

6


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

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
Operating activities:
           
Net income (loss)
 
$
90,884
   
$
(10,812
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation
   
3,073
     
2,363
 
Amortization of patents
   
470
     
443
 
Amortization of premium on investments, net
   
(2,433
)
   
1,192
 
Amortization of debt issuance costs
   
474
     
441
 
Amortization of convertible senior notes discount
   
8,726
     
8,083
 
Stock-based compensation expense
   
45,505
     
28,451
 
Non-cash losses related to patents, licensing and property, plant and equipment
   
14
     
175
 
Provision for deferred income taxes
   
13,549
     
 
Changes in operating assets and liabilities:
               
Contracts receivable
   
4,908
     
26,097
 
Inventories
   
(2,475
)
   
922
 
Other current and long-term assets
   
1,802
     
11,422
 
Accounts payable
   
(17,191
)
   
(13,144
)
Accrued compensation
   
(13,004
)
   
(12,985
)
Accrued liabilities and deferred rent
   
13,756
     
(1,695
)
Deferred contract revenue
   
(40,353
)
   
(27,788
)
Net cash provided by operating activities
   
107,705
     
13,165
 
                 
Investing activities:
               
Purchases of short-term investments
   
(492,781
)
   
(91,157
)
Proceeds from the sale of short-term investments
   
426,868
     
173,724
 
Purchases of property, plant and equipment
   
(3,229
)
   
(2,343
)
Acquisition of licenses and other assets, net
   
(1,032
)
   
(738
)
Net cash provided by (used in) investing activities
   
(70,174
)
   
79,486
 
                 
Financing activities:
               
Proceeds from equity awards
   
67,057
     
5,675
 
Payments of tax withholdings related to vesting of employee stock awards
   
(7,597
)
   
 
Offering costs paid
   
     
(451
)
Net cash provided by financing activities
   
59,460
     
5,224
 
                 
Net increase in cash and cash equivalents
   
96,991
     
97,875
 
Cash and cash equivalents at beginning of period
   
278,820
     
129,630
 
Cash and cash equivalents at end of period
 
$
375,811
   
$
227,505
 
                 
                 
Supplemental disclosures of cash flow information:
               
Interest paid
 
$
667
   
$
644
 
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Right-of-use assets obtained in exchange for lease liabilities
 
$
13,557
   
$
 
Amounts accrued for capital and patent expenditures
 
$
1,864
   
$
2,091
 


See accompanying notes.

7


IONIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

1.  Basis of Presentation

We prepared the unaudited interim condensed consolidated financial statements for the three months ended March 31, 2019 and 2018 on the same basis as the audited financial statements for the year ended December 31, 2018. 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, 2018 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC.

In the condensed consolidated financial statements, we included the accounts of Ionis Pharmaceuticals, Inc. and the consolidated results of our majority owned affiliate, Akcea Therapeutics, Inc. and its wholly owned subsidiaries. We formed Akcea in December 2014. In July 2017, Akcea completed an initial public offering, or IPO, and therefore, beginning in July 2017, we no longer owned 100 percent of Akcea. In the first quarter of 2019, we received 2.8 million shares of Akcea common stock as payment for the sublicense fee Akcea owed us when Novartis licensed AKCEA-APO(a)-LRx, increasing our ownership to approximately 76 percent at March 31, 2019. We reflected the increase in our ownership in these financial statements. Refer to the section titled “Noncontrolling Interest in Akcea” in Note 2, Significant Accounting Policies, for further information related to our accounting for our investment in Akcea.

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

2.  Significant Accounting Policies

Revenue Recognition

Our Revenue Sources

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

Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue

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

Commercial Revenue: TEGSEDI Product Sales, net

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

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.

We provide details about our collaboration agreements in Note 7, Collaborative Arrangements and Licensing Agreements, in our Annual Report on Form 10-K for the year ended December 31, 2018. 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:

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

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

3.
Determine the transaction price

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

Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the first quarter of 2019, we earned $35 million in milestone payments from Roche when it dosed the first patient in the Phase 3 study of IONIS-HTTRx (RG6042) because we do not have any performance obligations related to these milestone payments as Roche is conducting the Phase 3 study of IONIS-HTTRx. At December 31, 2018, we determined it was not probable that we could earn these milestone payments. As such, we did not recognize any revenue associated with the milestone payments in 2018.

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.

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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.

Commercial Revenue: TEGSEDI Product Sales, net

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

Reserves for TEGSEDI Product Sales

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

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

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

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

Trade discounts and allowances: We provide customary invoice discounts on TEGSEDI product sales to our U.S. customer for prompt payment. We record this discount as a reduction of TEGSEDI product sales in the period in which we recognize the related product revenue. In addition, we receive and pay for various distribution services from our U.S. customer and wholesalers in our U.S. distribution channel. For services we receive that are either not distinct from the sale of TEGSEDI or for which we cannot reasonably estimate the fair value, we classify such fees as a reduction of TEGSEDI product sales.

