QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of Principal Executive Offices) |
(Zip Code) |
Title of each class |
Name of each exchange on which registered |
Trading symbol |
||
“ |
Accelerated Filer ☐ |
|
Non-accelerated Filer ☐ |
Smaller Reporting Company |
Emerging Growth Company |
PART I |
FINANCIAL INFORMATION |
|
ITEM 1: |
Financial Statements: |
|
Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 |
3 |
|
Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited) |
4 |
|
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019 (unaudited) |
5 |
|
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited) |
6 |
|
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited) |
7 |
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
8 |
|
ITEM 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations: |
|
Overview |
25 |
|
Results of Operations |
28 |
|
Liquidity and Capital Resources |
34 |
|
ITEM 3: |
Quantitative and Qualitative Disclosures about Market Risk |
36 |
ITEM 4: |
Controls and Procedures |
36 |
PART II |
OTHER INFORMATION |
37 |
ITEM 1: |
Legal Proceedings |
37 |
ITEM 1A: |
Risk Factors |
37 |
ITEM 2: |
Unregistered Sales of Equity Securities and Use of Proceeds |
51 |
ITEM 3: |
Default upon Senior Securities |
51 |
ITEM 4: |
Mine Safety Disclosures |
51 |
ITEM 5: |
Other Information |
51 |
ITEM 6: |
Exhibits |
51 |
SIGNATURES |
53 |
March 31, 2020 |
December 31, 2019 |
|||||||
(Unaudited) |
||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Short-term investments |
||||||||
Contracts receivable |
||||||||
Inventories |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Property, plant and equipment, net |
||||||||
Patents, net |
||||||||
Long-term deferred tax assets |
||||||||
Deposits and other assets |
||||||||
Total assets |
$ |
$ |
||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ |
$ |
||||||
Accrued compensation |
||||||||
Accrued liabilities |
||||||||
Income taxes payable |
||||||||
Current portion of long-term obligations and other current liabilities |
||||||||
Current portion of deferred contract revenue |
||||||||
Total current liabilities |
||||||||
Long-term deferred contract revenue |
||||||||
Long-term obligations, less current portion |
||||||||
Long-term mortgage debt |
||||||||
Total liabilities |
||||||||
Stockholders’ equity: |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Accumulated other comprehensive loss |
( |
) |
( |
) |
||||
Accumulated deficit |
( |
) |
( |
) |
||||
Total Ionis stockholders’ equity |
||||||||
Noncontrolling interest in Akcea Therapeutics, Inc. |
||||||||
Total stockholders’ equity |
||||||||
Total liabilities and stockholders’ equity |
$ |
$ |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Revenue: |
||||||||
Commercial revenue: |
||||||||
SPINRAZA royalties |
$ |
$ |
||||||
Product sales, net |
||||||||
Licensing and other royalty revenue |
||||||||
Total commercial revenue |
||||||||
Research and development revenue under collaborative agreements |
||||||||
Total revenue |
||||||||
Expenses: |
||||||||
Cost of products sold |
||||||||
Research, development and patent |
||||||||
Selling, general and administrative |
||||||||
Total operating expenses |
||||||||
Income (loss) from operations |
( |
) |
||||||
Other income (expense): |
||||||||
Investment income |
||||||||
Interest expense |
( |
) |
( |
) |
||||
Other expenses |
( |
) |
( |
) |
||||
Income (loss) before income tax benefit (expense) |
( |
) |
||||||
Income tax benefit (expense) |
( |
) |
||||||
Net income (loss) |
( |
) |
||||||
Net (income) loss attributable to noncontrolling interest in Akcea Therapeutics, Inc. |
( |
) |
||||||
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders |
$ |
( |
) |
$ |
||||
Basic net income (loss) per share |
$ |
( |
) |
$ |
||||
Shares used in computing basic net income (loss) per share |
||||||||
Diluted net income (loss) per share |
$ |
( |
) |
$ |
||||
Shares used in computing diluted net income (loss) per share |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Net income (loss) |
$ |
( |
) |
$ |
||||
Unrealized gains (losses) on debt securities, net of tax |
( |
) |
||||||
Currency translation adjustment |
||||||||
Comprehensive income (loss) |
( |
) |
||||||
Comprehensive (income) loss attributable to noncontrolling interests |
( |
) |
||||||
Comprehensive income (loss) attributable to Ionis Pharmaceuticals, Inc. stockholders |
$ |
( |
) |
$ |
Common Stock |
Additional |
Accumulated Other |
Accumulated |
Total Ionis Stockholders’ |
Noncontrolling Interest in Akcea |
Total Stockholders’ |
||||||||||||||||||||||||||
Description |
Shares |
Amount |
Paid in Capital |
Comprehensive Loss |
Deficit |
Equity |
Therapeutics, Inc. |
Equity |
||||||||||||||||||||||||
Balance at December 31, 2018 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Net income |
— |
|||||||||||||||||||||||||||||||
Change in unrealized gains, net of tax |
— |
|||||||||||||||||||||||||||||||
Foreign currency translation |
— |
|||||||||||||||||||||||||||||||
Issuance of common stock in connection with employee stock plans |
||||||||||||||||||||||||||||||||
Stock-based compensation expense |
— |
|||||||||||||||||||||||||||||||
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||
Noncontrolling interest in Akcea Therapeutics, Inc |
— |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Balance at March 31, 2019 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Net loss |
— |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Change in unrealized gains, net of tax |
— |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Foreign currency translation |
— |
|||||||||||||||||||||||||||||||
Issuance of common stock in connection with employee stock plans |
||||||||||||||||||||||||||||||||
Repurchases and retirements of common stock |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Stock-based compensation expense |
— |
|||||||||||||||||||||||||||||||
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||
Noncontrolling interest in Akcea Therapeutics, Inc. |
— |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at March 31, 2020 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Operating activities: |
||||||||
Net income (loss) |
$ |
( |
) |
$ |
||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation |
||||||||
Amortization of right-of-use operating lease assets |
||||||||
Amortization of patents |
||||||||
Amortization of premium (discount) on investments, net |
( |
) |
||||||
Amortization of debt issuance costs |
||||||||
Amortization of convertible senior notes discount |
||||||||
Stock-based compensation expense |
||||||||
Non-cash losses related to patents, licensing and property, plant and equipment and investments |
( |
) |
||||||
Provision for deferred income taxes |
( |
) |
||||||
Changes in operating assets and liabilities: |
||||||||
Contracts receivable |
||||||||
Inventories |
( |
) |
( |
) |
||||
Other current and long-term assets |
||||||||
Accounts payable |
( |
) |
||||||
Accrued compensation |
( |
) |
( |
) |
||||
Other current liabilities |
( |
) |
||||||
Deferred contract revenue |
( |
) |
( |
) |
||||
Net cash provided by (used in) operating activities |
( |
) |
||||||
Investing activities: |
||||||||
Purchases of short-term investments |
( |
) |
( |
) |
||||
Proceeds from sale of short-term investments |
||||||||
Purchases of property, plant and equipment |
( |
) |
( |
) |
||||
Acquisition of licenses and other assets, net |
( |
) |
( |
) |
||||
Net cash used in investing activities |
( |
) |
( |
) |
||||
Financing activities: |
||||||||
Proceeds from issuance of equity, net |
||||||||
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options |
( |
) |
( |
) |
||||
Repurchases and retirements of common stock |
( |
) |
||||||
Net cash provided by financing activities |
( |
) |
||||||
Net increase in cash and cash equivalents |
( |
) |
||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ |
$ |
||||||
Supplemental disclosures of cash flow information: |
||||||||
Interest paid |
$ |
$ |
||||||
Income taxes paid |
$ |
$ |
||||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||
Right-of-use assets obtained in exchange for lease liabilities |
$ |
$ |
||||||
Amounts accrued for capital and patent expenditures |
$ |
$ |
1. | Identify the contract |
● | We and our partner approved the contract and we are both committed to perform our obligations; |
● | We have identified our rights, our partner’s rights and the payment terms; |
● | We have concluded that the contract has commercial substance, meaning that the risk, timing, or amount of our future cash flows is expected to change as a result of the contract; and |
● | We believe collectability of the consideration is probable. |
2. | Identify the performance obligations |
3. | Determine the transaction price |
4. | Allocate the transaction price |
● | Estimated future product sales; |
● | Estimated royalties we may receive from future product sales; |
● | Estimated contractual milestone payments we may receive; |
● | Expenses we expect to incur; |
● | Income taxes; and |
● | A discount rate. |
● | 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. |
5. | Recognize revenue |
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. |
● | 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. |
● |
● |
March 31, 2020 |
December 31, 2019 |
|||||||
Raw materials: |
||||||||
Raw materials- clinical |
$ |
$ |
||||||
Raw materials- commercial |
||||||||
Total raw materials |
||||||||
Work in process |
||||||||
Finished goods |
||||||||
Total inventory |
$ |
$ |
Three months ended March 31, 2020 |
