Opinion on Internal Control over Financial Reporting We have audited Ionis Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Ionis Pharmaceuticals, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Ionis Pharmaceuticals, Inc. as of December 31, 2018 and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Ionis Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ionis Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016 of Ionis Pharmaceuticals, Inc. and our report dated March 1, 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 1, 2019 expressed an unqualified opinion thereon.
| /s/ ERNSTBasis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & YOUNGYoung LLP | | | San Diego, California | | March 1, 20172019 | |
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We incorporate by reference the information required by this Item with respect to directors and the Audit Committee from the information under the caption “ELECTION OF DIRECTORS,” including in particular the information under “Nominating, Governance and Review Committee” and “Audit Committee,” contained in our definitive Proxy Statement, (the “Proxy Statement”), which we will file on or about April 15, 2016 with the Securities and Exchange Commission in connection withwithin 120 days after the solicitationend of proxies for our 2017 Annual Meeting of Stockholders to be held on May 27, 2017.the fiscal year ended December 31, 2018 (the “Proxy Statement”).
We incorporate by reference the required information concerning our Code of Ethics from the information under the caption “Code of Ethics and Business Conduct” contained in the Proxy Statement. Our Code of Ethics and Business Conduct is posted on our website at www.ionispharma.com(1). We intend to disclose future amendments to, or waivers from, our Code of Ethics and Business Conduct on our website.
Section 16(a) Beneficial Ownership Reporting Compliance
Item 1, Part I of this Report contains information concerning our executive officers. We incorporate by reference the information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, from the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement. ________________ (1) | Any information that is included on or linked to our website is not part of this Form 10-K. |
Item 11. Executive Compensation
We incorporate by reference the information required by this item to the information under the caption “EXECUTIVE COMPENSATION,” “Compensation Committee Interlocks and Insider Participation” and “COMPENSATION COMMITTEE REPORT” contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We incorporate by reference the information required by this item to the information under the captions “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” contained in the Proxy Statement.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2016.2018. Plan Category | | Number of Shares to be Issued Upon Exercise of Outstanding Options | | | Weighted Average Exercise Price of Outstanding Options | | | Number of Shares Remaining Available for Future Issuance | | | | Number of Shares to be Issued Upon Exercise of Outstanding Options | | | Weighted Average Exercise Price of Outstanding Options | | | Number of Shares Remaining Available for Future Issuance | | | Equity compensation plans approved by stockholders(a) | | | 9,177,979 | | | $ | 40.48 | | | | 4,434,959 | | (b) | | | 11,311,944 | | | $ | 47.85 | | | | 4,578,854 | | (b) | | | | | | | | | | | | | | | | Total | | | 9,177,979 | | | $ | 40.48 | | | | 4,434,959 | | | | | 11,311,944 | | | $ | 47.85 | | | | 4,578,854 | | |
________________ (a) | Consists of four Ionis plans: 1989 Stock Option Plan, Amended and Restated 2002 Non-Employee Directors’ Stock Option Plan, 2011 Equity Incentive Plan and Employee Stock Purchase Plan, or ESPP. |
(b) | Of these shares, 585,713774,816 remained available for purchase under the ESPP as of December 31, 2016.2018. The ESPP incorporates an evergreen formula pursuant to which on January 1 of each year on the first nine anniversaries of the plan, we automatically increase the aggregate number of shares reserved for issuance under the plan by 150,000 shares. |
For additional details about our equity compensation plans, including a description of each plan, see Note 4, Stockholders’ Equity, in the Notes to the Consolidated Financial Statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We incorporate by reference the information required by this item to the information under the captions “Independence of the Board of Directors” and “Certain Relationships and Related Transactions” contained in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
We incorporate by reference the information required by this item to the information under the caption “Ratification of Selection of Independent Auditors” contained in the Proxy Statement.
PART IV Item 15. Exhibits, Financial Statement Schedules (a)(1) Index to Financial Statements We submitted the consolidated financial statements required by this item in a separate section beginning on page F-1 of this Report. (a)(2) Index to Financial Statement Schedules We omitted these schedules because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (a)(3) Index to Exhibits
See Index to Exhibits beginning on page 72.
(b) Exhibits
We listed the exhibits required by this Item under Item 15(a)(3).