Product Returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the TEGSEDI’s expiration date. We estimate the amount of TEGSEDI product sales that our customer may return. We record our return estimate as an accrued refund liability on our condensed consolidated balance sheet with a corresponding offset reducing our TEGSEDI product sales, in the same period we recognize the related sale. Based on our distribution model for TEGSEDI, contractual inventory limits with our customer and wholesalers and the price of TEGSEDI, we believe we will have minimal returns. Our customer in Germany only takes title to the product once it receives an order from a hospital or pharmacy and therefore does not maintain any inventory of TEGSEDI, as such we do not estimate returns in Germany.

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

Research and development revenue under collaboration agreements:

Upfront Payments

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

Milestone Payments

We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments under our collaboration agreements. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales based milestone payments in the period 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. We added this payment to the transaction price and allocated it to our R&D services performance obligation. We are recognizing revenue from this milestone payment over our estimated period of performance.

Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the first quarter of 2019, we recognized $35 million in milestone payments when Roche dosed the first patient in a Phase 3 study for IONIS-HTTRx. We concluded that the milestone payments were not related to our R&D services performance obligation. Therefore, we recognized these milestone payments in full in the first quarter of 2019.

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 first quarter of 2019, we earned a $150 million license fee when Novartis licensed AKCEA-APO(a)-LRx from us.

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

For example, in May 2015, we entered into an exclusive license agreement with Bayer to develop and commercialize IONIS-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 7, Collaborative Arrangements and Licensing Agreements, for further discussion of our accounting treatment for our Bayer collaboration.

Multiple Agreements

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

Whether the agreements were negotiated together with a single objective;
Whether the amount of consideration in one contract depends on the price or performance of the other agreement; or
Whether the goods and/or services promised under the agreements are a single performance obligation.

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

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

Contracts Receivable

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

Unbilled SPINRAZA Royalties

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

Deferred Revenue

We are often entitled to bill our customers and receive payment from our customers in advance of our obligation to provide services or transfer goods to our partners. In these instances, we include the amounts in deferred revenue on our condensed consolidated balance sheet. During the three months ended March 31, 2019 and 2018, we recognized $40.3 million and $34.9 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above.

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Cost of Products Sold

Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of TEGSEDI. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval in July 2018, we expensed a significant portion of the costs we incurred to produce the TEGSEDI supply we are using in the commercial launch as research and development expense. We previously recognized $0.3 million of costs to produce TEGSEDI related to the TEGSEDI commercial revenue we recognized in the three months ended March 31, 2019.

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, third and fourth 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. In the first quarter of 2019, we received 2.8 million shares of Akcea common stock as payment for the sublicense fee Akcea owed us when Novartis licensed AKCEA-APO(a)-LRx, increasing our ownership to approximately 76 percent at March 31, 2019. We reflected this increase in our ownership percentage in these financial statements as an adjustment to noncontrolling interest. 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 condensed consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized.

Cash, cash equivalents and investments

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

We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At March 31, 2019, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in four privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd.

Inventory valuation

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

We obtained the first regulatory approval for TEGSEDI in July 2018. At March 31, 2019 and December 31, 2018, 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 medicines in development and historical write-offs. We did not record any inventory write-offs for the three months ended March 31, 2019 and 2018. Total inventory was $11.1 million and $8.6 million as of March 31, 2019 and December 31, 2018, respectively.

Leases

Topic 842 Adoption

In February 2016, the FASB issued amended accounting guidance related to lease accounting. This guidance supersedes the lease requirements we previously followed in Accounting Standards Codification, or ASC, Topic 840, Leases, or Topic 840, and created a new lease accounting standard, Topic 842, Leases, or Topic 842. Under Topic 842, an entity will record on its balance sheet all leases with a term longer than one year. Further, an entity will record a liability with a value equal to the present value of payments it will make over the life of the lease (lease liability) and an asset representing the underlying leased asset (right-of-use asset). The new accounting guidance requires entities to determine if its leases are operating or financing leases. Entities will recognize expense for operating leases on a straight-line basis as an operating expense. If an entity determines a lease is a financing lease, it will record
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both interest and amortization expense and generally the expense will be higher in the earlier periods of the lease. We adopted Topic 842 on January 1, 2019 and adjusted our opening balance sheet on that date for our right-of-use operating lease assets and operating lease liabilities. At adoption, we recorded $13.5 million in right-of-use operating lease assets and $18.5 million in operating lease liabilities, of which we classified $2 million as a current liability. We adopted Topic 842 using the available practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification of those leases we had in place as of January 1, 2019. The adoption did not have an impact on our condensed consolidated statement of operations.

Leases

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

As our current leases do not provide an interest rate implicit in the lease, we used our or Akcea’s incremental borrowing rate, based on the information available on the date we adopted Topic 842 in determining the present value of future payments. Our right-of-use operating lease asset also includes any lease payments we made and excludes any tenant improvement allowances we received. We recognize rent expense for our minimum lease payments on a straight-line basis over the expected term of our lease. We recognize period expenses, such as common area maintenance expenses, in the period we incur the expense.