Weighted Average Shares Owned in Akcea |
Akcea’s Net Loss Per Share |
Ionis’ Portion of Akcea’s Net Loss |
|||||||||
Common shares |
$ |
( |
) |
$ |
( |
) |
||||||
Akcea’s net loss attributable to our ownership |
$ |
( |
) |
|||||||||
Ionis’ stand-alone net loss |
( |
) |
||||||||||
Net loss available to Ionis common stockholders |
$ |
( |
) |
|||||||||
Weighted average shares outstanding |
||||||||||||
Basic net loss per share |
$ |
( |
) |
Three months ended March 31, 2019 |
Weighted Average Shares Owned in Akcea |
Akcea’s Net Income Per Share |
Ionis’ Portion of Akcea’s Net Income |
|||||||||
Common shares |
$ |
$ |
||||||||||
Akcea’s net income attributable to our ownership |
$ |
|||||||||||
Ionis’ stand-alone net income |
||||||||||||
Net income available to Ionis common stockholders |
$ |
|||||||||||
Weighted average shares outstanding |
||||||||||||
Basic net income per share |
$ |
● |
● |
● | Dilutive stock options; |
● | Unvested restricted stock units; and |
● | Employee Stock Purchase Plan, or ESPP. |
Three months ended March 31, 2019 |
Income (Numerator) |
Shares (Denominator) |
Per-Share Amount |
|||||||||
Net income available to Ionis common stockholders |
$ |
$ |
||||||||||
Effect of dilutive securities: |
||||||||||||
Shares issuable upon exercise of stock options |
— |
|||||||||||
Shares issuable upon restricted stock award issuance |
— |
|||||||||||
Shares issuable related to our Employee Stock Purchase Plan |
— |
|||||||||||
Income available to Ionis common stockholders |
$ |
$ |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Risk-free interest rate |
% |
% |
||||||
Dividend yield |
% |
% |
||||||
Volatility |
% |
% |
||||||
Expected life |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Risk-free interest rate |
% |
% |
||||||
Dividend yield |
% |
% |
||||||
Volatility |
% |
% |
||||||
Expected life |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Risk-free interest rate |
% |
% |
||||||
Dividend yield |
% |
% |
||||||
Volatility |
% |
% |
||||||
Expected life |
Three Months Ended March 31, |
||||
2020 |
||||
Risk-free interest rate |
% |
|||
Dividend yield |
% |
|||
Volatility |
% |
|||
Expected life |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Risk-free interest rate |
% |
% |
||||||
Dividend yield |
% |
% |
||||||
Volatility |
% |
% |
||||||
Expected life |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Cost of products sold |
$ |
$ |
||||||
Research, development and patent |
||||||||
Selling, general and administrative |
||||||||
Total |
$ |
$ |
1) | When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied |
● | We are applying 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 use the “unit of account” concept when we receive consideration under a collaborative arrangement 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 do not recognize revenue for the transaction |
% |
||||
After |
% |
|||
After |
% |
|||
Total |
% |
Gross Unrealized |
Estimated |
|||||||||||||||
March 31, 2020 |
Cost (1) |
Gains |
Losses |
Fair Value |
||||||||||||
Available-for-sale securities: |
||||||||||||||||
Corporate debt securities (2) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Debt securities issued by U.S. government agencies |
( |
) |
||||||||||||||
Debt securities issued by the U.S. Treasury (2) |
( |
) |
||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states |
( |
) |
||||||||||||||
Total securities with a maturity of one year or less |
( |
) |
||||||||||||||
Corporate debt securities |
( |
) |
||||||||||||||
Debt securities issued by U.S. government agencies |
( |
) |
||||||||||||||
Debt securities issued by the U.S. Treasury |
||||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states |
||||||||||||||||
Other municipal debt securities |
||||||||||||||||
Total securities with a maturity of more than one year |
( |
) |
||||||||||||||
Total available-for-sale securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Equity securities: |
||||||||||||||||
Total equity securities included in other current assets (3) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Total equity securities included in deposits and other assets (4) |
||||||||||||||||
Total equity securities |
( |
) |
||||||||||||||
Total available-for-sale and equity securities |
$ |
$ |
$ |
( |
) |
$ |
Gross Unrealized |
Estimated |
|||||||||||||||
December 31, 2019 |
Cost (1) |
Gains |
Losses |
Fair Value |
||||||||||||
Available-for-sale securities: |
||||||||||||||||
Corporate debt securities (2) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Debt securities issued by U.S. government agencies |
( |
) |
||||||||||||||
Debt securities issued by the U.S. Treasury (2) |
( |
) |
||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states (2) |
( |
) |
||||||||||||||
Total securities with a maturity of one year or less |
( |
) |
||||||||||||||
Corporate debt securities |
( |
) |
||||||||||||||
Debt securities issued by U.S. government agencies |
( |
) |
||||||||||||||
Debt securities issued by the U.S. Treasury |
( |
) |
||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states |
( |
) |
||||||||||||||
Total securities with a maturity of more than one year |
( |
) |
||||||||||||||
Total available-for-sale securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Equity securities: |
||||||||||||||||
Total equity securities included in other current assets (3) |
( |
) |
||||||||||||||
Total equity securities included in deposits and other assets (4) |
||||||||||||||||
Total equity securities |
( |
) |
||||||||||||||
Total available-for-sale and equity securities |
$ |
$ |
$ |
( |
) |
$ |
(1) |
(2) |
(3) |
(4) |
Less than 12 Months of Temporary Impairment |
More than 12 Months of Temporary Impairment |
Total Temporary Impairment |
||||||||||||||||||||||||||
Number of Investments |
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
Estimated Fair Value |
Unrealized Losses |
||||||||||||||||||||||
Corporate debt securities |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
( |
) |
||||||||||||||||||
Debt securities issued by U.S. government agencies |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Debt securities issued by the U.S. Treasury |
( |
) |
( |
) |
||||||||||||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states |
( |
) |
( |
) |
||||||||||||||||||||||||
Total temporarily impaired securities |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
At March 31, 2020 |
Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Cash equivalents (1) |
$ |
$ |
$ |
$ |
||||||||||||
Corporate debt securities (2) |
||||||||||||||||
Debt securities issued by U.S. government agencies (3) |
||||||||||||||||
Debt securities issued by the U.S. Treasury (4) |
||||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states (5) |
||||||||||||||||
Other municipal debt securities (5) |
||||||||||||||||
Investment in ProQR Therapeutics N.V. (6) |
||||||||||||||||
Total |
$ |
$ |
$ |
$ |
At December 31, 2019 |
Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Cash equivalents (1) |
$ |
$ |
$ |
$ |
||||||||||||
Corporate debt securities (7) |
||||||||||||||||
Debt securities issued by U.S. government agencies (8) |
||||||||||||||||
Debt securities issued by the U.S. Treasury (5) |
||||||||||||||||
Debt securities issued by states of the U.S. and political subdivisions of the states (5) |
||||||||||||||||
Investment in ProQR Therapeutics N.V. (6) |
||||||||||||||||
Total |
$ |
$ |
$ |
$ |
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) |
(8) |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
SPINRAZA royalties (commercial revenue) |
$ |
$ |
||||||
R&D revenue |
||||||||
Total revenue from our relationship with Biogen |
$ |
$ |
||||||
Percentage of total revenue |
% |
% |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
R&D revenue |
$ |
$ |
||||||
Percentage of total revenue |
% |
% |
Three Months Ended March 31, 2020 |
Ionis Core |
Akcea Therapeutics |
Elimination of Intercompany Activity |
Total |
||||||||||||
Revenue: |
||||||||||||||||
Commercial revenue: |
||||||||||||||||
SPINRAZA royalties |
$ |
$ |
$ |
$ |
||||||||||||
Product sales, net |
||||||||||||||||
Licensing and other royalty revenue |
( |
) |
||||||||||||||
Total commercial revenue |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
R&D revenue under collaborative agreements |
$ |
$ |
$ |
$ |
||||||||||||
Total segment revenue |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Total operating expenses |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Loss from operations |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
Three Months Ended March 31, 2019 |
Ionis Core |
Akcea Therapeutics |
Elimination of Intercompany Activity |
Total |
||||||||||||
Revenue: |
||||||||||||||||
Commercial revenue: |
||||||||||||||||
SPINRAZA royalties |
$ |
$ |
$ |
$ |
||||||||||||
Product sales, net |
||||||||||||||||
Licensing and other royalty revenue |
||||||||||||||||
Total commercial revenue |
$ |
$ |
$ |
$ |
||||||||||||
R&D revenue under collaborative agreements |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Total segment revenue |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Total operating expense |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Income from operations |
$ |
$ |
$ |
( |
) |
$ |
Total Assets |
Ionis Core |
Akcea Therapeutics |
Elimination of Intercompany Activity |
Total |
||||||||||||
March 31, 2020 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
December 31, 2019 |
$ |
$ |
$ |
( |
) |
$ |
ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Total revenue |
$ |
133,367 |
$ |
297,214 |
||||
Total operating expenses |
$ |
