XNAS:ISIS Isis Pharmaceuticals Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended March 31, 2012

 

OR

 

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

 

For the transition period from                       to                        

 

Commission file number 0-19125

 


 

Isis Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

33-0336973

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

2855 Gazelle Court, Carlsbad, CA 92010

(Address of principal executive offices, including zip code)

 

760-931-9200

(Registrant’s telephone number, including area code)

 

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

 

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

 

Common Stock, $.001 Par Value

 

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

 

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

 

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

 

Large accelerated filer x

Accelerated filer o

 

 

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

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

 

The number of shares of voting common stock outstanding as of May 3, 2012 was 100,183,683.

 

 

 



Table of Contents

 

ISIS PHARMACEUTICALS, INC.

FORM 10-Q

 

INDEX

 

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1:

Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

ITEM 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

Results of Operations

19

 

 

 

 

Liquidity and Capital Resources

23

 

 

 

 

Risk Factors

25

 

 

 

ITEM 3:

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

ITEM 4:

Controls and Procedures

33

 

 

 

PART II

OTHER INFORMATION

34

 

 

 

ITEM 1:

Legal Proceedings

34

 

 

 

ITEM 2:

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

ITEM 3:

Default upon Senior Securities

34

 

 

 

ITEM 4:

Mine Safety Disclosures

34

 

 

 

ITEM 5:

Other Information

34

 

 

 

ITEM 6:

Exhibits

35

 

 

 

SIGNATURES

 

36

 

TRADEMARKS

 

Isis Pharmaceuticals® is a registered trademark of Isis Pharmaceuticals, Inc.

 

Regulus Therapeutics™ is a trademark of Regulus Therapeutics Inc.

 

Vitravene® is a registered trademark of Novartis AG.

 

KYNAMRO™ is a trademark of Genzyme Corporation.

 

2



Table of Contents

 

ISIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

March 31,
2012

 

December 31,
2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

56,391

 

$

65,477

 

Short-term investments

 

277,553

 

278,187

 

Contracts receivable

 

1,379

 

6,921

 

Inventories

 

4,873

 

4,139

 

Other current assets

 

7,417

 

5,415

 

Total current assets

 

347,613

 

360,139

 

Property, plant and equipment, net

 

95,132

 

96,615

 

Licenses, net

 

8,421

 

9,036

 

Patents, net

 

17,071

 

16,259

 

Deposits and other assets

 

2,570

 

2,845

 

Total assets

 

$

470,807

 

$

484,894

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,344

 

$

8,300

 

Accrued compensation

 

3,502

 

9,183

 

Accrued liabilities

 

15,600

 

18,655

 

Current portion of long-term obligations

 

2,941

 

3,390

 

Current portion of deferred contract revenue

 

34,320

 

36,584

 

Total current liabilities

 

61,707

 

76,112

 

Long-term deferred contract revenue

 

35,469

 

17,474

 

25/8 percent convertible subordinated notes

 

143,717

 

141,448

 

Long-term obligations, less current portion

 

3,603

 

4,125

 

Long-term financing liability for leased facility

 

70,039

 

69,877

 

Investment in Regulus Therapeutics Inc.

 

5,400

 

4,424

 

Total liabilities

 

319,935

 

313,460

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized, 100,183,182 and 100,042,976 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

100

 

100

 

Additional paid-in capital

 

1,016,497

 

1,013,592

 

Accumulated other comprehensive loss

 

(242

)

(770

)

Accumulated deficit

 

(865,483

)

(841,488

)

Total stockholders’ equity

 

150,872

 

171,434

 

Total liabilities and stockholders’ equity

 

$

470,807

 

$

484,894

 

 

See accompanying notes.

 

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Table of Contents

 

ISIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Revenue:

 

 

 

 

 

Research and development revenue under collaborative agreements

 

$

21,818

 

$

20,014

 

Licensing and royalty revenue

 

1,417

 

1,133

 

Total revenue

 

23,235

 

21,147

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Research and development

 

38,714

 

34,245

 

General and administrative

 

2,976

 

3,010

 

Total operating expenses

 

41,690

 

37,255

 

 

 

 

 

 

 

Loss from operations

 

(18,455

)

(16,108

)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Equity in net loss of Regulus Therapeutics Inc.

 

(976

)

(856

)

Investment income

 

600

 

705

 

Interest expense

 

(5,179

)

(3,415

)

Gain (loss) on investments, net

 

17

 

(318

)

 

 

 

 

 

 

Loss before income tax expense

 

(23,993

)

(19,992

)

 

 

 

 

 

 

Income tax expense

 

(2

)

(2

)

 

 

 

 

 

 

Net loss

 

$

(23,995

)

$

(19,994

)

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.24

)

$

(0.20

)

Shares used in computing basic and diluted net loss per share

 

100,157

 

99,569

 

 

See accompanying notes.

 

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Table of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net loss

 

$

(23,995

)

$

(19,994

)

Unrealized gains (losses) on securities

 

528

 

(260

)

 

 

 

 

 

 

Comprehensive loss

 

$

(23,467

)

$

(20,254

)

 

See accompanying notes.

 

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ISIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Net cash used in operating activities

 

$

(6,711

)

$

(39,842

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of short-term investments

 

(61,841

)

(110,164

)

Proceeds from the sale of short-term investments

 

61,781

 

170,328

 

Purchases of property, plant and equipment

 

(113

)

(2,576

)

Acquisition of licenses and other assets, net

 

(349

)

(511

)

Purchases of strategic investments

 

 

(359

)

Net cash (used in) provided by investing activities

 

(522

)

56,718

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from issuance of equity

 

638

 

683

 

Principal payments on debt and capital lease obligations

 

(2,491

)

(1,411

)

Net cash used in financing activities

 

(1,853

)

(728

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(9,086

)

16,148

 

Cash and cash equivalents at beginning of period

 

65,477

 

70,052

 

Cash and cash equivalents at end of period

 

$

56,391

 

$

86,200

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Interest paid

 

$

2,211

 

$

2,275

 

Income taxes paid

 

$

 

$

2

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

Amounts accrued for capital and patent expenditures

 

$

844

 

$

1,222

 

 

See accompanying notes.

 

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Table of Contents

 

ISIS PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

 

1.                                      Basis of Presentation

 

The unaudited interim condensed consolidated financial statements for the three month periods ended March 31, 2012 and 2011 have been prepared on the same basis as the audited financial statements for the year ended December 31, 2011. The financial statements include all normal recurring adjustments, which we consider necessary for a fair presentation of our financial position at such dates and our operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

 

The condensed consolidated financial statements include the accounts of Isis Pharmaceuticals, Inc. (“we”, “us” or “our”) and our wholly owned subsidiary, Symphony GenIsis, Inc., which is currently inactive.  We use the equity method of accounting to account for our investment in Regulus Therapeutics Inc.

 

2.                                      Significant Accounting Policies

 

Revenue Recognition

 

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 those instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our consolidated balance sheet.

 

Research and development revenue under collaborative agreements

 

Our collaboration agreements typically contain multiple elements, or deliverables, including technology licenses or options to obtain technology licenses, research and development services, and in certain cases manufacturing services. Our collaborations may provide for various types of payments to us including upfront payments, funding of research and development, milestone payments, licensing fees, profit sharing and royalties on product sales. We evaluate the deliverables in our collaboration agreements to determine whether they meet the criteria to be accounted for as separate units of accounting or whether they should be combined with other deliverables and accounted for as a single unit of accounting. When the delivered items in an arrangement have “stand-alone value” to our customer, we account for the deliverables as separate units of accounting and we allocate the consideration to each unit of accounting based on the relative selling price of each deliverable. We use the following hierarchy of values to estimate the selling price of each deliverable: (i) vendor-specific objective evidence of fair value; (ii) third-party evidence of selling price; and (iii) best estimate of selling price, or BESP. The BESP reflects our best estimate of what the selling price would be if we regularly sold the deliverable on a stand-alone basis. We recognize the revenue allocated to each unit of accounting as we deliver the related goods or services. If we determine that we should treat the deliverables as a single unit of accounting, then we recognize the revenue ratably over our estimated period of performance.

 

Occasionally, we must estimate our period of performance when the agreements we enter into do not clearly define such information.  Our collaborative agreements typically include a research and/or development project plan that includes the activities the agreement requires each party to perform during the collaboration and the party responsible for performing them. We estimate the period of time over which we will complete the activities for which we are responsible and use that period of time as our period of performance for purposes of revenue recognition and amortize revenue over such period. If our collaborators ask us to continue performing work in a collaboration beyond the initial period of performance, we extend our amortization period to correspond to the new extended period of performance.  The revenue we recognize could be materially different if different estimates prevail. We have made estimates of our continuing obligations on several agreements.  Adjustments to performance periods and related adjustments to revenue amortization periods have not had a material impact on our revenue.

 

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In January 2012, we entered into a collaboration agreement with Biogen Idec to develop and commercialize ISIS-SMNRx for Spinal Muscular Atrophy, or SMA. As part of the collaboration, we received a $29 million upfront payment and we are responsible for global development of ISIS-SMNRx through completion of Phase 2/3 registrational clinical trials. Biogen Idec has the option to license ISIS-SMNRx through completion of the first successful Phase 2/3 trial.  If Biogen Idec exercises its option, it will pay us a license fee and will assume global development, regulatory and commercialization responsibilities. We evaluated the delivered item, the option to license ISIS-SMNRx, to determine if it had stand-alone value.  We determined that the option did not have stand alone value because Biogen Idec cannot pursue the development or commercialization of ISIS-SMNRx until it exercises the option.  As such we considered the deliverables in this collaboration to be a single unit of accounting and we are recognizing the upfront payment over the four-year research and development term for ISIS-SMNRx, which is the estimated period of our performance.

 

Our collaborations often include contractual milestones, which typically relate to the achievement of pre-specified development, regulatory and commercialization events.  These three categories of milestone events reflect the three stages of the life-cycle of our drugs, which we describe in more detail in the following paragraph.

 

Prior to the first stage in the life-cycle of our drugs, we perform a significant amount of work using our proprietary antisense technology to design chemical compounds which interact with specific genes that are good targets for drug discovery.  From these research efforts, we hope to identify a development candidate.  The designation of a development candidate is the first stage in the life-cycle of our drugs.  A development candidate is a chemical compound that has demonstrated the necessary safety and efficacy in preclinical animal studies to warrant further study in humans.  During the first step of the development stage, we or our partners study our drugs in IND-enabling studies, which are animal studies intended to support an Investigational New Drug, or IND, application and/or the foreign equivalent.  An approved IND allows us or our partners to study our development candidate in humans.  If the regulatory agency approves the IND, we or our partners initiate Phase 1 clinical trials in which we typically enroll a small number of healthy volunteers to ensure the development candidate is safe for use in patients.  If we or our partners determine that a development candidate is safe based on the Phase 1 data, we or our partners initiate Phase 2 studies that are generally larger scale studies in patients with the primary intent of determining the efficacy of the development candidate.  The final step in the development stage is Phase 3 studies to gather the necessary safety and efficacy data to request marketing approval from the Food and Drug Administration, or FDA and/or foreign equivalents.  The Phase 3 studies typically involve large numbers of patients and can take up to several years to complete.  If the data gathered during the trials demonstrates acceptable safety and efficacy results, we or our partner will submit an application to the FDA and/or its foreign equivalents for marketing approval.  This stage of the drug’s life-cycle is the regulatory stage.  If a drug achieves marketing approval, it moves into the commercialization stage, during which our partner will market and sell the drug to patients.  Although our partner will ultimately be responsible for marketing and selling the drug, our efforts to discover and develop a drug that is safe, effective and reliable contributes significantly to our partner’s ability to successfully sell the drug.  The FDA and its foreign equivalents have the authority to impose significant restrictions on an approved drug through the product label and on advertising, promotional and distribution activities.  Therefore, our efforts designing and executing the necessary animal and human studies are critical to obtaining claims in the product label from the regulatory agencies that would allow our partner to successfully commercialize our drug.  Further, the patent protection afforded our drugs as a result of our initial patent applications and related prosecution activities in the United States and foreign jurisdictions are critical to our partner’s ability to sell our drugs without competition from generic drugs.  The potential sales volume of an approved drug is dependent on several factors including the size of the patient population, market penetration of the drug, and the price charged for the drug.