(c) Financial Statement Schedules
None.
INDEX TO EXHIBITS
Exhibit Number | | Description of Document | 3.1 | | | | | | 3.2 | | | | | | 3.3 | | | | | | 3.4 | | Amended and Restated Bylaws, filed as an exhibit to the Registrant’s Current Report on Form 8-K filed December 18, 2015 and incorporated herein by reference. | | | | 4.1 | | | | | | 4.2 | | Specimen Common Stock Certificate, filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. | | | | 4.3 | | | | | | 4.4 | | | | | | 10.1 | | | | | | 10.2* | | Registrant’s 1989 Stock Option Plan, as amended, filed as an exhibit to Registrant’s Notice of Annual Meeting and Proxy Statement for the 2012 Annual Meeting of Stockholders, filed with the SEC on April 16, 2012, and incorporated herein by reference. | | | | 10.3* | | | | | | 10.4 | | | | | | 10.5 | | | | | | 10.6 | | | | | | 10.7 | | | | | | 10.8 | | |
10.13* | | | | | | 10.14 | | | | | | 10.15* | | | | | | 10.16* | | | | | | 10.17* | | | | | | 10.18 | | | | | | 10.19* | | | | | | 10.20* | | | | | | 10.21 | | | | | | 10.22 | | | | | | 10.23 | | | | | | 10.24 | | | | | | 10.25 | | | | | |
10.33 | | | | | | 10.34 | | | | | | 10.35 | | | | | | 10.36 | | | | | | 10.37 | | | | | | 10.38 | | | | | | 10.39 | | |
10.40 | | | | | | 10.41 | | | | | | 10.42 | | | | | | 10.43 | | | | | | 10.44 | | | | | | 10.45 | | | | | | 10.46 | | |
10.47 | | | | | | 10.48 | | | | | | 10.49 | | | | | | 10.50 | | | | | | 10.51 | | | | | | 10.52 | | | | | | 10.53 | | |
10.54 | | | | | | 10.55 | | | | | | 10.56 | | | | | | 10.57 | | | | | | 10.58 | | | | | | 10.59* | | | | | | 10.60* | | | | | | 10.61 | | | | | | 10.62 | | | | | | 10.63 | | | | | | 10.64 | | | | | | 10.65 | | | | | | 10.66 | | | | | | | | Factor B Development Collaboration, Option and License Agreement by and between the Registrant, F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc., dated October 9, 2018. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. | | | | | | Second Amended and Restated Strategic Neurology Drug Discovery and Development Collaboration, Option and License Agreement by and between the Registrant and Biogen MA Inc, dated October 17, 2018. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. | | | | | | Amendment #1 to the Strategic Collaboration Agreement by and between the Registrant and AstraZeneca AB, dated October 18, 2018. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. | | | | | | Amendment #4 to the Collaboration, License and Development Agreement by and between the Registrant and AstraZeneca AB, dated October 18, 2018. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. | | | | | | List of Subsidiaries for the Registrant. |
| | Consent of Independent Registered Public Accounting Firm. | | | | 24.1 | | Power of Attorney – Included on the signature page of this Annual Report on Form 10-K. | | | | | | 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. | | | | | | Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 101 | | The following financial statements from the Ionis Pharmaceuticals, Inc. Annual Report on Form 10-K for the year ended December 31, 2018, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income (loss), (iv) consolidated statements of stockholders’ equity, (v) consolidated statements of cash flows, and (vi) notes to consolidated financial statements (detail tagged). |
* | Indicates management compensatory plans and arrangements as required to be filed as exhibits to this Report pursuant to Item 14(c). |
+ | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 133, as amended, or the Securities Exchange Act of 1934, as amended. |
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 1st day of March, 2017.2019. | IONIS PHARMACEUTICALS, INC. | | | | | By: | /s/ STANLEY T. CROOKE | | | Stanley T. Crooke, M.D., Ph.D. | | | Chairman of the Board, President and Chief Executive Officer (Principal executive officer) |
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stanley T. Crooke and Elizabeth L. Hougen, or any of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