194,494 |
$ |
175,679 |
||||
Income (loss) from operations |
$ |
(61,127 |
) |
$ |
121,535 |
|||
Net income (loss) |
$ |
(58,480 |
) |
$ |
90,884 |
|||
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders |
$ |
(48,226 |
) |
$ |
84,443 |
● | SPINRAZA: a global foundation-of-care for the treatment of SMA patients of all ages |
o | Worldwide sales increased to $565 million in the first quarter, a 9 percent increase compared to the first quarter of 2019 |
o | Worldwide patients on treatment increased to approximately 10,800 at the end of the first quarter, including patients across commercial, expanded access and clinical trial settings |
o | Patient treatment is underway in the Phase 2/3 DEVOTE study evaluating the safety, tolerability and potential to achieve even greater efficacy with a higher dose of SPINRAZA |
o | Data from an independent study published in Lancet Neurology demonstrated statistically significant improvement in motor function with SPINRAZA treatment in teens and adults |
● | TEGSEDI: launched in multiple markets for the treatment of hATTR with polyneuropathy in adult patients |
o | Commercially available in 12 countries |
o | Launching in additional EU countries this year and expanding in Latin America through PTC Therapeutics |
o | Results from the NEURO-TTR Phase 3 open-label extension study were published in the European Journal of Neurology. |
● | WAYLIVRA: launched in the EU as the only approved treatment for adults with genetically confirmed FCS at high risk for pancreatitis |
o | Launch progressing in Germany, Austria and through the ATU in France |
o | Launching in additional EU countries this year |
● | Roche completed enrollment in the global, GENERATION HD1 Phase 3 study in patients with Huntington’s disease |
● | Initiated the CARDIO-TTRansform Phase 3 clinical trial for AKCEA-TTR-LRx in patients with TTR-mediated amyloid cardiomyopathy |
● | Two medicines granted Fast Track Designation by the U.S. FDA |
o | AKCEA-APO(a)-LRx for the treatment of cardiovascular disease due to elevated Lp(a) levels |
o | IONIS-C9Rx for the treatment of C9orf72-ALS |
● | We generated more than $20 million as numerous partnered medicines advanced |
o | $10 million from AstraZeneca for ION532 targeting APOL1 for the treatment of kidney disease |
o | $7.5 million from Biogen for IONIS-MAPTRx for the treatment of Alzheimer’s disease |
o | $5 million from Dynacure for IONIS-DNM2-2.5Rx for the treatment of centronuclear myopathies |
● | We and Akcea reported positive topline results for AKCEA-APOCIII-LRx and vupanorsen |
● | Results from the Phase 2 study of AKCEA-APO(a)-LRx in patients with Lp(a)-driven cardiovascular disease, highlighting the favorable safety and tolerability profile and the potential to address a major area of unmet need, were published in the New England Journal of Medicine |
● | Initiated a Phase 1 study of ION224, an Ionis-owned medicine in development for the treatment of NASH |
● | Assessing the propriety of revenue recognition and associated deferred revenue; |
● | Determining the appropriate cost estimates for unbilled preclinical studies and clinical development activities; and |
● | Estimating our income taxes |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Revenue: |
||||||||
Commercial revenue: |
||||||||
SPINRAZA royalties |
$ |
66,008 |
$ |
59,711 |
||||
Product sales, net |
15,159 |
6,754 |
||||||
Licensing and other royalty revenue |
2,794 |
1,623 |
||||||
Total commercial revenue |
83,961 |
68,088 |
||||||
R&D revenue: |
||||||||
Amortization from upfront payments |
21,146 |
35,851 |
||||||
Milestone payments |
23,119 |
40,017 |
||||||
License fees |
— |
150,000 |
||||||
Other services |
5,141 |
3,258 |
||||||
Total R&D revenue |
49,406 |
229,126 |
||||||
Total revenue |
$ |
133,367 |
$ |
297,214 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
95,020 |
$ |
78,514 |
||||
Akcea Therapeutics |
60,950 |
128,106 |
||||||
Elimination of intercompany activity |
(2,266 |
) |
(76,446 |
) |
||||
Subtotal |
153,704 |
130,174 |
||||||
Non-cash compensation expense related to equity awards |
40,790 |
45,505 |
||||||
Total operating expenses |
$ |
194,494 |
$ |
175,679 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
— |
$ |
— |
||||
Akcea Therapeutics |
4,534 |
2,326 |
||||||
Elimination of intercompany activity |
(2,223 |
) |
(1,403 |
) |
||||
Subtotal |
2,311 |
923 |
||||||
Non-cash compensation expense related to equity awards |
237 |
118 |
||||||
Total cost of products sold |
$ |
2,548 |
$ |
1,041 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Research, development and patent expenses, excluding non-cash compensation expense related to equity awards |
$ |
91,396 |
$ |
81,982 |
||||
Non-cash compensation expense related to equity awards |
25,556 |
24,435 |
||||||
Total research, development and patent expenses |
$ |
116,952 |
$ |
106,417 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
75,433 |
$ |
61,327 |
||||
Akcea Therapeutics |
16,006 |
95,698 |
||||||
Elimination of intercompany activity |
(43 |
) |
(75,043 |
) |
||||
Subtotal |
91,396 |
81,982 |
||||||
Non-cash compensation expense related to equity awards |
25,556 |
24,435 |
||||||
Total research, development and patent expenses |
$ |
116,952 |
$ |
106,417 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Antisense drug discovery expenses, excluding non-cash compensation expense related to equity awards |
$ |
18,366 |
$ |
14,632 |
||||
Non-cash compensation expense related to equity awards |
6,306 |
5,493 |
||||||
Total antisense drug discovery expenses |
$ |
24,672 |
$ |
20,125 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
AKCEA-TTR-LRx |
$ |
5,851 |
$ |
940 |
||||
WAYLIVRA |
978 |
1,971 |
||||||
TEGSEDI |
4,346 |
4,691 |
||||||
Other antisense development projects |
21,840 |
21,370 |
||||||
Development overhead expenses |
17,932 |
18,944 |
||||||
Total antisense drug development, excluding non-cash compensation expense related to equity awards |
50,947 |
47,916 |
||||||
Non-cash compensation expense related to equity awards |
11,787 |
12,234 |
||||||
Total antisense drug development expenses |
$ |
62,734 |
$ |
60,150 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
39,102 |
$ |
29,070 |
||||
Akcea Therapeutics |
11,845 |
93,846 |
||||||
Elimination of intercompany activity |
— |
(75,000 |
) |
|||||
Subtotal |
50,947 |
47,916 |
||||||
Non-cash compensation expense related to equity awards |
11,787 |
12,234 |
||||||
Total antisense drug development expenses |
$ |
62,734 |
$ |
60,150 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Manufacturing and development chemistry expenses, excluding non-cash compensation expense related to equity awards |
$ |
11,983 |
$ |
10,154 |
||||
Non-cash compensation expense related to equity awards |
2,832 |
2,057 |
||||||
Total manufacturing and development chemistry expenses |
$ |
14,815 |
$ |
12,211 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
10,311 |
$ |
8,799 |
||||
Akcea Therapeutics |
1,672 |
1,355 |
||||||
Subtotal |
11,983 |
10,154 |
||||||
Non-cash compensation expense related to equity awards |
2,832 |
2,057 |
||||||
Total manufacturing and development chemistry expenses |
$ |
14,815 |
$ |
12,211 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Personnel costs |
$ |
3,838 |
$ |
3,910 |
||||
Occupancy |
2,442 |
2,177 |
||||||
Patent expenses |
672 |
523 |
||||||
Depreciation and amortization |
162 |
121 |
||||||
Insurance |
610 |
411 |
||||||
Other |
2,376 |
2,138 |
||||||
Total R&D support expenses, excluding non-cash compensation expense related to equity awards |
10,100 |
9,280 |
||||||
Non-cash compensation expense related to equity awards |
4,632 |
4,651 |
||||||
Total R&D support expenses |
$ |
14,732 |
$ |
13,931 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
7,654 |
$ |
8,826 |
||||
Akcea Therapeutics |
2,489 |
497 |
||||||
Elimination of intercompany activity |
(43 |
) |
(43 |
) |
||||
Subtotal |
10,100 |
9,280 |
||||||
Non-cash compensation expense related to equity awards |
4,632 |
4,651 |
||||||
Total R&D support expenses |
$ |
14,732 |
$ |
13,931 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Selling, general and administrative expenses, excluding non-cash compensation expense related to equity awards |
$ |
59,997 |
$ |
47,270 |
||||
Non-cash compensation expense related to equity awards |
14,997 |
20,951 |
||||||
Total selling, general and administrative expenses |
$ |
74,994 |
$ |
68,221 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Ionis Core |
$ |
19,587 |
$ |
17,187 |
||||
Akcea Therapeutics |
40,410 |
30,082 |
||||||
Subtotal |
59,997 |
47,269 |
||||||
Non-cash compensation expense related to equity awards |
14,997 |
20,952 |
||||||
Total selling, general and administrative expenses |
$ |
74,994 |
$ |
68,221 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Cost of products sold |
$ |
4,534 |
$ |
2,326 |
||||
Development and patent expenses |
16,006 |
20,698 |
||||||
Sublicense fees to Ionis |
— |
75,000 |
||||||
Selling, general and administrative expenses |
40,410 |
30,082 |
||||||
Profit (loss) share for TEGSEDI commercialization activities |
(6,898 |
) |
(9,056 |
) |
||||
Total operating expenses, excluding non-cash compensation expense related to equity awards |
54,052 |
119,050 |
||||||
Non-cash compensation expense related to equity awards |
7,282 |
18,560 |
||||||
Total Akcea Therapeutics operating expenses |
$ |
61,334 |
$ |
137,610 |
Three Months Ended March 31, |
||||||||
2020 |
2019 |
|||||||
Convertible notes: |
||||||||
Non-cash amortization of the debt discount and debt issuance costs |
$ |
9,412 |
$ |
9,200 |
||||