 

Generally, the milestone events contained in our partnership agreements coincide with the progression of our drugs from development, to regulatory approval and then to commercialization.  The process of successfully discovering a new development candidate, having it approved and ultimately sold for a profit is highly uncertain.  As such, the milestone payments we may earn from our partners involve a significant degree of risk to achieve.  Therefore, as a drug progresses through the stages of its life-cycle, the value of the drug generally increases.

 

Development milestones in our partnerships may include the following types of events:

 

·                  Designation of a development candidate.  Following the designation of a development candidate, IND-enabling animal studies for a new development candidate generally take 12 to 18 months to complete;

·                  Initiation of a Phase 1 clinical trial.  Generally, Phase 1 clinical trials take one to two years to complete;

·                  Initiation or completion of a Phase 2 clinical trial.  Generally, Phase 2 clinical trials take one to three years to complete;

·                  Initiation or completion of a Phase 3 clinical trial.  Generally, Phase 3 clinical trials take two to four years to complete.

 

Regulatory milestones in our partnerships may include the following types of events:

 

·                  Filing of regulatory applications for marketing approval such as a New Drug Application, or NDA, in the United States or a Marketing Authorization Application, or MAA, in Europe.  Generally, it takes six to twelve months to prepare and submit regulatory filings.

·                  Marketing approval in a major market, such as the United States, Europe or Japan.  Generally it takes one to two years after an application is submitted to obtain approval from the applicable regulatory agency.

 

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Commercialization milestones in our partnerships may include the following types of events:

 

·                  First commercial sale in a particular market, such as in the United States or Europe.

·                  Product sales in excess of a pre-specified threshold, such as annual sales exceeding $1 billion.  The amount of time to achieve this type of milestone depends on several factors including but not limited to the dollar amount of the threshold, the pricing of the product and the pace at which customers begin using the product.

 

We assess whether a substantive milestone exists at the inception of our agreements.  When a substantive milestone is achieved, we recognize revenue related to the milestone payment.  For our existing licensing and collaboration agreements in which we are involved in the discovery and/or development of the related drug or provide the partner with ongoing access to new technologies we discover, we have determined that all future development, regulatory and commercialization milestones are substantive. For example, for our strategic alliance with GlaxoSmithKline, or GSK, we are using our antisense drug discovery platform to seek out and develop new drugs against targets for rare and serious diseases. Alternatively, we provide on-going access to our technology to Alnylam to develop and commercialize RNA interference, or RNAi, therapeutics.  We consider milestones for both of these collaborations to be substantive.  For those agreements that do not meet the following criteria, we do not consider the future milestones to be substantive.  In evaluating if a milestone is substantive we consider whether:

 

·                  Substantive uncertainty exists as to the achievement of the milestone event at the inception of the arrangement;

·                  The achievement of the milestone involves substantive effort and can only be achieved based in whole or part on our performance or the occurrence of a specific outcome resulting from our performance;

·                  The amount of the milestone payment appears reasonable either in relation to the effort expended or to the enhancement of the value of the delivered items;

·                  There is no future performance required to earn the milestone; and

·                  The consideration is reasonable relative to all deliverables and payment terms in the arrangement.

 

If any of these conditions are not met, we will defer recognition of the milestone payment and recognize it as revenue over the estimated period of performance, if any.  In 2011, OncoGenex Pharmaceuticals Inc. initiated a Phase 2 trial of OGX-427 in men with metastatic prostate cancer. Also in 2011, we initiated a Phase 1 clinical study on ISIS-TTRRX, the first drug selected as part of our collaboration with GSK and we selected ISIS-AATRX as the second development candidate as part of that collaboration. We consider milestones related to progression of a drug through the development stage of its life cycle to be substantive milestones because the level of effort and inherent risk associated with these events is high. Therefore, we recognized the $750,000 milestone payment from OncoGenex and two $5 million milestone payments from GSK in their entirety in 2011. Further information about our collaborative arrangements can be found in Note 6, Collaborative Arrangements and Licensing Agreements, below and Note 8 of our audited financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the SEC.

 

Licensing and royalty revenue

 

We often enter into agreements to license our proprietary patent rights on an exclusive or non-exclusive basis in exchange for license fees and/or royalties. We generally recognize as revenue immediately those licensing fees and royalties for which we have no significant future performance obligations and are reasonably assured of collecting the resulting receivable.

 

Cash, cash equivalents and short-term investments

 

We consider all liquid investments with maturities of 90 days or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than 90 days from date of purchase. We classify our short-term investments as “available-for-sale” and carry them at fair market value based upon prices for identical or similar items on the last day of the fiscal period. We record unrealized gains and losses as a separate component of stockholders’ equity 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 have equity investments in privately- and publicly-held biotechnology companies that we have received as part of a technology license or collaboration agreement.  We hold ownership interests of less than 20 percent in each of the respective companies except Regulus, our jointly owned subsidiary.  In determining if and when a decrease in market value below our cost in our equity positions is temporary or other-than-temporary, we examine historical trends in the stock price, the financial condition of the company, near term prospects of the company and our current need for cash.  We record unrealized gains and losses related to temporary declines in the publicly-held companies as a separate component of stockholders’ equity and account for securities in the privately-held companies, except for Regulus, under the cost method of accounting because we own less than 20 percent and do not have significant influence in their operations. Most of the cost method investments we hold are in early stage biotechnology companies and realization of our equity position in those companies is uncertain. In those circumstances we record a full valuation allowance. If we determine that a decline in value in either a public or private investment is other-than-temporary, we recognize an impairment loss in the period in which the other-than-temporary decline occurs.

 

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Inventory valuation

 

We capitalize the costs of raw materials that we purchase for use in producing our drugs because until we use these raw materials they have alternative future uses. We include in inventory raw material costs for drugs that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We can use each of our raw materials in multiple products and, as a result, each raw material has future economic value independent of the development status of any single drug. For example, if one of our drugs failed, we could use the raw materials allocated for that drug to manufacture our other drugs. We expense these costs when we deliver the drugs to our partners, or as we provide these drugs for our own clinical trials. We reflect our inventory on the balance sheet at the lower of cost or market value under the first-in, first-out method. We review inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value. We consider several factors in estimating the net realizable value, including shelf life of raw materials, alternative uses for our drugs and clinical trial materials and historical write-offs.  We did not record any inventory write-offs for the first three months of 2012 and 2011.  Total inventory, which consisted of raw materials, was $4.9 million and $4.1 million as of March 31, 2012 and December 31, 2011, respectively.

 

Patents

 

We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. We evaluate patents and patent applications that we are not actively pursuing and write off any associated costs. We amortize patent costs over their useful lives, beginning with the date the United States Patent and Trademark Office, or foreign equivalent, issues the patent and ending when the patent expires or is written off.  For the first three months of 2012 and 2011, we recorded a non-cash charge of $61,000 and $582,000, respectively, which we included in research and development expenses, related to the write-down of our patent costs to their estimated net realizable values.

 

Long-lived assets

 

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

 

Equity method of accounting

 

We account for our ownership interest in Regulus using the equity method of accounting.  We include our share of Regulus’ operating results on a separate line in our condensed consolidated statement of operations called “Equity in net loss of Regulus Therapeutics Inc.”  On our condensed consolidated balance sheet, we present our investment in Regulus on a separate line in the non-current liabilities section called “Investment in Regulus Therapeutics Inc.”  The equity method of accounting requires us to suspend recognizing losses if the carrying amount of our investment in Regulus exceeds the amount of funding we are required to provide to Regulus.  Since we and Alnylam are guarantors of both of the convertible notes that Regulus issued to GSK we will continue to recognize losses in excess of our net investment in Regulus up to the principal plus accrued interest we guaranteed, which was $5.5 million at March 31, 2012.  The total carrying value of our investment in Regulus was a liability of $5.4 million at March 31, 2012.

 

Use of estimates

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 loss per share

 

We compute basic net loss per share by dividing the net loss by the weighted-average number of common shares outstanding during the period. As we incurred a net loss for the three months ended March 31, 2012 and 2011, we did not include the following diluted common equivalent shares in the computation of diluted net loss per share because the effect would have been anti-dilutive:

 

·                  25/8 percent convertible subordinated notes;

·                  GlaxoSmithKline convertible promissory notes;

·                  Dilutive stock options; and

·                  Warrants issued to Symphony GenIsis Holdings LLC

 

In April 2011, Symphony GenIsis Holdings LLC exercised the remaining warrants.

 

Consolidation of variable interest entities

 

We identify entities as variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest.  We perform ongoing qualitative assessments of our variable interest entities to determine whether we have a controlling financial interest in the variable interest entity and therefore are the primary beneficiary.  As of March 31, 2012 and December 31, 2011, we had collaborative arrangements with six entities that we considered to be variable interest entities.  We are not the primary beneficiary for any of these entities as we do not have both the power to direct the activities that most significantly impact the economic performance of our variable interest entities and the obligation to absorb losses or the right to receive benefits from our variable interest entities that could potentially be significant to the variable interest entities.  In the case of Regulus, since we and Alnylam share the ability to impact Regulus’ economic performance, we are not the primary beneficiary of Regulus.

 

Comprehensive loss

 

We report the components of comprehensive loss in our condensed consolidated statements of comprehensive loss in the period in which we recognize them. The components of comprehensive loss include net loss and unrealized gains and losses on investment holdings.

 

Convertible debt

 

We account for our 25/8 percent convertible notes by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate when we recognize interest expense in subsequent periods.  As a result, we assigned a value to the debt component of our 25/8 percent convertible notes equal to the estimated fair value of a similar debt instrument without the conversion feature, which resulted in us recording the debt at a discount.  We are amortizing this debt discount over the life of the debt as additional non-cash interest expense utilizing the effective interest method.

 

Segment information

 

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

 

Stock-based compensation expense

 

We measure stock-based compensation expense for equity-classified awards, principally related to stock options, restricted stock units, or RSUs, and stock purchase rights under the Employee Stock Purchase Plan, or ESPP, at the grant date, based on the estimated fair value of the award and we recognize the expense over the employee’s requisite service period. We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under the ESPP.  The expected term of stock options granted represents the period of time that we expect them to be outstanding.  We estimated the expected term of options granted based on historical exercise patterns.