Research, development and patent expenses

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

We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the 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.

Income Taxes

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

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the Tax Act. The Tax Act created a new requirement on global intangible low-taxed income, or GILTI, earned by foreign subsidiaries for tax years beginning on or after January 1, 2018. The GILTI provisions require foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s assets to be included in our U.S. income tax return. Under U.S. GAAP, we are permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into our measurement of deferred taxes. We have made the election to account for GILTI as a component of current taxes incurred rather than as a component of deferred taxes.

Long-lived assets

We evaluate long-lived assets, which include property, plant and equipment, right-of-use operating lease assets 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.

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Basic and diluted net income (loss) per share

Basic net income (loss) per share

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

The calculation of total net income (loss) attributable to our common stockholders for the three months ended March 31, 2019 and 2018 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 income per share for the three months ended March 31, 2019, was calculated as follows (in thousands, except per share amounts):

Three months ended March 31, 2019
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Income
Per Share
   
Ionis’ Portion of
Akcea’s Net Loss
 
                   
Common shares
   
68,582
   
$
0.35
   
$
23,846
 
Akcea’s net income attributable to our ownership
                 
$
23,846
 
Ionis’ stand-alone net income
                   
63,697
 
Net income available to Ionis common stockholders
                 
$
87,543
 
Weighted average shares outstanding
                   
138,582
 
Basic net income per share
                 
$
0.63
 

Our basic net loss per share for the three months ended March 31, 2018, was calculated as follows (in thousands, except per share amounts):

Three months ended March 31, 2018
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Loss
Per Share
   
Ionis’ Portion of
Akcea’s Net Loss
 
                   
Common shares
   
45,448
   
$
(0.44
)
 
$
(19,997
)
Akcea’s net loss attributable to our ownership
                 
$
(19,997
)
Ionis’ stand-alone net income
                   
18,785
 
Net loss available to Ionis common stockholders
                 
$
(1,212
)
Weighted average shares outstanding
                   
125,330
 
Basic net loss per share
                 
$
(0.01
)

Dilutive net income (loss per share)

For the three months ended March 31, 2019, 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 the period.

We calculated our diluted net income per share for the three months ended March 31, 2019 as follows (in thousands except per share amounts):

Three months ended March 31, 2019
 
Income
(Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
 
                   
Net income available to Ionis common stockholders
 
$
87,543
     
138,582
   
$
0.63
 
Effect of dilutive securities:
                       
Shares issuable upon exercise of stock options
   
     
2,252
         
Shares issuable upon restricted stock award issuance
   
     
665
         
Shares issuable related to our ESPP
   
     
38
         
Income available to Ionis common stockholders
 
$
87,543
     
141,537
   
$
0.62
 

For the three months ended March 31, 2019, the calculation excluded the 1 percent notes because the effect on diluted earnings per share was anti-dilutive.

15


For the three months ended March 31, 2018, 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;
Dilutive stock options;
Unvested restricted stock units; and
Employee Stock Purchase Plan, or ESPP.

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 medicines 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 three months ended March 31, 2019 and 2018, we used the following weighted-average assumptions in our Black-Scholes calculations:

Ionis Employee Stock Options:
 
Three Months Ended
March 31,
 
2019
 
2018
Risk-free interest rate
 
2.4%
   
2.2%
Dividend yield
 
0.0%
   
0.0%
Volatility
 
60.3%
   
63.2%
Expected life
 
4.6 years
   
4.6 years

Ionis ESPP:
 
Three Months Ended
March 31,
 
2019
 
2018
Risk-free interest rate
 
2.5%
   
1.6%
Dividend yield
 
0.0%
   
0.0%
Volatility
 
45.5%
   
44.4%
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 for the three months ended March 31, 2019 was $58.26 per share.

16


In addition to our stock plans, Akcea has its own stock plan under which it grants options and RSUs and under which it derives its stock-based compensation expense. The following are the weighted-average Black-Scholes assumptions Akcea used under its plan for the three months ended March 31, 2019 and March 31, 2018:

Akcea Employee Stock Options:
 
Three Months Ended
March 31,
 
2019
 
2018
Risk-free interest rate
 
2.5%
   
2.6%
Dividend yield
 
   
Volatility
 
76.4%
   
77.1%
Expected life
 
6.1 years
   
6.1 years

Akcea ESPP:
 
Three Months Ended
March 31,
 
2019
 
2018
Risk-free interest rate
 
2.5%
   
1.6%
Dividend yield
 
   
Volatility
 
64.1%
   
62.3%
Expected life
 
6 months
   
6 months

The following table summarizes stock-based compensation expense for the three months ended March 31, 2019 and 2018 (in thousands). Our non-cash stock-based compensation expense includes $18.6 million and $6.4 million of stock-based compensation expense for Akcea employees for the three months ended March 31, 2019 and 2018, respectively.