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, and Chief Executive Officer | | March 1, 20172019 | Stanley T. Crooke, M.D., Ph.D. | | (Principal executive officer) | | | | | | | | /s/ B. LYNNE PARSHALL | | Director, Chief Operating Officer and Secretary | | March 1, 2017 | B. Lynne Parshall, J.D. | | | | | | | | | | /s/ ELIZABETH L. HOUGEN | | Senior Vice President, Finance and Chief Financial Officer | | March 1, 20172019 | Elizabeth L. Hougen | | (Principal financial and accounting officer) | | | | | | | | /s/ B. LYNNE PARSHALL | | Director and Senior Strategic Advisor | | March 1, 2019 | B. Lynne Parshall, J.D. | | | | | | | | | | /s/ SPENCER R. BERTHELSEN | | Director | | March 1, 20172019 | Spencer R. Berthelsen, M.D. | | | | | | | | | | /s/ BREAUX CASTLEMAN | | Director | | March 1, 20172019 | Breaux Castleman | | | | | | | | | | /s/ MICHAEL HAYDEN | | Director | | March 1, 2019 | Michael Hayden, CM OBC MB ChB PhD FRCP(C) FRSC | | | | | | | | | | /s/ JOSEPH KLEIN | | Director | | March 1, 20172019 | Joseph Klein, III | | | | | | | | | | /s/ JOSEPH LOSCALZO | | Director | | March 1, 20172019 | Joseph Loscalzo, M.D., Ph.D. | | | | | | | | | | /s/ FREDERICK T. MUTO | | Director | | March 1, 20172019 | Frederick T. Muto, Esq. | | | | | | | | | | /s/ PETER N. REIKES | | Director | | March 1, 2019 | Peter N. Reikes | | | | | | | | | | /s/ JOSEPH H. WENDER | | Director | | March 1, 20172019 | Joseph H. Wender | | | | |
INDEX TO EXHIBITS
Exhibit
Number
| | Description of Document | 3.1 | | Amended and Restated Certificate of Incorporation filed June 19, 1991. - Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-39640) or amendments thereto and incorporated herein by reference. | | | | 3.2 | | Certificate of Amendment to Restated Certificate of Incorporation filed June 17, 2014. - Filed as an exhibit to the Registrant’s Notice of Annual Meeting and Proxy Statement, for the 2014 Annual Meeting of Stockholders, filed with the SEC on April 25, 2014, and incorporated herein by reference. | | | | 3.3 | | Certificate of Amendment to Restated Certificate of Incorporation filed December 18, 2015. - Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed December 18, 2015 and incorporated herein by reference. | | | | 3.4 | | Amended and Restated Bylaws. - Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed December 18, 2015 and incorporated herein by reference. | | | | 4.1 | | Certificate of Designation of the Series C Junior Participating Preferred Stock. - Filed as an exhibit to Registrant’s Report on Form 8-K dated filed December 13, 2000 and incorporated herein by reference. | | | | 4.2 | | Specimen Common Stock Certificate. - Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-39640) or amendments thereto and incorporated herein by reference. | | | | 4.3 | | Indenture, dated as of August 13, 2012, between the Registrant and Wells Fargo Bank, National Association, as trustee, including Form of 2¾ percent Convertible Senior Note due 2019. - Filed as an exhibit to the Registrant’s Report on Form 8-K filed August 13, 2012 and incorporated herein by reference. | | | | 4.4 | | Indenture, dated as of November 17, 2014, between the Registrant and Wells Fargo Bank, National Association, as trustee, including Form of 1.00 percent Convertible Senior Note due 2021. - Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed November 21, 2014 and incorporated herein by reference. | | | | 10.1 | | Form of Indemnity Agreement entered into between the Registrant and its Directors and Officers with related schedule. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 and incorporated herein by reference. | | | | 10.2* | | Registrant’s 1989 Stock Option Plan, as amended. - Filed as an exhibit to Registrant’s Notice of Annual Meeting and Proxy Statement for the 2012 Annual Meeting of Stockholders, filed with the SEC on April 16, 2012, and incorporated herein by reference. | | | | 10.3* | | Registrant’s Amended and Restated 2000 Employee Stock Purchase Plan. - Filed as an exhibit to Registrant’s Notice of Annual Meeting and Proxy Statement for the 2009 Annual Meeting of Stockholders, filed with the SEC on April 20, 2009, and incorporated herein by reference. | | | | 10.4 | | Form of Employee Assignment of Patent Rights. - Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-39640) or amendments thereto and incorporated herein by reference. | | | | 10.5 | | Patent Rights Purchase Agreement between the Registrant and Gilead Sciences, Inc., dated December 18, 1998. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. | | | | 10.6 | | Collaboration and License Agreement between the Registrant and Hybridon, Inc., dated May 24, 2001. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s report on Form 10-Q as amended for the quarter ended June 30, 2001 and incorporated herein by reference. | | | | 10.7 | | Amendment #1 to the Research, Development and License Agreement dated May 11, 2011 by and between the Registrant and Glaxo Group Limited. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 and incorporated herein by reference. | | | | 10.8 | | Amended and Restated Collaboration and License Agreement between the Registrant and Antisense Therapeutics Ltd dated February 8, 2008. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference. | | | |