Interest expense payable in cash |
946 |
1,714 |
||||||
Interest on mortgage for primary R&D and manufacturing facilities |
601 |
582 |
||||||
Other |
31 |
103 |
||||||
Total interest expense |
$ |
10,990 |
$ |
11,599 |
Payments Due by Period (in millions) |
||||||||||||||||||||
Contractual Obligations (selected balances described below) |
Total |
Less than 1 year |
1-3 years |
3-5 years |
After 5 years |
|||||||||||||||
0.125% Notes (principal and interest payable) |
$ |
552.3 |
$ |
0.7 |
$ |
1.4 |
$ |
550.2 |
$ |
— |
||||||||||
1% Notes (principal and interest payable) |
316.1 |
3.1 |
313.0 |
— |
— |
|||||||||||||||
Building mortgage payments |
77.6 |
2.4 |
5.5 |
6.9 |
62.8 |
|||||||||||||||
Operating leases |
22.6 |
3.3 |
5.7 |
4.8 |
8.8 |
|||||||||||||||
Other obligations (principal and interest payable) |
1.0 |
0.1 |
0.1 |
0.1 |
0.7 |
|||||||||||||||
Total |
$ |
969.6 |
$ |
9.6 |
$ |
325.7 |
$ |
562.0 |
$ |
72.3 |
0.125% Notes |
||||
Outstanding principal balance |
$ |
548.8 |
||
Maturity date |
December 2024 |
|||
Interest rate |
0.125 percent |
|||
Conversion price per share |
$ |
83.28 |
||
Total shares of common stock subject to conversion |
6.6 |
1% Notes |
||||
Outstanding principal balance |
$ |
309.9 |
||
Maturity date |
November 2021 |
|||
Interest rate |
1 percent |
|||
Conversion price per share |
$ |
66.81 |
||
Total shares of common stock subject to conversion |
4.6 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 1. | LEGAL PROCEEDINGS |
ITEM 1A. | RISK FACTORS |
● | receipt and scope of marketing authorizations; |
● | establishment and demonstration in the medical and patient community of the efficacy and safety of our medicines and their potential advantages over competing products; |
● | cost and effectiveness of our medicines compared to other available therapies; |
● | patient convenience of the dosing regimen for our medicines; and |
● | reimbursement policies of government and third-party payers. |
● | priced lower than our medicines; |
● | reimbursed more favorably by government and other third-party payers than our medicines; |
● | safer than our medicines; |
● | more effective than our medicines; or |
● | more convenient to use than our medicines. |
● | ZOLGENSMA could compete with SPINRAZA; |
● | ONPATTRO, VYNDAQEL and VYNDAMAX, AG10 and vutrisiran could compete with TEGSEDI; |
● | ARO-APOC3, Myalept and gemcabene could compete with WAYLIVRA; |
● | WVE-120101/WVE-120102, Selistat and VX15 could compete with tominersen; |
● | Arimoclomol could compete with tofersen; and |
● | ONPATTRO, VYNDAQEL and VYNDAMAX, vutrisiran and AG10 could complete with AKCEA-TTR-LRx;. |
● | in the U.S., TEGSEDI’s label contains a boxed warning for thrombocytopenia and glomerulonephritis; |
● | TEGSEDI requires periodic blood and urine monitoring; |
● | in the U.S., TEGSEDI is available only through a Risk Evaluation and Mitigation Strategy, or REMS, program; and |
● | we expect WAYLIVRA will require periodic blood monitoring if approved in the U.S. |
● | fund our development activities for SPINRAZA; |
● | seek and obtain regulatory approvals for SPINRAZA; and |
● | successfully commercialize SPINRAZA. |
● | such authorities may disagree with the design or implementation of our clinical studies; |
● | we or our partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a medicine is safe and effective for any indication; |
● | such authorities may not accept clinical data from studies conducted at clinical facilities that have deficient clinical practices or that are in countries where the standard of care is potentially different from the U.S.; |
● | we or our partners may be unable to demonstrate that our medicine's clinical and other benefits outweigh its safety risks to support approval; |
● | such authorities may disagree with the interpretation of data from preclinical or clinical studies; |
● | such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers who manufacture clinical and commercial supplies for our medicines; and |
● | the approval policies or regulations of such authorities or their prior guidance to us or our partners during clinical development may significantly change in a manner rendering our clinical data insufficient for approval. |
● | the clinical study may produce negative or inconclusive results; |
● | regulators may require that we hold, suspend or terminate clinical research for noncompliance with regulatory requirements; |
● | we, our partners, the FDA or foreign regulatory authorities could suspend or terminate a clinical study due to adverse side effects of a medicine on subjects in the trial; |
● | we, or our partners, may decide, or regulators may require us, to conduct additional preclinical testing or clinical studies; |
● | enrollment in our clinical studies may be slower than we anticipate; |
● | we or our partners, including our independent clinical investigators, contract research organizations and other third-party service providers on which we rely, may not identify, recruit and train suitable clinical investigators at a sufficient number of study sites or timely enroll a sufficient number of study subjects in the clinical study; |
● | the institutional review board for a prospective site might withhold or delay its approval for the study; |
● | enrollment in our clinical studies may be slower than we anticipate; |
● | people who enroll in the clinical study may later drop out due to adverse events, a perception they are not benefiting from participating in the study, fatigue with the clinical study process or personal issues; |
● | a clinical study site may deviate from the protocol for the study; |
● | the cost of our clinical studies may be greater than we anticipate; |
● | our partners may decide not to exercise any existing options to license and conduct additional clinical studies for our medicines; and |
● | the supply or quality of our medicines or other materials necessary to conduct our clinical studies may be insufficient, inadequate or delayed. |
● | Roche for development and funding of tominersen; |
● | Novartis for development and funding of AKCEA-APO(a)-LRx; and |
● | Biogen for development and funding of tofersen. |
● | conduct clinical studies; |
● | seek and obtain marketing authorization; and |
● | manufacture, market and sell our medicines. |
● | pursue alternative technologies or develop alternative products that may be competitive with the medicine that is part of the collaboration with us; |
● | pursue higher-priority programs or change the focus of its own development programs; or |
● | choose to devote fewer resources to our medicines than it does for its own medicines. |
● | successful commercialization of SPINRAZA, TEGSEDI and WAYLIVRA; |
● | additional marketing approvals for WAYLIVRA and TEGSEDI; |
● | the profile and launch timing of our medicines, including TEGSEDI and WAYLIVRA; |
● | changes in existing collaborative relationships and our ability to establish and maintain additional collaborative arrangements; |
● | continued scientific progress in our research, drug discovery and development programs; |
● | the size of our programs and progress with preclinical and clinical studies; |
● | the time and costs involved in obtaining marketing authorizations; and |
● | competing technological and market developments, including the introduction by others of new therapies that address our markets. |
● | interruption of our research, development and manufacturing efforts; |
● | injury to our employees and others; |
● | environmental damage resulting in costly clean up; and |
● | liabilities under federal, state and local laws and regulations governing health and human safety, as well as the use, storage, handling and disposal of these materials and resultant waste products. |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Total Number of Shares Purchased |
Average Price Paid Per Share (1) |
|||||||
January 2020 |
1,478 |
$ |
61.27 |
|||||
Total |
1,478 |
(1) |
Average Price Paid Per Share excludes cash paid for commissions. |
ITEM 3. | DEFAULT UPON SENIOR SECURITIES |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 5. | OTHER INFORMATION |
ITEM 6. | EXHIBITS |
a. | Exhibits |
Exhibit Number |
Description of Document |
|
Certification by Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. |
||
Certification by Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. |
||
32.1* |
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101 |
The following financial statements from the Ionis Pharmaceuticals, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of comprehensive income (loss), (iv) condensed consolidated statements of stockholders' equity, (v) condensed consolidated statements of cash flows and (vi) notes to condensed consolidated financial statements (detail tagged). |
|
104 |
Cover Page Interactive Data File (formatted in iXBRL and included in exhibit 101). |
* | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
Signatures |
Title |
Date |
||
/s/ BRETT P. MONIA |
Director and Chief Executive Officer |
|||
Brett P. Monia, Ph.D. |
(Principal executive officer) |
May 6, 2020 |
||
/s/ ELIZABETH L. HOUGEN |
Executive Vice President, Finance and Chief Financial Officer |
|||
Elizabeth L. Hougen |
(Principal financial and accounting officer) |
May 6, 2020 |
1. | I have reviewed this Quarterly Report on Form 10-Q of Ionis Pharmaceuticals, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, condensed consolidated results of operations and condensed consolidated cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 6, 2020 | |
/s/ BRETT P. MONIA | |
Brett P. Monia, Ph.D. | |