 

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For the three months ended March 31, 2012 and 2011, we used the following weighted-average assumptions in our Black-Scholes calculations:

 

Employee Stock Options:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Risk-free interest rate

 

1.1

%

2.3

%

Dividend yield

 

0.0

%

0.0

%

Volatility

 

50.6

%

52.5

%

Expected Life

 

5.1 years

 

5.3 years

 

 

ESPP:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Risk-free interest rate

 

0.1

%

0.2

%

Dividend yield

 

0.0

%

0.0

%

Volatility

 

43.4

%

26.5

%

Expected Life

 

6 months

 

6 months

 

 

In January 2012, we began granting RSUs to our employees.  The fair value of RSUs is based on the market price of our common stock on the date of grant. The weighted-average grant date fair value of RSUs granted to employees for the three months ended March 31, 2012 was $7.60 per RSU.

 

The following table summarizes stock-based compensation expense for the three months ended March 31, 2012 and 2011 (in thousands), which was allocated as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Research and development

 

$

1,935

 

$

2,292

 

General and administrative

 

332

 

440

 

Total

 

$

2,267

 

$

2,732

 

 

As of March 31, 2012, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options and RSUs was $10.1 million and 1.1 million, respectively. We will adjust total unrecognized compensation cost for future changes in estimated 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 1.5 years and 3.8 years, respectively.

 

Impact of recently issued accounting standards

 

In May 2011, the FASB amended its authoritative guidance on the measurement and disclosure for fair value measurements. The amendment clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 and was effective for our fiscal year beginning January 1, 2012. The adoption of this guidance did not have a material impact on our financial statements.

 

In June 2011, the FASB amended its authoritative guidance on the presentation of comprehensive income. Under the amendment, companies have the option to present the components of net income and other comprehensive income either in a single continuous statement of comprehensive income or in separate but consecutive statements. This amendment eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment does not change the items that companies must report in other comprehensive income or when companies must reclassify an item of other comprehensive income to net income. The guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 and was effective for our fiscal year beginning January 1, 2012. As this guidance relates to presentation only, the adoption of this guidance did not have any other effect on our financial statements.

 

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3.                                      Investments

 

As of March 31, 2012, we primarily invested our excess cash in commercial paper and debt instruments of the U.S. Treasury, financial institutions, corporations, and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody’s, Standard & Poor’s (S&P) or Fitch, respectively.  We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.

 

The following table summarizes the contract maturity of the available-for-sale securities we held as of March 31, 2012:

 

One year or less

 

65

%

After one year but within two years

 

28

%

After two years but within three years

 

7

%

Total

 

100

%

 

As illustrated above, we primarily invest our excess cash in short-term instruments with 93 percent of our available-for-sale securities having a maturity of less than two years.

 

At March 31, 2012, we had an ownership interest of less than 20 percent in each of three private companies and two public companies with which we conduct business.  The companies are Santaris Pharma A/S (formerly Pantheco A/S), Achaogen Inc., and Atlantic Pharmaceuticals Limited, which are privately-held and Antisense Therapeutics Limited, or ATL, and iCo Therapeutics Inc., or iCo, which are publicly-traded.  We account for securities in the privately-held companies under the cost method of accounting and we classify the securities in the publicly-traded companies as available-for-sale.

 

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

 

 

 

 

 

 

 

 

 

Other-Than-

 

 

 

 

 

 

 

 

 

 

 

Temporary

 

 

 

 

 

Amortized

 

Unrealized

 

Impairment

 

Estimated

 

March 31, 2012

 

Cost

 

Gains

 

Losses

 

Loss

 

Fair Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

108,190

 

$

78

 

$

(26

)

$

 

$

108,242

 

Debt securities issued by U.S. government agencies

 

53,159

 

26

 

(3

)

 

53,182

 

Debt securities issued by the U.S. Treasury

 

2,351

 

1

 

 

 

2,352

 

Debt securities issued by states of the United States and political subdivisions of the states

 

18,277

 

6

 

(2

)

 

18,281

 

Total securities with a maturity of one year or less

 

181,977

 

111

 

(31

)

 

182,057

 

Corporate debt securities

 

64,864

 

110

 

(91

)

 

64,883

 

Debt securities issued by U.S. government agencies

 

16,203

 

6

 

(161

)

 

16,048

 

Debt securities issued by states of the United States and political subdivisions of the states

 

14,549

 

37

 

(21

)

 

14,565

 

Total securities with a maturity of more than one year

 

95,616

 

153

 

(273

)

 

95,496

 

Subtotal

 

$

277,593

 

$

264

 

$

(304

)

$

 

$

277,553

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

Current portion (included in Other current assets)

 

$

1,538

 

$

603

 

$

 

$

(880

)

$

1,261

 

Long-term portion (included in Deposits and other assets)

 

625

 

 

 

 

625

 

Subtotal

 

$

2,163

 

$

603

 

$

 

$

(880

)

$

1,886

 

 

 

$

279,756

 

$

867

 

$

(304

)

$

(880

)

$

279,439

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

Other-Than-

 

 

 

 

 

 

 

 

 

 

 

Temporary

 

 

 

 

 

Amortized

 

Unrealized

 

Impairment

 

Estimated

 

December 31, 2011

 

Cost

 

Gains

 

Losses

 

Loss

 

Fair Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

109,842

 

$

13

 

$

(255

)

$

 

$

109,600

 

Debt securities issued by U.S. government agencies

 

53,723

 

35

 

(5

)

 

53,753

 

Debt securities issued by the U.S. Treasury

 

2,353

 

3

 

 

 

2,356

 

Debt securities issued by states of the United States and political subdivisions of the states

 

16,141

 

4

 

(3

)

 

16,142

 

Total securities with a maturity of one year or less

 

182,059

 

55

 

(263

)

 

181,851

 

Corporate debt securities

 

57,632

 

21

 

(331

)

 

57,322

 

Debt securities issued by U.S. government agencies

 

26,754

 

 

(67

)

 

26,687

 

Debt securities issued by states of the United States and political subdivisions of the states

 

12,331

 

19

 

(23

)

 

12,327

 

Total securities with a maturity of more than one year

 

96,717

 

40

 

(421

)

 

96,336

 

Subtotal

 

$

278,776

 

$

95

 

$

(684

)

$

 

$

278,187

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

Current portion (included in Other current assets)

 

$

1,538

 

$

624

 

$

 

$

(880

)

$

1,282

 

Long-term portion (included in Deposits and other assets)

 

625

 

 

 

 

625

 

Subtotal

 

$

2,163

 

$

624

 

$

 

$

(880

)

$

1,907

 

 

 

$

280,939

 

$

719

 

$

(684

)

$

(880

)

$

280,094

 

 

Investments we considered to be temporarily impaired at March 31, 2012 were as follows (in thousands):

 

 

 

 

 

Less than 12 months of
temporary impairment

 

 

 

Number of
Investments

 

Estimated
Fair Value

 

Unrealized
Losses

 

Corporate debt securities

 

29

 

$

68,508

 

$

(117

)

Debt securities issued by U.S. government agencies

 

7

 

17,564

 

(164

)

Debt securities issued by states of the United States and political subdivisions of the states

 

7

 

10,874

 

(23

)

Total temporarily impaired securities

 

43

 

$

96,946

 

$

(304

)

 

We believe that the decline in value of these securities is temporary and primarily related to the change in market interest rates since purchase.  We believe it is more likely than not that we will be able to hold these securities to maturity.  Therefore we anticipate full recovery of their amortized cost basis at maturity.

 

4.                                    Fair Value Measurements

 

We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities and equity securities in publicly-held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The majority of our securities have been classified as Level 2. To estimate the fair value of securities classified as Level 2, we utilize the services of a fixed income pricing provider that uses an industry standard valuation model, which is based on a market approach.  The significant inputs for the valuation model include reported trades, broker/dealer quotes, benchmark securities and bids.  We validate the fair value of securities from our pricing provider by understanding the pricing model they used and comparing their assessment of the fair value of our Level 2 investments to the fair value provided by the custodians of our Level 2 investments.  Our pricing provider and custodians use similar techniques to derive fair value for Level 2 securities. During the three months ended March 31, 2012 and March 31, 2011 there were no transfers between our Level 1 and Level 2 investments. We use the end of reporting period method for determining transfers between levels. At March 31, 2012 and December 31, 2011, we had no securities that we classified as Level 3.

 

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We measure the following major security types at fair value on a recurring basis. We break down the inputs used to measure fair value for these assets at March 31, 2012 and December 31, 2011 as follows (in thousands):

 

 

 

At March 31,
2012

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash equivalents (1)

 

$

56,374

 

$

52,974

 

$

3,400

 

$

 

Corporate debt securities (2)

 

173,125

 

 

173,125

 

 

Debt securities issued by U.S. government agencies (2)

 

69,230

 

 

69,230

 

 

Debt securities issued by the U.S. Treasury (2)

 

2,352

 

2,352

 

 

 

Debt securities issued by states of the United States and political subdivisions of the states (2)

 

32,846

 

 

32,846

 

 

Equity securities (3)

 

1,261

 

1,261

 

 

 

Total

 

$

335,188

 

$

56,587

 

$

278,601

 

$

 

 

 

 

At December 31,
2011

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash equivalents (1)

 

$

58,892

 

$

55,893

 

$

2,999

 

$

 

Corporate debt securities (2)

 

166,922

 

 

166,922

 

 

Debt securities issued by U.S. government agencies (2)

 

80,440

 

 

80,440

 

 

Debt securities issued by the U.S. Treasury (2)

 

2,356

 

2,356

 

 

 

Debt securities issued by states of the United States and political subdivisions of the states (2)

 

28,469

 

 

28,469

 

 

Equity securities (3)

 

1,282

 

1,282

 

 

 

Total

 

$

338,361

 

$

59,531

 

$

278,830

 

$

 

 


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

 

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

 

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

 

Other Fair Value Disclosures

 

Our 25/8 percent convertible notes had a fair value of $158.7 million and $151.1 million at March 31, 2012 and December 31, 2011, respectively.  We determine the fair value of our 25/8 percent convertible notes based on quoted market prices for these notes which is a Level 2 measurement.

 

5.                                      Concentration of Business Risk

 

We have historically funded our operations from collaborations with corporate partners and a relatively small number of partners have accounted for a significant percentage of our revenue. For the three months ended March 31, 2012 and 2011, revenue from one significant partner, which is defined as ten percent or more of our total revenue, made up 71 percent and 79 percent, respectively, of our revenue.

 

Contract receivables from two significant partners comprised approximately 63 percent and 21 percent of our contract receivables at March 31, 2012. Contract receivables from one significant partner comprised approximately 85 percent of our contract receivables at December 31, 2011.

 

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6.                                    Collaborative Arrangements and Licensing Agreements

 

Traditional Pharmaceutical Alliances and Licensing

 

Biogen Idec

 

In January 2012, we entered into a global collaboration agreement with Biogen Idec to develop and commercialize ISIS-SMNRx for the treatment of SMA. Under the terms of the agreement, we received an upfront payment of $29 million and are eligible to receive up to $45 million in substantive milestone payments associated with the clinical development of ISIS-SMNRx prior to licensing.  We are responsible for global development of ISIS-SMNRx through the completion of Phase 2/3 registrational clinical trials. Biogen Idec has the option to license ISIS-SMNRx through completion of the first successful Phase 2/3 trial.  If Biogen Idec exercises its option, it will pay us a license fee and will assume global development, regulatory and commercialization responsibilities.  We may also receive up to $150 million in substantive milestone payments if Biogen Idec achieves pre-specified regulatory milestones.  We will earn the next milestone payment of $18 million if we initiate the first Phase 2/3 study for ISIS-SMNRx. In addition, we will receive up to double-digit royalties on sales of ISIS-SMNRx if Biogen Idec successfully develops and commercializes ISIS-SMNRx after option exercise.