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
Cost of products sold
 
$
118
   
$
 
Research, development and patent
   
24,435
     
19,682
 
Selling, general and administrative
   
20,952
     
8,769
 
Total
 
$
45,505
   
$
28,451
 

As of March 31, 2019, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options and RSUs was $192.2 million and $68.7 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 1.4 years and 2.0 years, respectively.

Impact of recently issued accounting standards

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 condensed consolidated financial statements and disclosures.

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 condensed 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 adopted this updated guidance on January 1, 2019 and it did not have a significant impact on our disclosures.

17


In November 2018, the FASB issued clarifying guidance of the interaction between the collaboration accounting guidance and the new revenue recognition guidance we adopted on January 1, 2018 (Topic 606). Below is the clarifying guidance and how we will implement it (in italics):

1)
When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied
We will apply all of the associated accounting under Topic 606 when we determine a participant in a collaborative arrangement is a customer
2)
Adds “unit of account” concept to collaboration accounting guidance to align with Topic 606. The “unit of account” concept is used to determine if revenue is recognized or if a contra expense is recognized from consideration received under a collaboration
We will use the “unit of account” concept when we receive consideration under a collaboration to determine when we recognize revenue or a contra expense
3)
The clarifying guidance precludes us from recognizing revenue under Topic 606 when we determine a transaction with a collaborative partner is not a customer and is not directly related to the sales to third parties
When we conclude a collaboration partner is not a customer and is not directly related to the sales to third parties, we will not recognize revenue for the transaction

The updated guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our condensed consolidated financial statements and disclosures.

3.  Investments

As of March 31, 2019, 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 March 31, 2019:

One year or less
74%
After one year but within two years
21%
After two years but within three years
5%
Total
100%

As illustrated above, at March 31, 2019, 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 March 31, 2019, we had an ownership interest of less than 20 percent in four private companies and two public companies 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 companies are ProQR and ATL.

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

     
Gross Unrealized
     
March 31, 2019
 
Cost (1)
   
Gains
   
Losses
   
Estimated Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities (2)
 
$
869,483
   
$
326
   
$
(531
)
 
$
869,278
 
Debt securities issued by U.S. government agencies
   
124,744
     
71
     
(15
)
   
124,800
 
Debt securities issued by the U.S. Treasury (2)
   
328,340
     
110
     
(12
)
   
328,438
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
63,366
     
10
     
(203
)
   
63,173
 
Other municipal debt securities
   
2,931
     
1
     
     
2,932
 
Total securities with a maturity of one year or less
   
1,388,864
     
518
     
(761
)
   
1,388,621
 
Corporate debt securities
   
360,976
     
1,236
     
(336
)
   
361,876
 
Debt securities issued by U.S. government agencies
   
120,341
     
279
     
(112
)
   
120,508
 
Debt securities issued by the U.S. Treasury
   
33,569
     
12
     
(22
)
   
33,559
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
15,615
     
     
(125
)
   
15,490
 
Total securities with a maturity of more than one year
   
530,501
     
1,527
     
(595
)
   
531,433
 
Total available-for-sale securities
 
$
1,919,365
   
$
2,045
   
$
(1,356
)
 
$
1,920,054
 
Equity securities:
                               
Total equity securities included in other current assets (3)
 
$
1,212
   
$
   
$
(244
)
 
$
968
 
Total available-for-sale and equity securities
 
$
1,920,577
   
$
2,045
   
$
(1,600
)
 
$
1,921,022
 

18



     
Gross Unrealized
     
December 31, 2018
 
Cost (1)
   
Gains
   
Losses
   
Estimated Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities
 
$
956,879
   
$
13
   
$
(1,858
)
 
$
955,034
 
Debt securities issued by U.S. government agencies
   
168,839
     
3
     
(104
)
   
168,738
 
Debt securities issued by the U.S. Treasury
   
244,640
     
15
     
(77
)
   
244,578
 
Debt securities issued by states of the U.S. and political subdivisions of the states (2)
   
63,572
     
     
(323
)
   
63,249
 
Total securities with a maturity of one year or less
   
1,433,930
     
31
     
(2,362
)
   
1,431,599
 
Corporate debt securities
   
299,018
     
194
     
(1,286
)
   
297,926
 
Debt securities issued by U.S. government agencies
   
107,789
     
194
     
(109
)
   
107,874
 
Debt securities issued by the U.S. Treasury
   
15,600
     
     
(24
)
   
15,576
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
16,980
     
     
(287
)
   
16,693
 
Total securities with a maturity of more than one year
   
439,387
     
388
     
(1,706
)
   
438,069
 
Total available-for-sale securities
 
$
1,873,317
   
$
419
   
$
(4,068
)
 
$
1,869,668
 
Equity securities:
                               
Total equity securities included in other current assets (3)
   
1,212
     
137
     
     
1,349
 
Total available-for-sale and equity securities
 
$
1,874,529
   
$
556
   
$
(4,068
)
 
$
1,871,017
 

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

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

(3)
We recognize our equity securities at cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on our condensed consolidated balance sheet.