Chief Executive Officer |
1. | I have reviewed this Quarterly Report on Form 10-Q of Ionis Pharmaceuticals, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, condensed consolidated results of operations and condensed consolidated cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ ELIZABETH L. HOUGEN | |
Elizabeth L. Hougen | |
Chief Financial Officer |
1. | The Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and the results of operations of the Company for the period covered by the Periodic Report. |
/s/ BRETT P. MONIA | /s/ ELIZABETH L. HOUGEN | |
Brett P. Monia, Ph.D. | Elizabeth L. Hougen | |
Chief Executive Officer | Chief Financial Officer |
Significant Accounting Policies, Contracts Receivable (Details) |
3 Months Ended |
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Mar. 31, 2020 | |
Contracts Receivable [Abstract] | |
Period of time after billing when payment is received | 3 months |
Collaborative Arrangements and Licensing Agreements (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Biogen [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collaborative Arrangements and Licensing Agreements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue from Collaborative Relationship |
During the three months ended March 31, 2020 and 2019, we earned the following revenue from our relationship with Biogen (in millions, except percentage amounts):
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AstraZeneca [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Revenue from Collaborative Relationship |
During the three months ended March 31, 2020 and 2019, we earned the following revenue from our relationship with AstraZeneca (in millions, except percentage amounts):
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Significant Accounting Policies, Cash, Cash Equivalents and Investments (Details) |
Mar. 31, 2020
Company
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Cash, Cash Equivalents and Investments [Abstract] | |
Number of publicly-held companies in which there is an equity ownership interest of less than 20% | 2 |
Number of privately-held companies in which there is an equity ownership interest of less than 20% | 5 |
Significant Accounting Policies (Policies) |
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Revenue Recognition |
Revenue Recognition
Our Revenue Sources
We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our condensed consolidated balance sheet.
Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships.
Commercial Revenue: Product sales, net
We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 and we added product sales from WAYLIVRA to our commercial revenue in the third quarter of 2019. In the U.S., we distribute TEGSEDI through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Europe, prior to the third quarter of 2019 we distributed TEGSEDI through a non-exclusive distribution model with a 3PL that took title to TEGSEDI. The 3PL was our sole customer in Europe. The 3PL in Europe then distributed TEGSEDI to hospitals and pharmacies. In the third quarter of 2019, we entered into a distribution arrangement with a 3PL and began to sell both TEGSEDI and WAYLIVRA directly to hospitals and pharmacies in Europe.
Research and development revenue under collaborative agreements
We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services.
In Note 6, Collaborative Arrangements and Licensing Agreements, we have included our collaborations with substantive changes during the first three months of 2020 from those included in Note 6 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Steps to Recognize Revenue
We use a five-step process to determine the amount of revenue we should recognize and when we should recognize it. The five-step process is as follows:
First we determine if we have a contract with our partner, including confirming that we have met each of the following criteria:
We next identify our performance obligations, which represent the distinct goods and services we are required to provide under the contract. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services.
Often times we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights because these items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item.
In some cases, we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.
We then determine the transaction price by reviewing the amount of consideration we are eligible to earn under the collaboration agreement, including any variable consideration. Under our collaboration agreements, consideration typically includes fixed consideration in the form of an upfront payment and variable consideration in the form of potential milestone payments, license fees and royalties. At the start of an agreement, our transaction price usually consists of only the upfront payment. We do not typically include any payments we may receive in the future in our initial transaction price because the payments are not probable and are contingent on certain future events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price.
Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the first quarter of 2020, we earned a $10 million milestone payment from AstraZeneca when AstraZeneca advanced ION532 targeting APOL1 for the treatment of kidney disease under our cardiovascular, renal and metabolic diseases collaboration. We did not consider the milestone payment probable until AstraZeneca achieved the milestone event because advancing ION532 was a contingent event that was not within our control. We recognized the milestone payment in full in the period the milestone event was achieved because we did not have any remaining performance obligations related to the milestone payment.
Next, we allocate the transaction price to each of our performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.
We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:
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:
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 recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner.
For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods. For example, in the third quarter of 2019, we updated our estimate of the total effort we expected to expend to satisfy our performance obligation under our 2013 Strategic Neurology collaboration with Biogen. As of September 30, 2019, we had completed a significant portion of the research and development services. We expect to complete the remainder of our services in 2020. As a result of our change in estimate, in the third quarter of 2019, we recorded a cumulative catch up adjustment of $16.5 million to decrease revenue. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the cumulative catch up adjustment we made.
The following are examples of when we typically recognize revenue based on the types of payments we receive.
Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We recognize royalty revenue, including royalties from SPINRAZA sales, in the period in which the counterparty sells the related product and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue.
Commercial Revenue: Product sales, net
We recognize product sales in the period when our customer obtains control of our products, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. Otherwise, payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues taxes collected from customers relating to product sales and remitted to governmental authorities.
Reserves for Product sales
We record product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as a reduction of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment. In certain cases, our estimates include a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net product sales in the respective period.
The following are the components of variable consideration related to product sales:
Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We also estimate the amount of chargebacks related to our estimated product remaining in the distribution channel at the end of the reporting period that we expect our customer to sell to healthcare providers in future periods. We record these reserves as an accrued liability on our condensed consolidated balance sheet for the chargebacks related to product sales to our U.S. customer during the reporting period.
Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S. and we record reserves for government rebates based on statutory discount rates and estimated utilization. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability-weighted for the estimated payer mix. We record these reserves as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.
Managed care rebates: We are subject to rebates in connection with value-based agreements with certain of our commercial payers. We record these rebates as an accrual on our condensed consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate.
Trade discounts: We provide customary invoice discounts on product sales to our U.S. customer for prompt payment. We record this discount as a reduction of product sales in the period in which we recognize the related product revenue.
Distribution services: We receive and pay for various distribution services from our U.S. and EU customers and wholesalers in the U.S.. We classify the costs for services we receive that are either not distinct from the sale of the product or for which we cannot reasonably estimate the fair value as a reduction of product sales. To the extent that the services we receive are distinct from the sale of the product, we classify the costs for such services as SG&A expenses.