 

During the three months ended March 31, 2012, we earned revenue of $1.8 million from our relationship with Biogen Idec. Our balance sheet at March 31, 2012 included deferred revenue of $27.2 million related to the upfront payment.

 

Xenon Pharmaceuticals Inc.

 

In November 2010, we established a collaboration with Xenon to discover and develop antisense drugs as novel treatments for the common disease anemia of inflammation, or AI. AI is the second most common form of anemia worldwide and physicians associate a wide variety of conditions including infection, cancer and chronic inflammation with AI.  We received an upfront payment in the form of a convertible promissory note from Xenon to discover and develop antisense drugs to the targets hemojuvelin and hepcidin. In addition to license and option fees, we are eligible to receive development and commercial milestone payments and royalties on sales of drugs licensed to Xenon under the collaboration and a portion of sublicense revenue.

 

In May 2012, Xenon selected XEN701, a drug targeting the hepcidin-hemojuvelin pathway, as a development candidate. Xenon may take an exclusive license for the development and worldwide commercialization of XEN701. Under our collaboration agreement with Xenon we may receive up to $296 million in substantive milestone payments for multiple indications upon the achievement of pre-specified events, including up to $26 million for the achievement of development milestones, up to $150 million for the achievement of regulatory milestones and up to $120 million for the achievement of commercialization milestones.  We will earn the next milestone payment of $3 million if Xenon initiates a phase 2 clinical trial for XEN701.

 

During the three months ended March 31, 2012 and March 31, 2011, we did not earn any revenue from our relationship with Xenon.

 

Eli Lilly and Company

 

In August 2001, we formed a broad strategic relationship with Eli Lilly and Company, which included a joint research collaboration.  As part of the collaboration, Eli Lilly and Company licensed LY2181308, an antisense inhibitor of survivin.  Eli Lilly and Company has decided not to continue the development of LY2181308.  Therefore we will not earn future milestone payments from Eli Lilly and Company associated with LY2181308.

 

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Table of Contents

 

ITEM 2.

 

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

 

In this Report on Form 10-Q, unless the context requires otherwise, “Isis,” “Company,” “we,” “our,” and “us,” means Isis Pharmaceuticals, Inc. and its subsidiaries, including Regulus Therapeutics Inc., our jointly owned subsidiary.

 

Forward-Looking Statements

 

In addition to historical information contained in this Report on Form 10-Q, this Report includes forward-looking statements regarding our business, the therapeutic and commercial potential of our technologies and products in development, and the financial position of Isis Pharmaceuticals, Inc.  Any statement describing our goals, expectations, financial or other projections, intentions or beliefs, including the planned commercialization of KYNAMRO, is a forward-looking statement and should be considered an at-risk statement.  Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics, and in the endeavor of building a business around such drugs.  Our forward-looking statements also involve assumptions that, if they never materialize or prove correct, could cause its results to differ materially from those expressed or implied by such forward-looking statements.  Although our forward-looking statements reflect the good faith judgment of our management, these statements are based only on facts and factors currently known by us.  As a result, you are cautioned not to rely on these forward-looking statements.  These and other risks concerning our programs are described in additional detail in our Annual Report on Form 10-K for the year ended December 31, 2011, which is on file with the U.S. Securities and Exchange Commission, and those identified within this Item in the section entitled “Risk Factors” beginning on page 25 of this Report.

 

Overview

 

We are the leading company in antisense drug discovery and development, exploiting a novel drug discovery platform we created to generate a broad pipeline of first-in-class drugs. Antisense technology provides a direct route from genomics to drugs.  With our highly efficient and prolific drug discovery platform we can expand our pipeline and our partners’ pipelines with antisense drugs that address significant medical needs.  Our strategy is to do what we do best—to discover unique antisense drugs and develop these drugs to key clinical value inflection points.  We discover and conduct early development of new drugs and, at the key clinical value inflection points, outlicense our drugs to partners. We maximize the value of the drugs we discover by putting them in the hands of leading pharmaceutical companies with late-stage development, commercialization and marketing expertise, such as Biogen Idec, Bristol-Myers Squibb, Genzyme, a Sanofi company, and GlaxoSmithKline, or GSK.  For instance, our partner, Genzyme, plans to commercialize our lead product, KYNAMRO™, following planned regulatory approval in 2012. We also work with a consortium of smaller companies that can exploit our drugs and technologies in areas that are outside of our core focus. As a result of our unique strategy, we can keep our organization small and focused. Our strong financial position is a result of the successful execution of our business strategy as well as our inventive and focused research and development capabilities.

 

Our flagship product, KYNAMRO (formerly mipomersen), is moving closer to the market for patients with severe forms of familial hypercholesterolemia, or FH, at high cardiovascular risk, who cannot reduce their low-density lipoprotein cholesterol, or LDL-C, sufficiently with currently available lipid-lowering therapies. In July 2011, Genzyme submitted a marketing application in Europe for KYNAMRO for patients with homozygous familial hypercholesterolemia, or hoFH, and severe heterozygous familial hypercholesterolemia, or severe heFH. In March 2012, Genzyme submitted the U.S. application for marketing approval for patients with hoFH. Genzyme is actively preparing to launch KYNAMRO subject to marketing approval. Genzyme is also preparing to commercialize KYNAMRO in other major markets.

 

To maximize the value of our drugs and technologies, we have a multifaceted partnering strategy.  We form traditional partnering alliances that enable us to discover and conduct early development of new drugs, outlicense our drugs to partners, such as Genzyme, and build a broad base of license fees, milestone payments and royalty income.  We also form preferred partner transactions that provide us with a vested partner, such as Biogen Idec and GSK, early in the development of a drug.  In this way, we benefit in the short term from upfront option fees and development milestone payments while we maintain control over the early development of the drug.  We benefit in the long term by having a knowledgeable and committed partner to license the drug at clinical proof-of-concept and by receiving regulatory milestone payments and royalties as our partner moves the drug to the market.  In all of our partnerships, we benefit from the expertise our partners bring to our drugs. We also work with a consortium of smaller companies that can exploit our drugs and technologies. We call these smaller companies our satellite companies.  In this way, we benefit from the disease-specific expertise of our satellite company partners, who are advancing drugs in our pipeline in areas that are outside of our core focus. In addition, we can maintain our broad RNA technology leadership through collaborations with companies such as Alnylam Pharmaceuticals, Inc., or Alnylam, and Regulus Therapeutics Inc., or Regulus, a company we jointly own focused on microRNA therapeutics.  All of these different types of relationships are part of our unique business model and create near and long-term shareholder value.

 

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The clinical successes of the drugs in our pipeline continue to create new partnering opportunities.  For example, in January 2012, we formed a new strategic alliance with Biogen Idec to develop and commercialize ISIS-SMNRx to treat spinal muscular atrophy.  We received a $29 million upfront payment and are eligible to receive up to $270 million in payments and double-digit royalties on sales from ISIS-SMNRx.  Since 2007, our partnerships have generated an aggregate of more than $890 million in payments from upfront and licensing fees, equity purchase payments, milestone payments and research and development funding.  In addition, for our current partnered programs we have the potential to earn more than $3.3 billion in future milestone payments. We also will share in the future commercial success of our inventions and drugs resulting from these partnerships through earn out, profit sharing, or royalty arrangements. Our strong financial position is a result of the successful execution of our business strategy as well as our inventive and focused research and development capabilities.

 

We protect our proprietary technologies and products through our substantial patent estate. As an innovator in RNA-targeting drug discovery and development, we design and execute our patent strategy to provide us with extensive protection for our drugs and our technology.  With our ongoing research and development, we continue to add to our substantial patent estate. The patents not only protect our key assets—our technology and our drugs—they also form the basis for lucrative licensing and partnering arrangements.  To date, we have generated over $400 million from our intellectual property sale and licensing program that helps support our internal drug discovery and development programs.

 

Recent Events

 

Drug Development and Corporate Highlights

 

·                  Genzyme submitted a new drug application for KYNAMRO in the United States for homozygous FH patients.

·                  Dr. Raul Santos presented data from the long-term extension study of KYNAMRO at the International Symposium on Atherosclerosis.  The data highlight the long-term safety and efficacy of KYNAMRO in patients who have been treated with KYNAMRO.

·                  We initiated a Phase 2 study on ISIS-APOCIIIRx in patients with elevated triglycerides and a Phase 1 study on ISIS-STAT3Rx in patients with cancer.

·                  We reported data from a Phase 1 study of ISIS-TTRRx showing that ISIS-TTRRx produced statistically significant reductions in TTR protein.

·                  We formed a new strategic alliance with Biogen Idec to develop and commercialize ISIS-SMNRx to treat Spinal Muscular Atrophy, or SMA.  We received a $29 million upfront payment and we are eligible to receive up to an additional $270 million in a license fee and milestone payments and double-digit royalties on sales of ISIS-SMNRx.

·                  We received Orphan Drug Designation for ISIS-SMNRx in Europe for the treatment of SMA.

·                  OncoGenex reported preliminary positive Phase 1 data at the American Society of Clinical Oncology showing that treatment with OGX-427 produced a trend toward increased tumor cell death in patients with bladder cancer and preliminary Phase 2 data showing that treatment with OGX-427 decreased prostate specific antigen in patients with metastatic prostate cancer.

·                  Xenon Pharmaceuticals selected a drug targeting the hepcidin-hemojuvelin pathway as a development candidate to treat anemia of inflammation, a common form of anemia.

 

Critical Accounting Policies

 

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial condition. Each quarter, our senior management discusses the development, selection and disclosure of such estimates with our audit committee of our board of directors. In the following paragraphs, we describe the specific risks associated with these critical accounting policies.  For all of these policies, we caution that future events rarely develop exactly as one may expect, and that best estimates routinely require adjustment.

 

Historically, our estimates have been accurate as we have not experienced any material differences between our estimates and our actual results. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, require the following:

 

·                  Assessing the propriety of revenue recognition and associated deferred revenue;

 

·                  Determining the proper valuation of investments in marketable securities and other equity investments;

 

·                  Assessing the recoverability of long-lived assets, including property and equipment, intellectual property and licensed technology;

 

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·                  Determining the proper valuation of inventory;

 

·                  Determining the appropriate cost estimates for unbilled preclinical studies and clinical development activities;

 

·                  Estimating our net deferred income tax asset valuation allowance;

 

·                  Determining when we are the primary beneficiary for entities that we identify as variable interest entities;

 

·                  Determining the fair value of convertible debt without the conversion feature; and

 

·                  Determining the fair value of stock-based compensation, including the expected life of the option, the expected stock price volatility over the term of the expected life and estimated forfeitures.

 

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Results of Operations

 

Revenue

 

Total revenue for the three months ended March 31, 2012 was $23.2 million, compared to $21.1 million for the same period in 2011.  Our revenue fluctuates based on the nature and timing of payments under agreements with our partners, including license fees, milestone-related payments and other payments. We earned new revenue in the first quarter of 2012 from the $29 million upfront fee we received from our new partner, Biogen Idec, which we are amortizing over four years. If the FDA accepts the NDA filing for KYNAMRO, which we currently anticipate to happen in the second quarter of 2012, we will earn a $25 million milestone.

 

Research and Development Revenue Under Collaborative Agreements

 

Research and development revenue under collaborative agreements for the three months ended March 31, 2012 was $21.8 million, compared to $20.0 million for the same period in 2011. The increase was primarily due to new revenue we earned in the first quarter of 2012 from our new partner, Biogen Idec.

