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ISIS > SEC Filings for ISIS > Form 10-Q on 6-Aug-2012All Recent SEC Filings

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Form 10-Q for ISIS PHARMACEUTICALS INC


6-Aug-2012

Quarterly Report


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 26 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, 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 Europe and in the United States. 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.


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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 May 2012, the U.S. Food and Drug Administration, or FDA, accepted the marketing application for KYNAMRO™ 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.

The clinical successes of the drugs in our pipeline continue to create new partnering opportunities. For example, in January 2012, we formed a 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 as well as double-digit royalties on sales from ISIS-SMNRx. Since 2007, our partnerships have generated an aggregate of more than $875 million in payments from upfront and licensing fees, equity purchase payments, milestone payments and research and development funding, including the $12 million upfront payment we received from Biogen Idec in July 2012 related to our new alliance valued at up to $271 million to develop and commercialize a drug targeting dystrophia myotonica-protein kinase, or DMPK. In addition, for our current partnered programs we have the potential to earn $3.5 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

† KYNAMRO™ continues to advance in development and move closer to the market for patients with severe forms of familial hypercholesterolemia (FH; homozygous FH and severe heterozygous FH), at high cardiovascular risk, who cannot reduce their LDL-C sufficiently with currently available lipid-lowering therapies.

† The FDA accepted for filing the NDA for KYNAMRO™ for the treatment of patients with homozygous FH.

† We received a $25 million milestone payment from Genzyme for the KYNAMRO™ NDA filing.

† A clinical investigator presented an analysis of lipoprotein a, or Lp(a), data from the KYNAMRO™ Phase 3 program at the European Atherosclerosis Society. The data demonstrated sustained reductions of Lp(a), an independent risk factor for cardiovascular disease.

† We received European GMP certification of our manufacturing facility for production of drug substance to support KYNAMRO™ commercial launch.

† We initiated a Phase 2 study evaluating ISIS-APOCIIIRx in patients with hypertriglyceridemia, a condition characterized by high levels of triglycerides that is often associated with premature coronary artery disease and pancreatitis.


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† We formed a new strategic alliance with Biogen Idec to develop and commercialize a drug to treat DM1 that expands our severe and rare disease franchise. We received a $12 million upfront payment and are eligible to receive up to an additional $259 million in a licensing fee and milestone payments. We will also receive double-digit royalties on product sales.

† We and collaborators published a paper in Nature demonstrating that an antisense compound selectively and rapidly reduced target RNA in skeletal muscle and alleviated disease in animal models of DM1.

† We and collaborators published a paper in Neuron demonstrating that an antisense compound reversed disease in animal models of Huntington's disease.

† We received Orphan Drug Designation in the United States for ISIS-TTRRx for the treatment of TTR amyloidosis.

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;

† 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 and six months ended June 30, 2012 was $47.3 million and $70.6 million, respectively, compared to $24.8 million and $46.0 million for the same periods 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. For example, our revenue in the first half of 2012 was significantly higher than in the first half of 2011 primarily due to the $25 million milestone payment we earned from Genzyme for the FDA acceptance of the KYNAMRO™ NDA. Also in the first half of 2012, we sold $6.2 million of drug substance to Genzyme to support the planned commercial launch of KYNAMRO™ and began recognizing revenue from the $29 million upfront payment we received from Biogen Idec earlier this year. These increases were partially offset by $5.5 million less in revenue because amortization of the upfront payments associated with the Genzyme collaboration ended in May 2012.


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As mentioned above, our revenue fluctuates from quarter to quarter based on the timing of payments from our partners as the Genzyme $25 million milestone payment we earned in the second quarter of this year clearly demonstrates. Also, we earned $27.7 million from the amortization of the Genzyme upfront payments, which ended as anticipated in the May of 2012. As a result, that will not be a component of revenue in the second half of 2012.

Research and Development Revenue Under Collaborative Agreements

Research and development revenue under collaborative agreements for the three and six months ended June 30, 2012 was $47.1 million and $69.0 million, respectively, compared to $24.3 million and $44.3 million for the same periods in 2011. The increase in the first half of 2012 was primarily due to the $25 million milestone payment and $6.2 million in sales of drug substance that we earned from Genzyme and revenue we earned from our partner, Biogen Idec, partially offset by a decrease in revenue when the amortization of the upfront payments associated with the Genzyme collaboration ended in May 2012.

Licensing and Royalty Revenue

Our revenue from licensing activities and royalties for the three and six months ended June 30, 2012 was $200,000 and $1.6 million, respectively, and was essentially flat when compared to $518,000 and $1.7 million for the same periods in 2011.