Product returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that our customer may return. We record our return estimate as an accrued refund liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Based on our distribution model for product sales, contractual inventory limits with our customer and wholesalers and the price of the product, we have had minimal returns to date and we believe we will continue to have minimal returns. Our EU customers only take title to the product after they receive an order from a hospital or pharmacy and therefore they do not maintain excess inventory levels of our products. Accordingly, we have limited return risk in the EU and we do not estimate returns in the EU.
Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale.
Research and development revenue under collaboration agreements:
Upfront payments
When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our collaboration agreement with Roche to develop IONIS-FB-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. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules.
We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the first quarter of 2020, we achieved a $7.5 million milestone payment from Biogen when we advanced IONIS-MAPTRx under our 2012 neurology collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation for IONIS-MAPTRx. We are recognizing revenue related to this milestone payment over our estimated period of performance.
Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the first quarter of 2020, we recognized a $10 million milestone payment when AstraZeneca advanced ION532 targeting APOL1 for the treatment of kidney disease under our cardiovascular, renal and metabolic diseases collaboration agreement. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized the milestone payment in full in the first quarter of 2020.
License fees
We generally recognize as revenue the total amount we determine to be the relative stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the fourth quarter of 2019, we earned a $45 million license fee when Biogen licensed IONIS-MAPTRx from us. We also recognized $246 million of license fee revenue related to Akcea’s license of vupanorsen to Pfizer in the fourth quarter of 2019.
Sublicense fees
We recognize sublicense fee revenue in the period in which a party, who has already licensed our technology, further licenses the technology to another party because we do not have any performance obligations related to the sublicense. For example, in the second quarter of 2019, we earned a $20 million sublicense fee when Alnylam Pharmaceuticals sublicensed our technology to Regeneron Pharmaceuticals.
Amendments to Agreements
From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:
If 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 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the Bayer collaboration.
Multiple agreements
From time to time, we may enter into separate agreements at or near the same time with the same partner. We evaluate such agreements to determine whether we should account for them individually as distinct arrangements or whether the separate agreements should be combined and accounted for together. We evaluate the following to determine the accounting for the agreements:
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.
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Contracts Receivable |
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 of billing our partner or customer.
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Unbilled SPINRAZA Royalties |
Unbilled SPINRAZA Royalties
Our unbilled SPINRAZA royalties represent our right to receive consideration from Biogen in advance of when we are eligible to bill Biogen for SPINRAZA royalties. We include these unbilled amounts in other current assets on our condensed consolidated balance sheet.
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Deferred Revenue |
Deferred Revenue
We are often entitled to bill our customers and receive payment from our customers in advance of our obligation to provide services or transfer goods to our partners. In these instances, we include the amounts in deferred revenue on our condensed consolidated balance sheet. During the three months ended March 31, 2020 and 2019, we recognized $28.0 million and $40.3 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above.
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Cost of Products Sold |
Cost of Products Sold
Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of our products. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval of TEGSEDI in July 2018 and WAYLIVRA in May 2019, we expensed as research and development expenses a significant portion of the costs we incurred to produce the initial commercial launch supply for each medicine. We previously expensed $0.6 million and $0.3 million of costs to produce our products related to the product sales revenue we recognized in the three months ended March 31, 2020 and 2019, respectively.
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Noncontrolling Interest in Akcea Therapeutics, Inc. |
Noncontrolling Interest in Akcea Therapeutics, Inc.
Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. Since Akcea’s IPO, our ownership has ranged from 68 percent to 77 percent. At March 31, 2020, our ownership was approximately 76 percent. We reflect changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurs. During 2019, we received the following additional shares of Akcea common stock:
The shares third parties own represent an interest in Akcea’s equity that we do control. However, as we continue to maintain overall control of Akcea through our voting interest, we reflect the assets, liabilities and results of operations of Akcea in our condensed consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized.
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Cash, Cash Equivalents and Investments |
Cash, Cash Equivalents and Investments
We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold.
We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At March 31, 2020, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in five privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd.
We are required to measure and record our equity investments at fair value and to recognize the changes in fair value in our condensed consolidated statement of operations. We account for our equity investments in privately held companies at their cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
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Inventory Valuation |
Inventory Valuation
We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. We capitalize the costs of raw materials that we purchase for use in producing our medicines because until we use these raw materials, they have alternative future uses, which we refer to as clinical raw materials. We include in inventory raw material costs for medicines that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We can use each of our raw materials in multiple products and, as a result, each raw material has future economic value independent of the development status of any single medicine. For example, if one of our medicines failed, we could use the raw materials for that medicine to manufacture our other medicines. We expense these costs as R&D expenses when we begin to manufacture API for a particular medicine if the medicine has not been approved for marketing by a regulatory agency.
We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At March 31, 2020, our physical inventory for TEGSEDI and WAYLIVRA included API that we produced prior to when we obtained regulatory approval. As such, this API has no cost basis as we had previously expensed the costs as R&D expenses.
We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of our inventory, alternative uses for our medicines in development and historical write-offs. We did not record any material inventory write-offs for the three months ended March 31, 2020. Total inventory was $22.9 million and $18.2 million as of March 31, 2020 and December 31, 2019, respectively, and consisted of the following (in thousands):
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Leases |
Leases
We determine if an arrangement contains a lease at inception. We currently only have operating leases. We recognize a right-of-use operating lease asset and associated short- and long-term operating lease liability on our condensed consolidated balance sheet for operating leases greater than one year. Our right-of-use assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments arising from the lease arrangement. We recognize our right-of-use operating lease assets and lease liabilities based on the present value of the future minimum lease payments we will pay over the lease term. We determined the lease term at the inception of the lease, and in certain cases our lease term could include renewal options if we concluded we were reasonably certain that we will exercise the renewal option.
As our current leases do not provide an interest rate implicit in the lease, we used our incremental borrowing rate, based on the information available on the date we adopted Topic 842 (January 2019) or as of the lease inception date in determining the present value of future payments. We recognize rent expense for our minimum lease payments on a straight-line basis over the expected term of our lease. We recognize period expenses, such as common area maintenance expenses, in the period we incur the expense.
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Research and Development 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.
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Patent Expenses |
We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the U.S. Patent and Trademark Office, or foreign equivalent, issues the patent. We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. When we identify patents and patent applications that we are not actively pursuing, we write off any associated costs.
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Income Taxes |
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. We record a valuation allowance when necessary to reduce our net deferred tax assets to the amount expected to be realized.
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Long-Lived Assets |
Long-lived Assets
We evaluate long-lived assets, which include property, plant and equipment and patent costs, for impairment on at least a quarterly basis and whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of such assets.
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Use of Estimates |
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
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Basic and Diluted Net Income (Loss) per Share |
2. Significant Accounting Policies
Revenue Recognition
Our Revenue Sources
We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our condensed consolidated balance sheet.
Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships.
Commercial Revenue: Product sales, net
We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 and we added product sales from WAYLIVRA to our commercial revenue in the third quarter of 2019. In the U.S., we distribute TEGSEDI through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Europe, prior to the third quarter of 2019 we distributed TEGSEDI through a non-exclusive distribution model with a 3PL that took title to TEGSEDI. The 3PL was our sole customer in Europe. The 3PL in Europe then distributed TEGSEDI to hospitals and pharmacies. In the third quarter of 2019, we entered into a distribution arrangement with a 3PL and began to sell both TEGSEDI and WAYLIVRA directly to hospitals and pharmacies in Europe.
Research and development revenue under collaborative agreements
We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services.
In Note 6, Collaborative Arrangements and Licensing Agreements, we have included our collaborations with substantive changes during the first three months of 2020 from those included in Note 6 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Steps to Recognize Revenue
We use a five-step process to determine the amount of revenue we should recognize and when we should recognize it. The five-step process is as follows:
First we determine if we have a contract with our partner, including confirming that we have met each of the following criteria:
We next identify our performance obligations, which represent the distinct goods and services we are required to provide under the contract. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services.
Often times we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights because these items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item.
In some cases, we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.
We then determine the transaction price by reviewing the amount of consideration we are eligible to earn under the collaboration agreement, including any variable consideration. Under our collaboration agreements, consideration typically includes fixed consideration in the form of an upfront payment and variable consideration in the form of potential milestone payments, license fees and royalties. At the start of an agreement, our transaction price usually consists of only the upfront payment. We do not typically include any payments we may receive in the future in our initial transaction price because the payments are not probable and are contingent on certain future events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price.
Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the first quarter of 2020, we earned a $10 million milestone payment from AstraZeneca when AstraZeneca advanced ION532 targeting APOL1 for the treatment of kidney disease under our cardiovascular, renal and metabolic diseases collaboration. We did not consider the milestone payment probable until AstraZeneca achieved the milestone event because advancing ION532 was a contingent event that was not within our control. We recognized the milestone payment in full in the period the milestone event was achieved because we did not have any remaining performance obligations related to the milestone payment.
Next, we allocate the transaction price to each of our performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.
We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:
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:
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 recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner.
For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods. For example, in the third quarter of 2019, we updated our estimate of the total effort we expected to expend to satisfy our performance obligation under our 2013 Strategic Neurology collaboration with Biogen. As of September 30, 2019, we had completed a significant portion of the research and development services. We expect to complete the remainder of our services in 2020. As a result of our change in estimate, in the third quarter of 2019, we recorded a cumulative catch up adjustment of $16.5 million to decrease revenue. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the cumulative catch up adjustment we made.
The following are examples of when we typically recognize revenue based on the types of payments we receive.
Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We recognize royalty revenue, including royalties from SPINRAZA sales, in the period in which the counterparty sells the related product and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue.
Commercial Revenue: Product sales, net
We recognize product sales in the period when our customer obtains control of our products, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. Otherwise, payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues taxes collected from customers relating to product sales and remitted to governmental authorities.
Reserves for Product sales
We record product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as a reduction of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment. In certain cases, our estimates include a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net product sales in the respective period.
The following are the components of variable consideration related to product sales:
Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We also estimate the amount of chargebacks related to our estimated product remaining in the distribution channel at the end of the reporting period that we expect our customer to sell to healthcare providers in future periods. We record these reserves as an accrued liability on our condensed consolidated balance sheet for the chargebacks related to product sales to our U.S. customer during the reporting period.
Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S. and we record reserves for government rebates based on statutory discount rates and estimated utilization. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability-weighted for the estimated payer mix. We record these reserves as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.
Managed care rebates: We are subject to rebates in connection with value-based agreements with certain of our commercial payers. We record these rebates as an accrual on our condensed consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate.
Trade discounts: We provide customary invoice discounts on product sales to our U.S. customer for prompt payment. We record this discount as a reduction of product sales in the period in which we recognize the related product revenue.
Distribution services: We receive and pay for various distribution services from our U.S. and EU customers and wholesalers in the U.S.. We classify the costs for services we receive that are either not distinct from the sale of the product or for which we cannot reasonably estimate the fair value as a reduction of product sales. To the extent that the services we receive are distinct from the sale of the product, we classify the costs for such services as SG&A expenses.
Product returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that our customer may return. We record our return estimate as an accrued refund liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Based on our distribution model for product sales, contractual inventory limits with our customer and wholesalers and the price of the product, we have had minimal returns to date and we believe we will continue to have minimal returns. Our EU customers only take title to the product after they receive an order from a hospital or pharmacy and therefore they do not maintain excess inventory levels of our products. Accordingly, we have limited return risk in the EU and we do not estimate returns in the EU.
Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale.
Research and development revenue under collaboration agreements:
Upfront payments
When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our collaboration agreement with Roche to develop IONIS-FB-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. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules.
We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the first quarter of 2020, we achieved a $7.5 million milestone payment from Biogen when we advanced IONIS-MAPTRx under our 2012 neurology collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation for IONIS-MAPTRx. We are recognizing revenue related to this milestone payment over our estimated period of performance.
Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the first quarter of 2020, we recognized a $10 million milestone payment when AstraZeneca advanced ION532 targeting APOL1 for the treatment of kidney disease under our cardiovascular, renal and metabolic diseases collaboration agreement. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized the milestone payment in full in the first quarter of 2020.
License fees
We generally recognize as revenue the total amount we determine to be the relative stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the fourth quarter of 2019, we earned a $45 million license fee when Biogen licensed IONIS-MAPTRx from us. We also recognized $246 million of license fee revenue related to Akcea’s license of vupanorsen to Pfizer in the fourth quarter of 2019.
Sublicense fees
We recognize sublicense fee revenue in the period in which a party, who has already licensed our technology, further licenses the technology to another party because we do not have any performance obligations related to the sublicense. For example, in the second quarter of 2019, we earned a $20 million sublicense fee when Alnylam Pharmaceuticals sublicensed our technology to Regeneron Pharmaceuticals.
Amendments to Agreements
From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:
If 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 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the Bayer collaboration.
Multiple agreements
From time to time, we may enter into separate agreements at or near the same time with the same partner. We evaluate such agreements to determine whether we should account for them individually as distinct arrangements or whether the separate agreements should be combined and accounted for together. We evaluate the following to determine the accounting for the agreements:
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 of billing our partner or customer.
Unbilled SPINRAZA Royalties
Our unbilled SPINRAZA royalties represent our right to receive consideration from Biogen in advance of when we are eligible to bill Biogen for SPINRAZA royalties. We include these unbilled amounts in other current assets on our condensed consolidated balance sheet.
Deferred Revenue
We are often entitled to bill our customers and receive payment from our customers in advance of our obligation to provide services or transfer goods to our partners. In these instances, we include the amounts in deferred revenue on our condensed consolidated balance sheet. During the three months ended March 31, 2020 and 2019, we recognized $28.0 million and $40.3 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above.
Cost of Products Sold
Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of our products. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval of TEGSEDI in July 2018 and WAYLIVRA in May 2019, we expensed as research and development expenses a significant portion of the costs we incurred to produce the initial commercial launch supply for each medicine. We previously expensed $0.6 million and $0.3 million of costs to produce our products related to the product sales revenue we recognized in the three months ended March 31, 2020 and 2019, respectively.
Noncontrolling Interest in Akcea Therapeutics, Inc.
Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. Since Akcea’s IPO, our ownership has ranged from 68 percent to 77 percent. At March 31, 2020, our ownership was approximately 76 percent. We reflect changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurs. During 2019, we received the following additional shares of Akcea common stock:
The shares third parties own represent an interest in Akcea’s equity that we do control. However, as we continue to maintain overall control of Akcea through our voting interest, we reflect the assets, liabilities and results of operations of Akcea in our condensed consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized.
Cash, Cash Equivalents and Investments
We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold.
We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At March 31, 2020, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in five privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd.
We are required to measure and record our equity investments at fair value and to recognize the changes in fair value in our condensed consolidated statement of operations. We account for our equity investments in privately held companies at their cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
Inventory Valuation
We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. We capitalize the costs of raw materials that we purchase for use in producing our medicines because until we use these raw materials, they have alternative future uses, which we refer to as clinical raw materials. We include in inventory raw material costs for medicines that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We can use each of our raw materials in multiple products and, as a result, each raw material has future economic value independent of the development status of any single medicine. For example, if one of our medicines failed, we could use the raw materials for that medicine to manufacture our other medicines. We expense these costs as R&D expenses when we begin to manufacture API for a particular medicine if the medicine has not been approved for marketing by a regulatory agency.
We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At March 31, 2020, our physical inventory for TEGSEDI and WAYLIVRA included API that we produced prior to when we obtained regulatory approval. As such, this API has no cost basis as we had previously expensed the costs as R&D expenses.
We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of our inventory, alternative uses for our medicines in development and historical write-offs. We did not record any material inventory write-offs for the three months ended March 31, 2020. Total inventory was $22.9 million and $18.2 million as of March 31, 2020 and December 31, 2019, respectively, and consisted of the following (in thousands):
Leases
We determine if an arrangement contains a lease at inception. We currently only have operating leases. We recognize a right-of-use operating lease asset and associated short- and long-term operating lease liability on our condensed consolidated balance sheet for operating leases greater than one year. Our right-of-use assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments arising from the lease arrangement. We recognize our right-of-use operating lease assets and lease liabilities based on the present value of the future minimum lease payments we will pay over the lease term. We determined the lease term at the inception of the lease, and in certain cases our lease term could include renewal options if we concluded we were reasonably certain that we will exercise the renewal option.
As our current leases do not provide an interest rate implicit in the lease, we used our incremental borrowing rate, based on the information available on the date we adopted Topic 842 (January 2019) or as of the lease inception date in determining the present value of future payments. We recognize rent expense for our minimum lease payments on a straight-line basis over the expected term of our lease. We recognize period expenses, such as common area maintenance expenses, in the period we incur the expense.
Research, Development and Patent Expenses
Our research and development expenses include wages, benefits, facilities, supplies, external services, clinical trial and manufacturing costs and other expenses that are directly related to our research and development operations. We expense research and development costs as we incur them. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our condensed consolidated balance sheet and we expense them as the services are provided.