The following is a summary of our investments we consider to be temporarily impaired at March 31, 2019. 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
   
275
   
$
530,786
   
$
(306
)
 
$
102,815
   
$
(561
)
 
$
633,601
   
$
(867
)
Debt securities issued by U.S. government agencies
   
24
     
91,005
     
(81
)
   
16,534
     
(46
)
   
107,539
     
(127
)
Debt securities issued by the U.S. Treasury
   
15
     
94,603
     
(34
)
   
     
     
94,603
     
(34
)
Debt securities issued by states of the U.S. and political subdivisions of the states
   
39
     
11,254
     
(9
)
   
51,579
     
(319
)
   
62,833
     
(328
)
Total temporarily impaired securities
   
353
   
$
727,648
   
$
(430
)
 
$
170,928
   
$
(926
)
 
$
898,576
   
$
(1,356
)

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.

The following tables present the major security types we held at March 31, 2019 and December 31, 2018 that we regularly measure and carry at fair value. At March 31, 2019 and December 31, 2018, our ProQR investment was subject to trading restrictions that extend through the fourth quarter of 2019, as a result we included a lack of marketability discount in valuing this investment,
19


which is a Level 3 input. The amount we owned in ProQR did not change from December 31, 2018 to March 31, 2019. 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
March 31, 2019
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Cash equivalents (1)
 
$
146,542
   
$
146,542
   
$
   
$
 
Corporate debt securities (2)
   
1,231,154
     
     
1,231,154
     
 
Debt securities issued by U.S. government agencies (3)
   
245,308
     
     
245,308
     
 
Debt securities issued by the U.S. Treasury (4)
   
361,997
     
361,997
     
     
 
Debt securities issued by states of the U.S. and political subdivisions of the states (3)
   
78,663
     
     
78,663
     
 
Other municipal debt securities (3)
   
2,932
     
     
2,932
     
 
Investment in ProQR Therapeutics N.V. (5)
   
968
     
     
     
968
 
Total
 
$
2,067,564
   
$
508,539
   
$
1,558,057
   
$
968
 

   
At
December 31, 2018
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Cash equivalents (1)
 
$
146,281
   
$
146,281
   
$
   
$
 
Corporate debt securities (6)
   
1,252,960
     
     
1,252,960
     
 
Debt securities issued by U.S. government agencies (3)
   
276,612
     
     
276,612
     
 
Debt securities issued by the U.S. Treasury (7)
   
260,154
     
260,154
     
     
 
Debt securities issued by states of the U.S. and political subdivisions of the states (3)
   
79,942
     
     
79,942
     
 
Investment in ProQR Therapeutics N.V. (5)
   
1,349
     
     
     
1,349
 
Total
 
$
2,017,298
   
$
406,435
   
$
1,609,514
   
$
1,349
 

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

(2) $27.1 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)
$15.0 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.

(5)
Included in other current assets on our condensed consolidated balance sheet.

(6)
$50.2 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.

(7)
$14.2 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.

Convertible Notes

Our 1 percent notes had a fair value of $928.4 million at March 31, 2019. 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.  Operating Leases

We lease a facility adjacent to our manufacturing facility that has laboratory and office space that we use to support our manufacturing facility. We lease this space under a non-cancelable operating lease with an initial term ending in June 2021 and an option to extend the lease for up to two five-year periods.

We also lease additional office space and we sublease a portion of this space to Akcea. We lease this space under a non-cancelable operating lease with an initial term ending in June 2023 and an option to extend the lease for one five-year period. The sublease with Akcea is eliminated in our condensed consolidated financial statements.

20


Akcea entered into an operating lease agreement for office space located in Boston, Massachusetts for its new corporate headquarters in the second quarter of 2018. The lease commencement date was in August 2018 and Akcea took occupancy in September 2018. Akcea is leasing this space under a non-cancelable operating lease with an initial term ending after 123 months and an option to extend the lease for an additional five-year term. Under the lease agreement, Akcea received a three-month free rent period, which commenced on August 15, 2018, and a tenant improvement allowance up to $3.8 million. Akcea provided the lessor with a letter of credit to secure its obligations under the lease in the initial amount of $2.4 million, to be reduced to $1.8 million on the third anniversary of the rent commencement date and to $1.2 million on the fifth anniversary of the rent commencement date if Akcea meets certain conditions set forth in the lease at each such time.

When we determined our lease term for our operating lease right-of-use assets and lease liabilities for these leases we did not include the extension options for these leases.

Amounts related to our operating leases were as follows (dollar amounts in millions):

   
At March 31, 2019
 
       
Right-of-use operating lease assets (1)
 
$
13.1
 
Operating lease liabilities (2)
 
$
18.0
 
Weighted average remaining lease term
 
9 years
 
Weighted average discount rate
   
7.6
%

(1)
Included in deposits and other assets on our condensed consolidated balance sheet.

(2)
Current portion of $2.0 million was included in current portion of long-term obligations on our condensed consolidated balance sheet, with the difference included in long-term obligations.