 

Licensing and Royalty Revenue

 

Our revenue from licensing activities and royalties for the three months ended March 31, 2012 was $1.4 million and was slightly higher compared to $1.1 million for the three months ended March 31, 2011.

 

Operating Expenses

 

Operating expenses for the three months ended March 31, 2012 were $41.7 million, compared to $37.3 million for the same period in 2011. The higher expenses in 2012 were primarily due to an increase in costs associated with our maturing pipeline of drugs offset by lower development expenses related to KYNAMRO because we are sharing these expenses equally with Genzyme until KYNAMRO is profitable. Genzyme is paying all of the marketing and selling expenses for KYNAMRO.

 

In order to analyze and compare our results of operations to other similar companies, we believe it is important to exclude non-cash compensation expense related to equity awards from our operating expenses. We believe non-cash compensation expense is not indicative of our operating results or cash flows from our operations. Further, we internally evaluate the performance of our operations excluding it.

 

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Research and Development Expenses

 

Our research and development expenses consist of costs for antisense drug discovery, antisense drug development, manufacturing and operations and R&D support costs.

 

The following table sets forth information on research and development costs (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Research and development expenses

 

$

36,779

 

$

31,953

 

Non-cash compensation expense related to equity awards

 

1,935

 

2,292

 

 

 

 

 

 

 

Total research and development

 

$

38,714

 

$

34,245

 

 

For the three months ended March 31, 2012, we incurred total research and development expenses of $36.8 million, compared to $32.0 million for the same period in 2011.  The higher expenses in the first quarter of 2012 were primarily due to an increase in costs associated with our maturing pipeline of drugs offset by lower development expenses related to KYNAMRO. As drugs move forward to more advanced stages of development, including into larger, longer clinical studies, the costs of development increase.  All amounts discussed exclude non-cash compensation expense related to equity awards.

 

Antisense Drug Discovery

 

We use our proprietary antisense technology to generate information about the function of genes and to determine the value of genes as drug discovery targets. We use this information to direct our own antisense drug discovery research, and that of our antisense drug discovery partners. Antisense drug discovery is also the function within Isis that is responsible for advancing antisense core technology.

 

As we continue to advance our antisense technology, we are investing in our antisense drug discovery programs to expand our and our partners’ drug pipeline. We anticipate that our existing relationships and collaborations, as well as prospective new partners, will continue to help fund our research programs, as well as contribute to the advancement of the science behind our technology by funding core antisense technology research.

 

Our antisense drug discovery expenses were as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Antisense drug discovery

 

$

8,364

 

$

7,182

 

Non-cash compensation expense related to equity awards

 

565

 

642

 

Total antisense drug discovery

 

$

8,929

 

$

7,824

 

 

Antisense drug discovery costs for the three months ended March 31, 2012 were $8.4 million, compared to $7.2 million for the same period in 2011.  All amounts exclude non-cash compensation expense related to equity awards. The higher expenses in the first quarter of 2012 compared to the same period in 2011 were primarily due to increased research services provided by third parties to support our partnered research programs.  We expect our 2012 antisense drug discovery costs to be modestly higher compared to 2011.

 

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Antisense Drug Development

 

The following table sets forth research and development expenses for our major antisense drug development projects (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

KYNAMRO

 

$

3,035

 

$

3,543

 

Other antisense development products

 

12,197

 

8,555

 

Development overhead costs

 

1,901

 

1,611

 

Non-cash compensation expense related to equity awards

 

657

 

774

 

Total antisense drug development

 

$

17,790

 

$

14,483

 

 

Antisense drug development expenditures were $17.1 million for the three months ended March 31, 2012, compared to $13.7 million for the same period in 2011.  All amounts exclude non-cash compensation expense related to equity awards. The higher expenses in the first quarter of 2012 were primarily due to an increase in costs associated with our maturing pipeline of drugs.  As drugs move forward to more advanced stages of development, including into larger, longer clinical studies, the costs of development increase.

 

We may conduct multiple clinical trials on a drug candidate, including multiple clinical trials for the various indications we may be studying. Furthermore, as we obtain results from trials we may elect to discontinue clinical trials for certain drug candidates in certain indications in order to focus our resources on more promising drug candidates or indications. Our Phase 1 and Phase 2 programs are clinical research programs that fuel our Phase 3 pipeline. When our products are in Phase 1 or Phase 2 clinical trials, they are in a dynamic state where we continually adjust the development strategy for each product. Although we may characterize a product as “in Phase 1” or “in Phase 2,” it does not mean that we are conducting a single, well-defined study with dedicated resources. Instead, we allocate our internal resources on a shared basis across numerous products based on each product’s particular needs at that time. This means we are constantly shifting resources among products. Therefore, what we spend on each product during a particular period is usually a function of what is required to keep the products progressing in clinical development, not what products we think are most important. For example, the number of people required to start a new study is large, the number of people required to keep a study going is modest and the number of people required to finish a study is large. However, such fluctuations are not indicative of a shift in our emphasis from one product to another and cannot be used to accurately predict future costs for each product. And, because we always have numerous products in preclinical and early stage clinical research, the fluctuations in expenses from product to product, in large part, offset one another. If we partner a drug, it may affect the size of a trial, its timing, its total cost and the timing of the related cost. We have partnered 13 of our 25 drug candidates, which substantially reduces our development costs. As part of our collaboration with Genzyme, we have transitioned the majority of the development responsibility for KYNAMRO to Genzyme.  In 2011, we satisfied our $125 million development funding obligation.  We and Genzyme now share development costs equally.  Our shared funding will end when the program is profitable.

 

Manufacturing and Operations

 

Expenditures in our manufacturing and operations function consist primarily of personnel costs, specialized chemicals for oligonucleotide manufacturing, laboratory supplies and outside services. This function is responsible for providing drug supplies to antisense drug discovery and antisense drug development, including the analytical testing to satisfy good laboratory and good manufacturing practices requirements.

 

Our manufacturing and operations expenses were as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Manufacturing and operations

 

$

4,571

 

$

4,551

 

Non-cash compensation expense related to equity awards

 

262

 

306

 

Total manufacturing and operations

 

$

4,833

 

$

4,857

 

 

Manufacturing and operations expenses were consistent for the three months ended March 31, 2012 and 2011 with $4.6 million for both periods.  All amounts exclude non-cash compensation expense related to equity awards.

 

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R&D Support

 

In our research and development expenses, we include support costs such as rent, repair and maintenance for buildings and equipment, utilities, depreciation of laboratory equipment and facilities, amortization of our intellectual property, information technology costs, procurement costs and waste disposal costs. We call these costs R&D support costs.

 

The following table sets forth information on R&D support costs (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Personnel costs

 

$

2,267

 

$

2,064

 

Occupancy

 

1,729

 

1,785

 

Depreciation and amortization

 

1,139

 

1,816

 

Insurance

 

309

 

213

 

Other

 

1,267

 

633

 

Non-cash compensation expense related to equity awards

 

451

 

570

 

Total R&D support costs

 

$

7,162

 

$

7,081

 

 

R&D support costs for the three months ended March 31, 2012 were $6.7 million, compared to $6.5 million for the same period in 2011, all amounts exclude non-cash compensation expense related to equity awards.  The increase in expenses in the first quarter of 2012 compared to the same period in 2011 primarily relates to litigation costs related to our patent infringement lawsuit against Santaris Pharma A/S offset by a reduction in non-cash charges related to patents and patent applications that we wrote off in 2011 because we were no longer pursuing them.

 

General and Administrative Expenses

 

General and administrative expenses include corporate costs required to support our company, our employees and our stockholders. These costs include personnel and outside costs in the areas of legal, human resources, investor relations, and finance. Additionally, we include in general and administrative expenses such costs as rent, repair and maintenance of buildings and equipment, depreciation, utilities, information technology and procurement costs that we need to support the corporate functions listed above.

 

The following table sets forth information on general and administrative expenses (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

General and administrative expenses

 

$

2,644

 

$

2,570

 

Non-cash compensation expense related to equity awards

 

332

 

440

 

Total general and administrative expenses

 

$

2,976

 

$

3,010

 

 

General and administrative expenses were consistent for the three months ended March 31, 2012 and 2011 with $2.6 million for both periods. All amounts exclude non-cash compensation expense related to equity awards.

 

Equity in Net Loss of Regulus Therapeutics Inc.

 

Our equity in net loss of Regulus for the three months ended March 31, 2012 was $976,000, and increased slightly compared to $856,000 for the same period in 2011.

 

Investment Income

 

Investment income for the three months ended March 31, 2012 was $600,000, compared to $705,000 for the same period in 2011.  The decrease in investment income was primarily due to a lower average return on our investments resulting from a lower average cash balance and current market conditions.

 

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Interest Expense

 

Interest expense for the three months ended March 31, 2012 was $5.2 million compared to $3.4 million for the same period in 2011. The increase in interest expense in 2012 is a result of additional non-cash interest expense we recorded for the long-term liability associated with our new facility.

 

Gain (Loss) on Investments, Net

 

Gain on investments for the three months ended March 31, 2012 was $17,000, compared to a loss on investments of $318,000 for the same period in 2011. The loss on investments for the first three months of 2011 was primarily due to a $359,000 valuation allowance we recorded related to an investment we made in Excaliard offset by nominal gains on our available for sale securities.

 

Net Loss and Net Loss per Share

 

Net loss for the three months ended March 31, 2012 was $24.0 million, compared to a net loss of $20.0 million for the three months ended March 31, 2011.  Basic and diluted net loss per share for the three months ended March 31, 2012 was $0.24 per share, compared to $0.20 per share for the three months ended March 31, 2011.  Net loss for the first three months of 2012 was higher than the same period in 2011 primarily due to the increase in our net operating loss in 2012, which is discussed above, and an increase in interest expense due to additional non-cash interest expense we recorded for the long-term liability associated with our new facility.

 

Liquidity and Capital Resources

 

We have financed our operations with revenue primarily from research and development collaborative agreements. Additionally, we have earned revenue from the sale or licensing of our intellectual property. We have also financed our operations through the sale of our equity securities and the issuance of long-term debt. From our inception through March 31, 2012, we have earned approximately $1.0 billion in revenue from contract research and development and the sale and licensing of our intellectual property.  From the time we were founded through March 31, 2012, we have raised net proceeds of approximately $824.7 million from the sale of our equity securities and we have borrowed approximately $568.5 million under long-term debt arrangements to finance a portion of our operations.

 

As of March 31, 2012, we had cash, cash equivalents and short-term investments of $333.9 million and stockholders’ equity of $150.9 million.  In comparison, we had cash, cash equivalents and short-term investments of $343.7 million and stockholders’ equity of $171.4 million at December 31, 2011.  At March 31, 2012, we had consolidated working capital of $285.9 million, compared to $284.0 million at December 31, 2011.  The decrease in cash in the first quarter of 2012 primarily relates to cash used for our operations offset by the $29 million upfront payment we received from Biogen Idec.

 

As of March 31, 2012, our debt and other obligations totaled $220.3 million, compared to $218.8 million at December 31, 2011.  The slight increase was primarily related to $2.3 million of non-cash amortization of the debt discount we recorded in the first three months of 2012, which increased the carrying value of our 25/8 percent convertible notes, offset by $996,000 of principal payments we made in the first three months of 2012 on our equipment financing arrangement.