We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the U.S. Patent and Trademark Office, or foreign equivalent, issues the patent. We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. When we identify patents and patent applications that we are not actively pursuing, we write off any associated costs.
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. We record a valuation allowance when necessary to reduce our net deferred tax assets to the amount expected to be realized.
Long-lived Assets
We evaluate long-lived assets, which include property, plant and equipment and patent costs, for impairment on at least a quarterly basis and whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of such assets.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share
We compute basic net income (loss) per share by dividing the total net income (loss) attributable to our common stockholders by our weighted-average number of common shares outstanding during the period.
The calculation of total net income (loss) attributable to our common stockholders for the three months ended March 31, 2020 and 2019 considered our net income (loss) for Ionis on a stand-alone basis plus our share of Akcea’s net income (loss) for the period. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s net income (loss) per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income (loss) available to Ionis common stockholders for the calculation of net income (loss) per share is different than net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders in the condensed consolidated statements of operations.
Our basic net loss per share for the three months ended March 31, 2020, was calculated as follows (in thousands, except per share amounts):
Our basic net income per share for the three months ended March 31, 2019, was calculated as follows (in thousands, except per share amounts):
Diluted net income (loss) per share
For the three months ended March 31, 2020, 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:
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):
For the three months ended March 31, 2019, the calculation excluded our 1 percent convertible senior notes, or 1% Notes, because the effect on diluted earnings per share was anti-dilutive.
Convertible Debt
At issuance, we accounted for our convertible debt instruments, including our 0.125 percent senior convertible notes, or 0.125% Notes, and 1% Notes 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 on the date the notes were issued. In reviewing debt issuances, we were not able to identify any comparable companies that issued non-convertible debt instruments at the time of the issuance of the convertible notes. Therefore, we estimated the fair value of the liability component of our notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities.
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 serious and rare 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 and we bill Akcea for these expenses.
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, 2020 and 2019, we used the following weighted-average assumptions in our Black-Scholes calculations:
Ionis Employee Stock Options:
Ionis ESPP:
Ionis RSU’s:
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, 2020 was $62.30 per share.
In addition to our stock plans, Akcea has its own stock plan under which it grants stock 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, 2020 and 2019:
Akcea Employee Stock Options:
Akcea Board of Directors Stock Options:
Akcea ESPP:
Akcea RSU’s:
The fair value of RSUs is based on the market price of Akcea’s common stock on the date of grant. Akcea has granted RSUs with various vesting terms between six months and four years. The weighted-average grant date fair value of RSUs granted to employees for the three months ended March 31, 2020 was $15.84 per share.
The following table summarizes stock-based compensation expense for the three months ended March 31, 2020 and 2019 (in thousands). Our non-cash stock-based compensation expense includes $7.3 million and $18.6 million of stock-based compensation expense for Akcea employees for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options and RSUs was $146.3 million and $114.3 million, respectively. Our actual expenses may differ from these estimates because we will adjust our unrecognized non-cash stock-based compensation expense for future forfeitures. We expect to recognize the cost of non-cash stock-based compensation expense related to non-vested stock options and RSUs over a weighted average amortization period of 1.4 years and 1.9 years, respectively.
Share Repurchase Program
In September 2019, our board of directors approved an initial share repurchase program of up to $125 million of our common stock. In 2019, we repurchased 535,000 shares for $34.4 million. In the first quarter of 2020, we repurchased an additional 1.5 million shares for $90.6 million.
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. We adopted this new guidance on January 1, 2020. This guidance did not have an impact on our condensed consolidated financial statements.
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. We adopted this guidance on January 1, 2020 on a prospective basis. This guidance did not have an impact on our condensed consolidated financial statements.
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 implemented it (in italics):
We adopted this new guidance on January 1, 2020. This guidance did not have a significant impact on our condensed consolidated financial statements.
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Convertible Debt |
Convertible Debt
At issuance, we accounted for our convertible debt instruments, including our 0.125 percent senior convertible notes, or 0.125% Notes, and 1% Notes 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 on the date the notes were issued. In reviewing debt issuances, we were not able to identify any comparable companies that issued non-convertible debt instruments at the time of the issuance of the convertible notes. Therefore, we estimated the fair value of the liability component of our notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities.
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.
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Segment Information |
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 serious and rare 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 and we bill Akcea for these expenses.
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Stock-Based Compensation Expense |
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, 2020 and 2019, we used the following weighted-average assumptions in our Black-Scholes calculations:
Ionis Employee Stock Options:
Ionis ESPP:
Ionis RSU’s:
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, 2020 was $62.30 per share.
In addition to our stock plans, Akcea has its own stock plan under which it grants stock 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, 2020 and 2019:
Akcea Employee Stock Options:
Akcea Board of Directors Stock Options:
Akcea ESPP:
Akcea RSU’s:
The fair value of RSUs is based on the market price of Akcea’s common stock on the date of grant. Akcea has granted RSUs with various vesting terms between six months and four years. The weighted-average grant date fair value of RSUs granted to employees for the three months ended March 31, 2020 was $15.84 per share.
The following table summarizes stock-based compensation expense for the three months ended March 31, 2020 and 2019 (in thousands). Our non-cash stock-based compensation expense includes $7.3 million and $18.6 million of stock-based compensation expense for Akcea employees for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options and RSUs was $146.3 million and $114.3 million, respectively. Our actual expenses may differ from these estimates because we will adjust our unrecognized non-cash stock-based compensation expense for future forfeitures. We expect to recognize the cost of non-cash stock-based compensation expense related to non-vested stock options and RSUs over a weighted average amortization period of 1.4 years and 1.9 years, respectively.
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Impact of Recently Issued Accounting Standards |
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. We adopted this new guidance on January 1, 2020. This guidance did not have an impact on our condensed consolidated financial statements.
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. We adopted this guidance on January 1, 2020 on a prospective basis. This guidance did not have an impact on our condensed consolidated financial statements.
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 implemented it (in italics):
We adopted this new guidance on January 1, 2020. This guidance did not have a significant impact on our condensed consolidated financial statements.
|
Income Taxes |
3 Months Ended |
---|---|
Mar. 31, 2020 | |
Income Taxes [Abstract] | |
Income Taxes |
5. Income Taxes
The Coronavirus Aid, Relief, and Economic Security, or CARES, Act was enacted in March 2020. We considered our ability to estimate annual effective tax rates based on our pre-tax income projections, the income tax effects of the CARES Act, the realizability of our net deferred tax assets and the appropriateness of our valuation allowances.
Under the Tax Cut and Jobs Act of 2017, the utilization of federal net operating losses was limited to 80 percent of taxable income. The CARES Act temporarily removed this limitation and provides for the utilization of net operating loss carryforwards to offset 100 percent of taxable income. The 80 percent limitation enacted by the Tax Act is reinstated for tax years beginning in 2021.
We recorded an income tax benefit of $3.3 million for the three months ended March 31, 2020, compared to income tax expense of $31.0 million for the same period in 2019. We recorded an income tax benefit for the three months ended March 31, 2020 primarily due to Ionis’ pre-tax loss for the period and the $1.7 million tax benefit related to Akcea. We did not record a tax benefit as a result of Akcea’s pre-tax loss in the first quarter of 2020 because Akcea maintains a full valuation allowance against its deferred tax assets.
Our effective tax rate may vary from the U.S. federal statutory rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, the tax impact of non-deductible expenses and other permanent differences between income before taxes and taxable income, and changes to tax laws or rates. Our effective income tax rate of 5.28 percent for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21 percent primarily due to Ionis’ pre-tax loss for the period and the $1.7 million tax benefit related to Akcea.
|
Income Taxes (Details) - USD ($) $ in Thousands |
3 Months Ended | |||
---|---|---|---|---|
Mar. 31, 2020 |
Mar. 31, 2019 |
Jan. 01, 2021 |
Dec. 31, 2019 |
|
Income Taxes [Abstract] | ||||
Percentage of taxable income that can be offset with federal net operating losses | 100.00% | 80.00% | ||
Tax benefit related to CARES Act | $ (1,700) | |||
Income tax expense (benefit) | $ (3,257) | $ 31,047 | ||
Effective tax rate | 5.28% | |||
Federal statutory rate | 21.00% | |||
Akcea [Member] | ||||
Income Taxes [Abstract] | ||||
Tax benefit related to CARES Act | $ (1,700) | |||
Plan [Member] | ||||
Income Taxes [Abstract] | ||||
Percentage of taxable income that can be offset with federal net operating losses | 80.00% |
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