We paid cash of $1.0 million for rent payments we made during the three months ended March 31, 2019, which was included in the measurement of our lease liabilities in our net cash provided by operating activities in our condensed consolidated statement of cash flows.

As of March 31, 2019, the payments for our operating lease liabilities are as follows (in thousands):

   
Operating Leases
 
Remainder of 2019
 
$
2,341
 
Years ending December 31,
       
2020
   
3,008
 
2021
   
2,725
 
2022
   
2,539
 
2023
   
2,505
 
Thereafter
   
11,862
 
Total minimum lease payments
   
24,980
 
Less:
       
Imputed interest
   
(7,020
)
Total operating lease liabilities
 
$
17,960
 

Rent expense was $0.9 million for the three months ended March 31, 2019 and was negligible for the three months ended March 31, 2018.

6.  Income Taxes

Our effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income.  Our effective income tax rate of 25.5 percent for the three months ended March 31, 2019 differed from the U.S. federal statutory rate of 21 percent primarily due to state taxes, partially offset by the tax benefit related to estimated research & development and orphan drug credits and the excess tax benefit related to share-based compensation.

We recorded income tax expense of $31 million for the three months ended March 31, 2019, compared to $15,000 for the same period in 2018. The increase in our income tax expense was primarily due to our expectation that we will generate U.S. federal and state taxable income in 2019. Our 2019 income tax expense has two components. The first component relates to federal income taxes. We expect to utilize our deferred tax assets to offset our U.S. federal taxable income. We are recording non-cash income tax expense as we utilize our federal deferred tax assets. The other component of our income tax expense relates to the estimated cash taxes we will pay for our state income taxes. Although we are recording the expense for our state income taxes in 2019, we will not have to make the majority of the payment for this liability until the first quarter of 2020.

21


7.  Collaborative Arrangements and Licensing Agreements

Below, we have included our collaborations with substantive changes during the first three months of 2019 from those included in Note 6 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 medicines with Biogen’s expertise in developing therapies for neurological disorders. We developed and licensed to Biogen SPINRAZA, our approved medicine to treat people with spinal muscular atrophy, or SMA. In December 2017, we entered into a collaboration with Biogen to identify new antisense medicines for the treatment of SMA. Additionally, we and Biogen are currently developing six other medicines to treat neurodegenerative diseases under these collaborations, including tofersen (formerly IONIS-SOD1Rx) for ALS patients with SOD1 mutations, or SOD1-ALS, which Biogen moved into a Phase 3 study in the first quarter of 2019, IONIS-MAPTRx for Alzheimer’s disease, IONIS-C9Rx for ALS patients with C9ORF72 mutations, and IONIS-BIIB6Rx, IONIS-BIIB7Rx and IONIS-BIIB8Rx to treat undisclosed neurodegenerative diseases. In addition to these medicines, we and Biogen are evaluating numerous additional targets to develop medicines to treat neurological diseases. In April 2018, we entered into a new strategic collaboration for the treatment of neurological diseases with Biogen. From inception through March 2019, we have received over $2.1 billion from our Biogen collaborations, including $1 billion we received from Biogen in the second quarter of 2018 for our 2018 strategic neurology collaboration.

During the three months ended March 31, 2019 and 2018, we earned the following revenue from our relationship with Biogen (in millions, except percentage amounts):

 
 
Three Months Ended
March 31,
 
 
 
2019
   
2018
 
SPINRAZA royalties (commercial revenue)
 
$
59.7
   
$
41.1
 
R&D revenue
   
24.5
     
10.8
 
Total revenue from our relationship with Biogen
 
$
84.2
   
$
51.9
 
Percentage of total revenue
   
28
%
   
36
%

During the first quarter of 2019, we did not have any changes to our performance obligations or the timing in which we expect to recognize revenue under our Biogen collaborations.

In April 2019, we achieved a $7.5 million milestone payment from Biogen, when we advanced a new target for an unidentified neurological disease under the 2018 strategic neurology collaboration. We will achieve the next payment of up to $10 million if Biogen designates a target under our 2018 strategic neurology collaboration.

Our condensed consolidated balance sheet at March 31, 2019 and December 31, 2018 included deferred revenue of $556.4 million and $580.9 million, respectively, related to our relationship with Biogen.

Research, Development and Commercialization Partners


Roche

We have two collaborations with Roche, one to develop treatments for Huntington's disease, or HD, and one to develop IONIS-FB-LRx for the treatment of complement-mediated diseases. In December 2017, upon completion of the Phase 1/2 study of IONIS-HTTRx, Roche exercised its option to license IONIS-HTTRx and is now responsible for the global development, regulatory and commercialization activities for IONIS-HTTRx. 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 plan to evaluate the medicine for 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. From inception through March 2019, we have received over $220 million from our Roche collaborations, including $35 million in milestone payments we earned in the first quarter of 2019 when Roche dosed the first patient in a Phase 3 study for IONIS-HTTRx. We will achieve the next payment of $15 million if Roche advances IONIS-HTTRx.