 

The following table summarizes our contractual obligations as of March 31, 2012. The table provides a breakdown of when obligations become due. We provide a more detailed description of the major components of our debt in the paragraphs following the table:

 

 

 

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

 

25/8 percent Convertible Subordinated Notes (principal and interest payable)

 

$

166.8

 

$

4.3

 

$

162.5

 

$

 

$

 

New Facility Rent Payments

 

$

148.1

 

$

5.8

 

$

12.1

 

$

12.8

 

$

117.4

 

Equipment Financing Arrangements (principal and interest payable)

 

$

4.5

 

$

2.9

 

$

1.6

 

$

 

$

 

Other Obligations (principal and interest payable)

 

$

1.4

 

$

0.1

 

$

0.1

 

$

0.1

 

$

1.1

 

Capital Lease

 

$

0.7

 

$

0.2

 

$

0.4

 

$

0.1

 

$

 

Operating Leases

 

$

28.6

 

$

1.4

 

$

2.8

 

$

2.8

 

$

21.6

 

Total

 

$

350.1

 

$

14.7

 

$

179.5

 

$

15.8

 

$

140.1

 

 

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Our contractual obligations consist primarily of our publicly traded convertible debt. In addition, we also have facility leases, equipment financing arrangements and other obligations.

 

In January 2007, we completed a $162.5 million convertible debt offering, which raised proceeds of approximately $157.1 million, net of $5.4 million in issuance costs. We included the issuance costs in our balance sheet and are amortizing these costs to interest expense over the life of the debt. The $162.5 million convertible subordinated notes mature in 2027 and bear interest at 25/8 percent, which is payable semi-annually.  The 25/8 percent notes are convertible, at the option of the note holders, into approximately 11.1 million shares of our common stock at a conversion price of $14.63 per share. We can redeem these notes at a redemption price equal to 100.75 percent of the principal amount between February 15, 2012 and February 14, 2013; 100.375 percent of the principal amount between February 15, 2013 and February 14, 2014; and 100 percent of the principal amount thereafter. Holders of the 25/8 percent notes may also require us to repurchase the 25/8 percent notes on February 15, 2014, February 15, 2017 and February 15, 2022, and upon the occurrence of certain defined conditions, at 100 percent of the principal amount of the 25/8 percent notes plus unpaid interest.

 

In October 2008, we entered into a loan agreement related to an equipment financing and in September 2009, we amended the loan agreement to increase the aggregate maximum amount of principal we could draw under the agreement.  Under the amended loan agreement, we could borrow up to $18.4 million in principal to finance the purchase of equipment until July 2011.  Each draw down under the loan agreement has a term of three years, with principal and interest payable monthly.  Interest on amounts we borrow under the loan agreement is based upon the three year interest rate swap at the time we make each draw down plus four percent. We are using the equipment purchased under the loan agreement as collateral.  As of March 31, 2012, we had drawn down $18.3 million in principal under this loan agreement at a weighted average interest rate of 6.19 percent.  The carrying balance under this loan agreement at March 31, 2012 and December 31, 2011 was $4.3 million and $5.3 million, respectively.  We will continue to use equipment lease financing as long as the terms remain commercially attractive.

 

In March 2010, we entered into a lease agreement with an affiliate of BioMed Realty, L.P.  Under the lease, BioMed constructed a new facility in Carlsbad, California. The lease has an initial term of 20 years with an option to extend the lease for up to four five-year periods.  Our rent under the new lease is based on a percentage of the total construction costs spent by BioMed to acquire the land and build the new facility. The leases on our former primary research and development facilities expired at the end of 2011. Rather than invest in costly renovations to these facilities, we chose to consolidate the majority of our operations in a new leased facility that Biomed constructed. To make our move as efficient as possible, we requested access to the new facility prior to the completion of construction.  To gain early access, we agreed to modify our lease with BioMed to accept additional responsibility.  As a result, accounting rules required us to record the cost of the facility as a fixed asset with a corresponding liability.  In 2011, we consolidated the majority of our operations into the new facility and began depreciating the building over its economic life.  Our rent payments, which began on January 1, 2012, will decrease the liability over the term of the lease.

 

In addition to contractual obligations, we had outstanding purchase orders as of March 31, 2012 for the purchase of services, capital equipment and materials as part of our normal course of business.

 

We plan to continue to enter into collaborations with partners to provide for additional revenue to us and we may incur additional cash expenditures related to our obligations under any of the new agreements we may enter into. We currently intend to use our cash, cash equivalents and short-term investments to finance our activities. However, we may also pursue other financing alternatives, like issuing additional shares of our common stock, issuing debt instruments, refinancing our existing debt, or securing lines of credit. Whether we use our existing capital resources or choose to obtain financing will depend on various factors, including the future success of our business, the prevailing interest rate environment and the condition of financial markets generally.

 

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RISK FACTORS

 

Investing in our securities involves a high degree of risk. You should consider carefully the following information about the risks described below, together with the other information contained in this report and in our other public filings in evaluating our business.  If any of the following risks actually occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. As a result, the trading price of our securities could decline, and you might lose all or part of your investment. We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Risks Associated with our Drug Discovery and Development Business

 

If we or our partners fail to obtain regulatory approval for our drugs, including KYNAMRO, we cannot sell them.*

 

We cannot guarantee that any of our drugs, including KYNAMRO, will be safe and effective, or will be approved for commercialization.  We and our partners must conduct time-consuming, extensive and costly clinical studies to show the safety and efficacy of each of our drugs, including KYNAMRO, before a drug can be approved for sale. We must conduct these studies in compliance with Food and Drug Administration, or FDA, regulations and with comparable regulations in other countries.

 

We and our partners may not obtain necessary regulatory approvals on a timely basis, if at all, for any of our drugs, including KYNAMRO.  Even though Genzyme has submitted marketing approval applications for KYNAMRO in Europe and the United States, it is possible that regulatory agencies will not approve KYNAMRO for marketing.  If the FDA or another regulatory agency believes that we or our partners have not sufficiently demonstrated the safety or efficacy of any of our drugs, including KYNAMRO, the agency will not approve the specific drug or will require additional studies, which can be time consuming and expensive and which will delay commercialization of the drug.

 

Failure to receive marketing approval for our drugs, including KYNAMRO, or delays in these approvals could prevent or delay commercial introduction of the drug, and, as a result, could negatively impact our ability to generate revenue from product sales.

 

If the results of clinical testing indicate that any of our drugs, including KYNAMRO, are not suitable for commercial use we may need to abandon one or more of our drug development programs.

 

Drug discovery and development has inherent risks and the historical failure rate for drugs is high. Antisense drugs are a relatively new approach to therapeutics. If we cannot demonstrate that our drugs, including KYNAMRO, are safe and effective for human use, we may need to abandon one or more of our drug development programs.

 

In the past, we have invested in clinical studies of drugs that have not met the primary clinical end points in their Phase 3 studies. Similar results could occur with any additional clinical studies for KYNAMRO and in clinical studies for our other drugs. If any of our drugs in clinical studies, including KYNAMRO, does not show sufficient efficacy in patients with the targeted indication, it could negatively impact our development and commercialization goals for the drug and our stock price could decline.

 

Even if our drugs are successful in preclinical and human clinical studies, the drugs may not be successful in late-stage clinical studies.

 

Successful results in preclinical or initial human clinical studies, including the Phase 3 results for KYNAMRO and the Phase 2 results for some of our other drugs in development, may not predict the results of subsequent clinical studies, including subsequent studies of KYNAMRO.  There are a number of factors that could cause a clinical study to fail or be delayed, including:

 

·                  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 drug on subjects in the trial;

 

·                  we 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;

 

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·                  the cost of our clinical studies may be greater than we anticipate; and

 

·                  the supply or quality of our drugs or other materials necessary to conduct our clinical studies may be insufficient, inadequate or delayed.

 

Any failure or delay in our clinical studies, including any further studies under our development program for KYNAMRO, could reduce the commercial potential or viability of our drugs.

 

Even if approved, KYNAMRO and any of our other drugs may be subject to regulatory limitations.

 

Following approval of a drug, we and our partners must comply with comprehensive government regulations regarding how we manufacture, market and distribute drug products. Even if approved, we may not obtain the labeling claims necessary or desirable for successfully commercializing our drug products, including KYNAMRO.  The FDA and foreign regulatory authorities have the authority to impose significant restrictions on an approved drug product through the product label and on advertising, promotional and distribution activities.  If approved, the FDA or a foreign regulatory authority may condition approval on the performance of post-approval clinical studies or patient monitoring, which could be time consuming and expensive.  If the results of such post-marketing studies are not satisfactory, the FDA or a foreign regulatory authority may withdraw marketing authorization or may condition continued marketing on commitments from us or our partners that may be expensive and/or time consuming to fulfill.  In addition, if we or others identify side effects after any of our drug products are on the market, or if manufacturing problems occur subsequent to regulatory approval, we may lose regulatory approval, or we may need to conduct additional clinical studies and/or change the labeling of our drug products including KYNAMRO.

 

If the market does not accept KYNAMRO or our other drugs, we are not likely to generate revenues or become consistently profitable.

 

If KYNAMRO or any of our other drugs is approved for marketing, our success will depend upon the medical community, patients and third party payors accepting our drug as medically useful, cost-effective and safe. Even if the FDA or foreign regulatory authorities approve KYNAMRO or our other drugs for commercialization, doctors may not use our drugs to treat patients. For example, we currently have one commercially approved drug, Vitravene, a treatment for CMV retinitis in AIDS patients, which our partner is no longer marketing due to a dramatic decline in the incidence of CMV retinitis in AIDS patients. We and our partners may not successfully commercialize additional drugs.

 

Additionally, in many of the markets where we may sell our drugs in the future, if we cannot agree with the government regarding the price we can charge for our drugs, then we may not be able to sell our drugs in that market.

 

The degree of market acceptance for KYNAMRO, and any of our other drugs, depends upon a number of factors, including the:

 

·                  receipt and scope of regulatory approvals;

 

·                  establishment and demonstration in the medical and patient community of the efficacy and safety of our drugs and their potential advantages over competing products;

 

·                  cost and effectiveness of our drugs compared to other available therapies;

 

·                  patient convenience of the dosing regimen for our drugs; and

 

·                  reimbursement policies of government and third-party payors.

 

Based on the profile of our drugs, physicians, patients, patient advocates, payors or the medical community in general may not accept and/or use any drugs that we may develop.  In addition, cost control initiatives by governments or third party payors could decrease the price that we receive for KYNAMRO or our other drugs or increase patient coinsurance to a level that makes KYNAMRO or our other drugs unaffordable.

 

We depend on our collaboration with Genzyme for the development and commercialization of KYNAMRO.

 

We have entered into a collaborative arrangement with Genzyme to develop and commercialize KYNAMRO.

 

We entered into this collaboration primarily to:

 

·                  fund some of our development activities for KYNAMRO;

 

·                  seek and obtain regulatory approvals for KYNAMRO; and

 

·                  successfully commercialize KYNAMRO.

 

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In general, we cannot control the amount and timing of resources that Genzyme devotes to our collaboration. If Genzyme fails to further develop and commercialize KYNAMRO, or if Genzyme’s efforts are not effective, our business may be negatively affected. We are relying on Genzyme to obtain marketing approvals for and successfully commercialize KYNAMRO.  Our collaboration with Genzyme may not continue or result in the successful commercialization of KYNAMRO.  Genzyme can terminate our collaboration at any time.  If Genzyme stopped developing or commercializing KYNAMRO, we would have to seek additional sources for funding and may have to delay or reduce our development and commercialization programs for KYNAMRO.  If Genzyme does not successfully commercialize KYNAMRO, we may receive limited or no revenues for KYNAMRO.  In addition, Sanofi’s acquisition of Genzyme could disrupt Genzyme or distract it from performing its obligations under our collaboration.