Operating Expenses

Operating expenses for the three and six months ended June 30, 2012 were $43.6 million and $85.3 million, respectively, compared to $38.9 million and $76.1 million for the same periods in 2011. The moderately higher expenses in the first half of 2012 were primarily due to higher development costs associated with our maturing pipeline of drugs offset by lower development expenses related to KYNAMRO™ because Genzyme is now sharing these expenses equally with us until KYNAMRO™ is profitable. In addition, Genzyme is paying all of the marketing and selling expenses until KYNAMRO™ is profitable.

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.

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                Six Months Ended
                                       June 30,                         June 30,
                                 2012             2011            2012             2011

Research and development
expenses                     $      38,362    $     33,725    $      75,141    $     65,682
Non-cash compensation
expense related to equity
awards                               2,073           2,284            4,008           4,572
Total research and
development                  $      40,435    $     36,009    $      79,149    $     70,254

For the three and six months ended June 30, 2012, we incurred total research and development expenses of $38.4 million and $75.1 million, respectively, compared to $33.7 million and $65.7 million for the same periods in 2011. The higher expenses in the first half of 2012 were primarily due to higher development costs associated with our maturing pipeline of drugs offset, in part, 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 exclude non-cash compensation expense related to equity awards.


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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                Six Months Ended
                                        June 30,                         June 30,
                                 2012             2011             2012             2011
Antisense drug discovery     $       8,429    $       8,019    $      16,793    $     15,200
Non-cash compensation
expense related to equity
awards                                 600              671            1,165           1,313
Total antisense drug
discovery                    $       9,029    $       8,690    $      17,958    $     16,513

Antisense drug discovery costs for the three and six months ended June 30, 2012 were $8.4 million and $16.8 million, respectively, compared to $8.0 million and $15.2 million for the same periods in 2011. The higher expenses in the first half 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. All amounts exclude non-cash compensation expense related to equity awards.

Antisense Drug Development



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



                                  Three Months Ended                Six Months Ended
                                       June 30,                         June 30,
                                 2012             2011            2012             2011

KYNAMRO™                     $       2,431    $      2,433    $       5,466    $      5,976
Other antisense
development products                14,496          10,742           26,693          19,297
Development overhead
costs                                1,549           1,498            3,450           3,109
Non-cash compensation
expense related to equity
awards                                 724             747            1,381           1,520
Total antisense drug
development                  $      19,200    $     15,420    $      36,990    $     29,902

Antisense drug development expenditures were $18.5 million and $35.6 million, respectively, for the three and six months ended June 30, 2012, compared to $14.7 million and $28.4 million for the same periods in 2011. The higher expenses in the first half of 2012 were primarily due to an increase in development costs associated with our maturing pipeline of drugs offset, in part, 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 exclude non-cash compensation expense related to equity awards.

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


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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                Six Months Ended
                                        June 30,                         June 30,
                                 2012             2011             2012             2011
Manufacturing and
operations                   $       5,115    $       4,734    $       9,685    $      9,285
Non-cash compensation
expense related to equity
awards                                 302              304              564             611
Total manufacturing and
operations                   $       5,417    $       5,038    $      10,249    $      9,896

Manufacturing and operations expenses increased slightly for the three and six months ended June 30, 2012 and 2011 with $5.1 million and $9.7 million, respectively, compared to $4.7 million and $9.3 million for the same periods in 2011. All amounts exclude non-cash compensation expense related to equity awards.

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                Six Months Ended
                                        June 30,                         June 30,
                                 2012             2011             2012             2011
Personnel costs              $       2,274    $       2,118    $       4,541           4,182
Occupancy                            1,675            1,862            3,403           3,648
Depreciation and
amortization                         1,321            1,478            2,460           3,294
Insurance                              271              214              581             427
Other                                  801              627            2,069           1,264
Non-cash compensation
expense related to equity
awards                                 447              562              898           1,128
Total R&D support costs      $       6,789    $       6,861    $      13,952    $     13,942

R&D support costs for the three and six months ended June 30, 2012 were $6.3 million and $13.1 million, respectively, compared to $6.3 million and $12.8 million for the same periods in 2011. Expenses in the first half of 2012 compared to the same period in 2011 are essentially flat. The increase in Other costs primarily relates to litigation costs for our patent infringement lawsuit against Santaris Pharma A/S offset by a reduction in Depreciation and Amortization because of non-cash charges related to patents and patent applications that we wrote off in 2011 because we were no longer pursuing them. . . .

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