During the three months ended March 31, 2019 and 2018, we earned the following revenue from our relationship with Roche (in millions, except percentage amounts):

 
 
Three Months Ended
March 31,
 
 
 
2019
   
2018
 
R&D revenue
 
$
41.2
   
$
2.0
 
Percentage of total revenue
   
14
%
   
1
%

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Our revenue in the first quarter of 2019, included $35 million of milestone payments we earned when Roche dosed the first patient in the Phase 3 study of IONIS-HTTRx. We recognized these milestone payments in full in the first quarter of 2019 because we do not have any performance obligations related to these milestone payments as Roche is conducting the Phase 3 study of IONIS-HTTRx.

During the first quarter of 2019, we did not have any changes to our performance obligations or the timing in which we expect to recognize revenue under our Roche collaborations.

Our condensed consolidated balance sheet at March 31, 2019 and December 31, 2018 included deferred revenue of $67.5 million and $72.6 million, respectively, related to our relationship with Roche.

Akcea Collaboration

The following collaboration agreement relates to Akcea, our majority owned affiliate. Our consolidated results include all the revenue earned and cash received under this collaboration agreement. 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 medicine. If Novartis exercises an option for either of these medicines, Novartis will be responsible for all further global development, regulatory and co-commercialization activities and costs for such medicine. In the first quarter of 2019, Novartis licensed AKCEA-APO(a)-LRx. Novartis is responsible for conducting and funding all future development, regulatory and commercialization activities for AKCEA-APO(a)-LRx, including a global pivotal cardiovascular outcomes study, for which planning and initiation activities are underway. From inception through March 2019, we have received over $330 million from our Novartis collaboration, including $150 million we earned from Novartis in the first quarter of 2019 for the license of AKCEA-APO(a)-LRx. Akcea paid us $75 million as a sublicense fee in 2.8 million shares of Akcea common stock.

We identified a new performance obligation when we granted Novartis the license of AKCEA-APO(a)-LRx in the first quarter of 2019 because the license is distinct from our other performance obligations. We recognized the $150 million license fee for AKCEA-APO(a)-LRx as revenue at that time because Novartis 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 Novartis.

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 condensed consolidated balance sheet.

During the three months ended March 31, 2019 and 2018, we earned the following revenue from our relationship with Novartis (in millions, except percentage amounts):

 
 
Three Months Ended
March 31,
 
 
 
2019
   
2018
 
R&D revenue
 
$
157.1
   
$
17.1
 
Percentage of total revenue
   
53
%
   
12
%

During the first quarter of 2019, we did not have any changes to our performance obligations, except as noted above, or the timing in which we expect to recognize revenue under our Novartis collaboration.

Our condensed consolidated balance sheet at March 31, 2019 and December 31, 2018 included deferred revenue of $23.3 million and $28.8 million, respectively, related to our relationship with Novartis.

8.  Segment Information

We have two reportable segments Ionis Core and Akcea Therapeutics. At March 31, 2019 we owned approximately 76 percent of Akcea. 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 medicines for us and our partners. Our Ionis Core segment generates revenue from a multifaceted partnering strategy.

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Akcea is a biopharmaceutical company focused on developing and commercializing medicines to treat patients with rare and serious diseases. Akcea generates revenue from TEGSEDI product sales and from its collaborations with Novartis and PTC Therapeutics.

The following tables show our segment revenue and income (loss) from operations for the three months ended March 31, 2019 and March 31, 2018 (in thousands), respectively.

Three Months Ended March 31, 2019
 
Ionis Core
   
Akcea Therapeutics
   
Elimination of
Intercompany Activity
   
Total
 
Revenue:
                       
Commercial revenue:
                       
SPINRAZA royalties
 
$
59,711
   
$
   
$
   
$
59,711
 
TEGSEDI product sales, net
   
     
6,754
     
     
6,754
 
Licensing and other royalty revenue
   
1,623
     
     
     
1,623
 
Total commercial revenue
 
$
61,334
   
$
6,754
   
$
   
$
68,088
 
R&D revenue under collaborative agreements
 
$
160,556
   
$
157,062
   
$
(88,492
)
 
$
229,126
 
Total segment revenue
 
$
221,890
   
$
163,816
   
$
(88,492
)
 
$
297,214
 
Total operating expenses
 
$
114,515
   
$
137,610
   
$
(76,446
)
 
$
175,679
 
Income from operations
 
$
107,375
   
$
26,206
   
$
(12,046
)
 
$
121,535
 

Three Months Ended March 31, 2018
 
Ionis Core
   
Akcea Therapeutics
   
Elimination of
Intercompany Activity
   
Total
 
Revenue:
                       
Commercial revenue:
                       
SPINRAZA royalties
 
$
41,081
   
$
   
$
   
$
41,081
 
Licensing and other royalty revenue
   
942
     
     
     
942
 
Total commercial revenue
 
$
42,023
   
$
   
$
   
$
42,023
 
R&D revenue under collaborative agreements
 
$
90,517
   
$
17,108
   
$
(5,229
)
 
$
102,396
 
Total segment revenue
 
$
132,540
   
$
17,108
   
$
(5,229
)
 
$
144,419
 
Total operating expense
 
$
105,544
   
$
47,435
   
$
(5,259
)
 
$
147,720
 
Income (loss) from operations
 
$
26,996
   
$
(30,327
)
 
$
30
   
$
(3,301
)

The following table shows our total assets by segment at March 31, 2019 and December 31, 2018 (in thousands), respectively.