 

If Genzyme cannot manufacture finished drug product for KYNAMRO or the post-launch supply of the active drug substance for KYNAMRO, KYNAMRO may not achieve or maintain commercial success.

 

We believe that our manufacturing facility has sufficient capacity to supply the drug substance necessary for the initial commercial launch of KYNAMRO, if approved.  However, we rely on Genzyme to manufacture the finished drug product for KYNAMRO, including the initial commercial launch supply.  In addition, if approved, Genzyme will be responsible for the long term supply of both KYNAMRO drug substance and finished drug product.  Genzyme may not be able to reliably manufacture KYNAMRO drug substance and drug product to support KYNAMRO’s long term commercialization.  If Genzyme cannot reliably manufacture KYNAMRO drug substance and drug product, KYNAMRO may not achieve or maintain commercial success, which will harm our ability to generate revenue.

 

If we cannot manufacture our drugs or contract with a third party to manufacture our drugs at costs that allow us to charge competitive prices to buyers, we cannot market our products profitably.

 

To successfully commercialize any of our drugs, we or our partner would need to establish large-scale commercial manufacturing capabilities either on our own or through a third party manufacturer. In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical trial and commercial manufacturing capacity. We have limited experience manufacturing pharmaceutical products of the chemical class represented by our drugs, called oligonucleotides, on a commercial scale for the systemic administration of a drug. There are a small number of suppliers for certain capital equipment and raw materials that we use to manufacture our drugs, and some of these suppliers will need to increase their scale of production to meet our projected needs for commercial manufacturing.  Further, we must continue to improve our manufacturing processes to allow us to reduce our drug costs.  We may not be able to manufacture our drugs at a cost or in quantities necessary to make commercially successful products.

 

Also, manufacturers, including us, must adhere to the FDA’s current Good Manufacturing Practices regulations and similar regulations in foreign countries, which the applicable regulatory authorities enforce through facilities inspection programs. We and our contract manufacturers may not comply or maintain compliance with Good Manufacturing Practices, or similar foreign regulations. Non-compliance could significantly delay or prevent our receipt of marketing approval for our drugs, including KYNAMRO, or result in enforcement action after approval that could limit the commercial success of our drugs, including KYNAMRO.

 

If our drug discovery and development business fails to compete effectively, our drugs will not contribute significant revenues.*

 

Our competitors engage in all areas of drug discovery throughout the world, are numerous, and include, among others, major pharmaceutical companies and specialized biopharmaceutical firms. Other companies engage in developing antisense technology. Our competitors may succeed in developing drugs that are:

 

·                  priced lower than our drugs;

 

·                  safer than our drugs;

 

·                  more effective than our drugs; or

 

·                  more convenient to use than our drugs.

 

These competitive developments could make our drugs, including KYNAMRO, obsolete or non-competitive.

 

Certain of our partners are pursuing other technologies or developing other drugs either on their own or in collaboration with others, including our competitors, to treat the same diseases our own collaborative programs target. Competition may negatively impact a partner’s focus on and commitment to our drugs and, as a result, could delay or otherwise negatively affect the commercialization of our drugs, including KYNAMRO.

 

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Many of our competitors have substantially greater financial, technical and human resources than we do. In addition, many of these competitors have significantly greater experience than we do in conducting preclinical testing and human clinical studies of new pharmaceutical products and in obtaining FDA and other regulatory approvals of products for use in health care. Accordingly, our competitors may succeed in obtaining regulatory approval for products earlier than we do.  Marketing and sales capability is another factor relevant to the competitive position of our drugs, and we will rely on our partners to provide this capability.

 

Regarding KYNAMRO, some competitors are pursuing a development strategy that competes with our strategy for KYNAMRO.  Other companies are currently developing products that could compete with KYNAMRO.  For example, products such as microsomal triglyceride transfer protein inhibitors, or MTP inhibitors, and other lipid lowering drugs other companies are developing could potentially compete with KYNAMRO.  For example, Aegerion has submitted a new drug application to the FDA and a marketing authorization application to the European Medicines Agency seeking approval of its MTP inhibitor, lomitapide, as an adjunct to a low fat diet and other lipid-lowering therapies to reduce cholesterol in patient with HoFH. Our revenues and financial position will suffer if KYNAMRO receives regulatory approval, but cannot compete effectively in the marketplace.

 

We depend on third parties to conduct our clinical studies for our drugs and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

 

We depend on independent clinical investigators, contract research organizations and other third-party service providers to conduct our clinical studies for our drugs and expect to continue to do so in the future. For example, Medpace is the primary clinical research organization for clinical studies for KYNAMRO. We rely heavily on these parties for successful execution of our clinical studies, but do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that these third parties conduct each of our clinical studies in accordance with the general investigational plan and approved protocols for the study. Third parties may not complete activities on schedule, or may not conduct our clinical studies in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations or a termination of our relationship with these third parties could delay or prevent the development, approval and commercialization of our drugs, including KYNAMRO.

 

Risks Associated with our Businesses as a Whole

 

We have incurred losses, and our business will suffer if we fail to consistently achieve profitability in the future.*

 

Because drug discovery and development requires substantial lead-time and money prior to commercialization, our expenses have generally exceeded our revenue since we were founded in January 1989. As of March 31, 2012, we had an accumulated deficit of approximately $865.5 million and stockholders’ equity of approximately $150.9 million.  Most of the losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. Most of our revenue has come from collaborative arrangements, with additional revenue from research grants and the sale or licensing of our patents, as well as interest income. We have had only one product, Vitravene, approved for commercial use, but our exclusive distribution partner for this product no longer markets this product.  We may incur additional operating losses over the next several years, and these losses may increase if we cannot increase or sustain revenue. We may not successfully develop any additional products or achieve or sustain future profitability.

 

Since corporate partnering is a key part of our strategy to fund the development and commercialization of our development programs, if any of our collaborative partners fail to fund our collaborative programs, or if we cannot obtain additional partners, we may have to delay or stop progress on our drug development programs.*

 

To date, corporate partnering has played a key role in our strategy to fund our development programs and to add key development resources. We plan to continue to rely on additional collaborative arrangements to develop and commercialize our unpartnered drugs.  However, we may not be able to negotiate favorable collaborative arrangements for these drug programs.  If we cannot continue to secure additional collaborative partners, our revenues could decrease and the development of our drugs could suffer.

 

Our corporate partners are developing and/or funding many of the drugs in our development pipeline, including ATL, Atlantic Pharmaceuticals, Biogen Idec, iCo, Genzyme, GSK, OncoGenex, Pfizer, and Teva Pharmaceutical Industries Ltd.  If any of these pharmaceutical companies stops developing and/or funding these drugs, our business could suffer and we may not have, or be willing to dedicate, the resources available to develop these drugs on our own.

 

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Our collaborators can terminate their relationships with us under certain circumstances, many of which are outside of our control. In the past, based on the disappointing results of Phase 3 clinical studies, we had a partner discontinue its investment in one of our drugs.

 

Even with funding from corporate partners, if our partners do not effectively perform their obligations under our agreements with them, it would delay or stop the progress of our drug development programs.

 

In addition to receiving funding, we enter into collaborative arrangements with third parties to:

 

·                  conduct clinical studies;

 

·                  seek and obtain regulatory approvals; and

 

·                  manufacture, market and sell our drugs.

 

Once we have secured a collaborative arrangement to further develop and commercialize one of our drug development programs, such as our collaborations with Genzyme, GSK, and Biogen Idec, these collaborations may not continue or result in commercialized drugs, or may not progress as quickly as we first anticipated.

 

For example, a collaborator such as Genzyme, GSK or Biogen Idec, could determine that it is in its financial interest to:

 

·                  pursue alternative technologies or develop alternative products that may be competitive with the drug 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 drugs than it does for its own drugs.

 

If any of these occur, it could affect our partner’s commitment to the collaboration with us and could delay or otherwise negatively affect the commercialization of our drugs, including KYNAMRO.

 

If we do not progress in our programs as anticipated, the price of our securities could decrease.*

 

For planning purposes, we estimate and may disclose the timing of a variety of clinical, regulatory and other milestones, such as when we anticipate a certain drug will enter the clinic, when we anticipate completing a clinical study, or when we anticipate filing an application for marketing approval. We base our estimates on present facts and a variety of assumptions. Many underlying assumptions are outside of our control. If we do not achieve milestones in accordance with our or our investors’ expectations, including milestones for approval of KYNAMRO, the price of our securities would likely decrease.

 

For example, in April 2008 the FDA provided guidance regarding approval requirements for KYNAMRO. The FDA indicated that reduction of LDL-C is an acceptable surrogate endpoint for accelerated approval of KYNAMRO for use in patients with HoFH.  The FDA also indicated that for broader indications in high risk, high cholesterol patients the FDA would require an outcome study.  This FDA guidance caused us to revise our development plans and timelines such that in July 2011 Genzyme filed for marketing approval in Europe for the treatment of patients with HoFH and patients with severe HeFH and in March 2012 submitted a new drug application (NDA) seeking approval for KYNAMRO for the treatment of patients with HoFH in the United States.

 

If we cannot protect our patents or our other proprietary rights, others may compete more effectively against us.

 

Our success depends to a significant degree upon whether we can continue to develop and secure intellectual property rights to proprietary products and services. However, we may not receive issued patents on any of our pending patent applications in the United States or in other countries. In addition, the scope of any of our issued patents may not be sufficiently broad to provide us with a competitive advantage. Furthermore, our issued patents or patents licensed to us may be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier or revenue source.

 

Intellectual property litigation could be expensive and prevent us from pursuing our programs.

 

From time to time we have to defend our intellectual property rights. In the event of an intellectual property dispute, we sometimes need to litigate to defend our rights or assert them against others. Disputes can involve arbitration, litigation or proceedings declared by the United States Patent and Trademark Office or the International Trade Commission or foreign patent authorities. Intellectual property litigation can be extremely expensive, and this expense, as well as the consequences should we not prevail, could seriously harm our business.  For example, in September 2011 we filed a patent infringement lawsuit against Santaris Pharma A/S and Santaris Pharma A/S Corp. in the United States District Court of the Southern District of California.  This lawsuit may be costly and may not be resolved in our favor.

 

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If a third party claims that our drugs or technology infringe its patents or other intellectual property rights, we may have to discontinue an important product or product line, alter our products and processes, pay license fees or cease certain activities. We may not be able to obtain a license to needed intellectual property on favorable terms, if at all. There are many patents issued or applied for in the biotechnology industry, and we may not be aware of patents or patent applications held by others that relate to our business.  This is especially true since patent applications in the United States are filed confidentially for the first 18 months. Moreover, the validity and breadth of biotechnology patents involve complex legal and factual questions for which important legal issues remain unresolved.

 

If we fail to obtain timely funding, we may need to curtail or abandon some of our programs.*

 

Many of our drugs are undergoing clinical studies or are in the early stages of research and development. All of our drug programs will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and/or commitment of significant additional resources prior to their commercialization. As of March 31, 2012, we had cash, cash equivalents and short-term investments equal to $333.9 million.  If we do not meet our goals to commercialize KYNAMRO or our other drugs, or to license our drugs and proprietary technologies, we will need additional funding in the future. Our future capital requirements will depend on many factors, such as the following:

 

·                  marketing approval and successful commercial launch of KYNAMRO;

 

·                  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 regulatory approvals;

 

·                  competing technological and market developments, including the introduction by others of new therapies that address our markets; and

 

·                  the profile and launch timing of our drugs.

 

If we need additional funds, we may need to raise them through public or private financing. Additional financing may not be available at all or on acceptable terms. If we raise additional funds by issuing equity securities, the shares of existing stockholders will be diluted and the price, as well as the price of our other securities, may decline. If adequate funds are not available or not available on acceptable terms, we may have to cut back on one or more of our research, drug discovery or development programs. For example, in January 2005 we terminated the development of two lower priority drugs, ISIS 14803 and ISIS 104838. Alternatively, we may obtain funds through arrangements with collaborative partners or others, which could require us to give up rights to certain of our technologies or drugs.

 

The loss of key personnel, or the inability to attract and retain highly skilled personnel, could make it more difficult to run our business and reduce our likelihood of success.

 

We are dependent on the principal members of our management and scientific staff. We do not have employment agreements with any of our executive officers that would prevent them from leaving us. The loss of our management and key scientific employees might slow the achievement of important research and development goals. It is also critical to our success that we recruit and retain qualified scientific personnel to perform research and development work. We may not be able to attract and retain skilled and experienced scientific personnel on acceptable terms because of intense competition for experienced scientists among many pharmaceutical and health care companies, universities and non-profit research institutions. In addition, failure to succeed in clinical studies may make it more challenging to recruit and retain qualified scientific personnel.

 

If the price of our securities continues to be highly volatile, this could make it harder for you to liquidate your investment and could increase your risk of suffering a loss.*

 

The market price of our common stock, like that of the securities of many other biopharmaceutical companies, has been and is likely to continue to be highly volatile. These fluctuations in our common stock price may significantly affect the trading price of our securities. During the 12 months preceding March 31, 2012, the market price of our common stock ranged from $6.25 to $9.49 per share.  Many factors can affect the market price of our securities, including, for example, fluctuations in our operating results, announcements of collaborations, clinical study results, technological innovations or new products being developed by us or our competitors, governmental regulation, regulatory approval, developments in patent or other proprietary rights, public concern regarding the safety of our drugs and general market conditions.

 

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We are exposed to potential product liability claims, and insurance against these claims may not be available to us at a reasonable rate in the future or at all.

 

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of therapeutic products.  We have clinical study insurance coverage and commercial product liability insurance coverage.  However, this insurance coverage may not be adequate to cover claims against us, or be available to us at an acceptable cost, if at all.  Regardless of their merit or eventual outcome, products liability claims may result in decreased demand for our drug products, injury to our reputation, withdrawal of clinical study volunteers and loss of revenues.  Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material.

 

Because we use biological materials, hazardous materials, chemicals and radioactive compounds, if we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

 

Our research, development and manufacturing activities involve the use of potentially harmful biological materials as well as materials, chemicals and various radioactive compounds that could be hazardous to human health and safety or the environment. We store these materials and various wastes resulting from their use at our facilities in Carlsbad, California pending ultimate use and disposal. We cannot completely eliminate the risk of contamination, which could cause:

 

·                 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.

 

In such an event, we may be held liable for any resulting damages, and any liability could exceed our resources. Although we carry insurance in amounts and types that we consider commercially reasonable, we do not have insurance coverage for losses relating to an interruption of our research, development or manufacturing efforts caused by contamination, and the coverage or coverage limits of our insurance policies may not be adequate. If our losses exceed our insurance coverage, our financial condition would be adversely affected.

 

We depend on Regulus for development of our microRNA technology.

 

Regulus is a jointly owned company that we and Alnylam established to focus on discovering, developing, and commercializing microRNA therapeutics. We exclusively licensed to Regulus our intellectual property rights covering microRNA technology. Regulus operates as an independent company, governed by a board of directors. We and Alnylam can elect an equal number of directors to serve on the Regulus Board. Regulus researches and develops microRNA projects and programs pursuant to an operating plan that its board approves.  However, Regulus and its employees are ultimately responsible for researching and developing our microRNA technology.  If Regulus is not successful, the value of our microRNA technology would be harmed and we would lose part or all of our investment in Regulus.

 

If a natural or man-made disaster strikes our research, development or manufacturing facilities, it could delay our progress developing and commercializing our drugs.

 

We manufacture our research and clinical supplies in a manufacturing facility located in Carlsbad, California. The facilities and the equipment we use to research, develop and manufacture our drugs would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, fires and acts of terrorism; and if our facilities are affected by a disaster, our development and commercialization efforts would be delayed. Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

 

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Provisions in our certificate of incorporation, other agreements and Delaware law may prevent stockholders from receiving a premium for their shares.

 

Our certificate of incorporation provides for classified terms for the members of our board of directors. Our certificate also includes a provision that requires at least 66 2¤3 percent of our voting stockholders to approve a merger or certain other business transactions with, or proposed by, any holder of 15 percent or more of our voting stock, except in cases where certain directors approve the transaction or certain minimum price criteria and other procedural requirements are met.

 

Our certificate of incorporation also requires that any action required or permitted to be taken by our stockholders must be taken at a duly called annual or special meeting of stockholders and may not be taken by written consent. In addition, only our board of directors, chairman of the board or chief executive officer can call special meetings of our stockholders.  We have in the past, and may in the future, implement a stockholders’ rights plan, also called a poison pill, which could make it uneconomical for a third party to acquire our company on a hostile basis.  These provisions, as well as Delaware law and other of our agreements, may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of our stockholders to approve transactions that they think may be in their best interests. In addition, our board of directors has the authority to fix the rights and preferences of, and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control of our company without action by our stockholders.

 

The provisions of our convertible subordinated notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or a portion of their notes, which may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the then current market prices.

 

In addition, our collaboration agreement with Genzyme regarding KYNAMRO provides that if we are acquired, Genzyme may elect to purchase all of our rights to receive payments under the KYNAMRO collaboration agreement for a purchase price to be mutually agreed to by us and Genzyme, or, if we cannot agree, a fair market value price determined by an independent investment banking firm.  This provision may make it more difficult or complicated for us to enter into an acquisition agreement with a potential acquirer.

 

Future sales of our common stock in the public market could adversely affect the trading price of our securities.

 

Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect trading prices of our securities. For example, we have registered for resale our 25/8 percent convertible subordinated notes, including the approximately 11.1 million shares issuable upon conversion of the notes. The addition of any of these shares into the public market may have an adverse effect on the price of our securities.

 

Our business is subject to changing regulations for corporate governance and public disclosure that has increased both our costs and the risk of noncompliance.

 

Each year we are required to evaluate our internal controls systems in order to allow management to report on and our Independent Registered Public Accounting Firm to attest to, our internal controls as required by Section 404 of the Sarbanes-Oxley Act. As a result, we continue to incur additional expenses and divert our management’s time to comply with these regulations. In addition, if we cannot continue to comply with the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC, the Public Company Accounting Oversight Board, or PCAOB, or The Nasdaq Global Market. Any such action could adversely affect our financial results and the market price of our common stock.

 

The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted.  There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access.  Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business.

 

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Negative conditions in the global credit markets and financial services and other industries may adversely affect our business.

 

The global credit markets, the financial services industry, the U.S. capital markets, and the U.S. economy as a whole have been experiencing a period of substantial turmoil and uncertainty characterized by unprecedented intervention by the U.S. federal government and the failure, bankruptcy, or sale of various financial and other institutions.  The impact of these events on our business and the severity of the economic crisis are uncertain.  It is possible that the crisis in the global credit markets, the U.S. capital markets, the financial services industry and the U.S. economy may adversely affect our business, vendors and prospects as well as our liquidity and financial condition.  More specifically, our insurance carriers and insurance policies covering all aspects of our business may become financially unstable or may not be sufficient to cover any or all of our losses and may not continue to be available to us on acceptable terms, or at all.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to changes in interest rates primarily from our long-term debt arrangements and, secondarily, investments in certain short-term investments. We primarily invest our excess cash in highly liquid short-term investments of the U.S. Treasury and reputable financial institutions, corporations, and U.S. government agencies with strong credit ratings.  We typically hold our investments for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

 

ITEM 4.

 

CONTROLS AND PROCEDURES

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2012.

 

An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives.

 

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PART II — OTHER INFORMATION

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

 

 

 

 

In September 2011, we filed a patent infringement lawsuit against Santaris Pharma A/S and Santaris Pharma A/S Corp. in the United States District Court of the Southern District of California. Our infringement lawsuit alleges that Santaris’ activities providing antisense drugs and antisense drug discovery services to several pharmaceutical companies infringes U.S. Patent No. 6,326,199, entitled “Gapped 2’ Modified Oligonucleotides” and U.S. Patent No. 6,066,500, entitled “Antisense Modulation of Beta Catenin Expression.” In the lawsuit we are seeking monetary damages and an injunction enjoining Santaris from conducting or participating in the infringing activities. In December 2011, Santaris filed an answer to our complaint, denying our allegations, and seeking a declaration from the court that Santaris has not, and does not, infringe the patents we asserted against Santaris in the suit. In January 2012, Santaris filed a motion for summary judgment asking the court to decide as a matter of law that Santaris’ activities do not infringe the patents we assert in the suit.

 

In January 2012, Alnylam Pharmaceuticals, Inc. filed a patent infringement lawsuit against Tekmira Pharmaceuticals Corporation in the U.S. District Court of the District of Massachusetts.  Alnylam’s lawsuit alleges Tekmira has infringed a number of issued patents related to siRNA and LNP technologies, including: U.S. Patent No. 7,695,902; U.S. Patent No. 6,858,225; U.S. Patent No. 6,815,432; U.S. Patent No. 6,534,484; U.S. Patent No. 6,586,410; and, U.S. Patent No. 6,858,224. Under Alnylam’s contractual right to enforce Isis’ patent U.S. Patent No. 7,695,902, Alnylam joined us to the suit as a co-plaintiff.

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

 

 

 

Not applicable

 

 

 

ITEM 3.

 

DEFAULT UPON SENIOR SECURITIES

 

 

 

 

 

Not applicable

 

 

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

 

 

 

 

Not applicable

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

 

 

 

 

Not applicable

 

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ITEM 6.

 

EXHIBITS

 

a.            Exhibits

 

Exhibit
Number

 

Description of Document

10.1

 

Development, Option and License Agreement dated January 3, 2012 between the Registrant and Biogen Idec International Holding Ltd. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment.

 

 

 

31.1

 

Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification by Chief Financial Offic5er Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

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 Isis Pharmaceuticals, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in Extensive Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of comprehensive loss, (iv) condensed consolidated statements of cash flows and (v) notes to condensed consolidated financial statements (detail tagged).

 

Isis Pharmaceuticals, Inc.

 

(Registrant)

 

35



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures

 

Title

 

Date

 

 

 

 

 

/s/ Stanley T. Crooke

 

Chairman of the Board, President,

 

 

Stanley T. Crooke, M.D., Ph.D.

 

and Chief Executive Officer

 

 

 

 

(Principal executive officer)

 

May 8, 2012

 

 

 

 

 

/s/ B. Lynne Parshall

 

Director, Chief Operating Officer,

 

 

B. Lynne Parshall, J.D.

 

Chief Financial Officer and Secretary

 

 

 

 

(Principal financial and accountingofficer)

 

May 8, 2012

 

36


XNAS:ISIS Isis Pharmaceuticals Quarterly Report 10-Q Filling

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