Total Assets
 
Ionis Core
   
Akcea Therapeutics
   
Elimination of
Intercompany Activity
   
Total
 
March 31, 2019
 
$
3,112,235
   
$
458,717
   
$
(735,063
)
 
$
2,835,889
 
December 31, 2018
 
$
2,975,491
   
$
365,261
   
$
(672,968
)
 
$
2,667,784
 

ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Report on Form 10-Q, unless the context requires otherwise, “Ionis,” “Company,” “we,” “our,” and “us,” means Ionis Pharmaceuticals, Inc. and its majority owned affiliate, Akcea Therapeutics, Inc.

Forward-Looking Statements

In addition to historical information contained in this Report on Form 10-Q, the Report includes forward-looking statements regarding our business and the therapeutic and commercial potential of SPINRAZA (nusinersen), TEGSEDI (inotersen), WAYLIVRA (volanesorsen) and our technologies and products in development, including the business of Akcea Therapeutics, Inc., our majority-owned affiliate. Any statement describing our goals, expectations, financial or other projections, intentions or beliefs, is a forward-looking statement and should be considered an at-risk statement. Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics, and in the endeavor of building a business around such drugs. Our forward-looking statements also involve assumptions that, if they never materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and described in additional detail in our annual report on Form 10-K for the year ended December 31, 2018, which is on file with the U.S. Securities and Exchange Commission and is available from us, and those identified within Part II Item 1A. Risk Factors of this Report. Although our forward-looking statements reflect the good faith judgment of our management, these statements are based only on facts and factors currently known by us. As a result, you are cautioned not to rely on these forward-looking statements.

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Overview

We are a leader in discovering and developing RNA-targeted therapeutics with sustained and growing revenues. We have created an efficient and broadly applicable drug discovery platform leveraging our expertise in antisense oligonucleotide therapeutics that we believe has fundamentally changed medicine and transformed the lives of people with devastating and often deadly diseases. Our large, diverse and advanced pipeline of over 40 first-in-class and/or best-in-class medicines addresses diseases across a broad range of therapeutic areas, targeting small, medium and large patient populations.

We have three commercial medicines approved in major markets around the world, SPINRAZA, TEGSEDI and WAYLIVRA. We have two medicines in Phase 3 studies, IONIS-HTTRx, for Huntington’s disease, and tofersen, for SOD1-ALS. We also have the potential for two more medicines to begin Phase 3 studies this year and the potential for a total of 10 medicines in Phase 3 studies by the end of 2020. These medicines, along with the more than 30 additional medicines in our pipeline, represent multiple potential drivers of value for years to come. We believe our efficient drug discovery platform, coupled with our innovation-centric business model, provides us with the flexibility to determine the optimal development and commercialization strategy to maximize the commercial opportunity for each of our medicines and ensure that we continue to produce transformative medicines for patients who need them. We believe we are positioned to drive substantial value for patients and shareholders.

As of March 2019, SPINRAZA was approved in over 40 countries around the world, and our partner Biogen, who is responsible for global SPINRAZA commercial activities, reported that more than 7,500 patients are now on SPINRAZA therapy. In addition, Biogen plans to continue to pursue regulatory filings in additional countries. SPINRAZA is the first and only approved medicine for the treatment of SMA. SPINRAZA is the established standard-of-care for all people with this progressive, debilitating and often fatal genetic disease. In November 2018, SPINRAZA was recognized with the 2018 International Prix Galien award as Best Biotechnology Product. This prestigious honor marks the seventh Prix Galien award for SPINRAZA. To date, we have earned more than $410 million in commercial revenues from royalties on sales of SPINRAZA.

TEGSEDI, a once weekly, self-administered subcutaneous medicine, was approved in 2018 in the U.S., EU and Canada for the treatment of polyneuropathy caused by hATTR in adult patients. hATTR is a debilitating, progressive, and fatal disease. Akcea, our majority-owned affiliate focused on developing and commercializing medicines to treat patients with rare and serious diseases, launched TEGSEDI globally in late 2018. Our aim is to make TEGSEDI available globally. We plan to achieve this in part through Akcea’s exclusive license agreement with PTC to commercialize TEGSEDI in Latin America. In January 2019, PTC filed an application for regulatory approval in Brazil with ANVISA, the Brazilian regulatory authority. ANVISA granted priority review for TEGSEDI. We have earned $9 million in TEGSEDI product sales since launching late last year.

WAYLIVRA, a self-administered, subcutaneous