10.9 | | Amended and Restated License Agreement between the Registrant and Atlantic Pharmaceuticals Limited dated November 30, 2009. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report as Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. |
10.10 | | Amended and Restated License Agreement dated July 2, 2008 between the Registrant and OncoGenex Technologies Inc. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference. | | | | 10.11 | | Lease Agreement between the Registrant and BMR-Gazelle Court LLC dated March 30, 2010. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference. | | | | 10.12 | | Second Amendment to Lease Agreement dated May 15, 2011 between the Registrant and BMR-Gazelle Court LLC, with First Amendment to Lease Agreement included. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 and incorporated herein by reference. | | | | 10.13 | | Registrant’s Amended and Restated 10b5-1 Trading Plan dated September 12, 2013. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference. | | | | 10.14* | | Registrant’s Amended and Restated 2002 Non-Employee Directors’ Stock Option Plan, as amended. - Filed as an exhibit to the Registrant’s Notice of Annual Meeting and Proxy Statement, for the 2014 Annual Meeting of Stockholders, filed with the SEC on April 25, 2014, and incorporated herein by reference. | | | | 10.15* | | Registrant’s Form of 2002 Non-Employee Directors’ Stock Option Agreement. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. |
10.16* | | Form of Restricted Stock Unit Agreement for Restricted Stock Units granted under the Ionis Pharmaceuticals, Inc. Amended and Restated 2002 Non-Employee Directors’ Stock Option Plan. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and incorporated herein by reference. | | | | 10.17* | | Amended and Restated Severance Agreement dated December 3, 2008 between the Registrant and Stanley T. Crooke. - Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed December 5, 2008 and incorporated herein by reference. | | | | 10.18* | | Amended and Restated Severance Agreement dated December 3, 2008 between the Registrant and B. Lynne Parshall. - Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed December 5, 2008 and incorporated herein by reference. | | | | 10.19* | | Ionis Pharmaceuticals, Inc. 2011 Equity Incentive Plan - Filed as an exhibit to the Registrant’s Notice of 2011 Annual Meeting of Stockholders and Proxy Statement filed with the SEC on April 28, 2011, and incorporated herein by reference. | | | | 10.20* | | Form of Option Agreement under the 2011 Equity Incentive Plan. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference. | | | | 10.21* | | Form of Restricted Stock Unit Agreement for Restricted Stock Units granted under the 2011 Equity Incentive Plan. - Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 filed with the SEC on August 8, 2011, and incorporated herein by reference. | | | | 10.22 | | Second Amendment to Lease Agreement between the Registrant and BMR-2282 Faraday Avenue LLC dated March 30, 2010. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference. | | | | 10.23* | | Form of Option Agreement under the 1989 Stock Option Plan. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference. | | | | 10.24* | | Form of Option Agreement for Options Granted after March 8, 2005 under the 2002 Non-Employee Director’s Stock Option Plan. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference. | | | |
10.25 | | Research, Development and License Agreement between the Registrant and Glaxo Group Limited dated March 30, 2010. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference. | | | | 10.26 | | Lease Agreement dated September 6, 2005 between the Registrant and BMR-2282 Faraday Avenue LLC. - Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference. | | | | 10.27 | | Stock Purchase Agreement dated December 17, 2008, among the Registrant, Ibis Biosciences, Inc. and Abbott Molecular Inc. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference. | | | | 10.28 | | Research Agreement dated August 10, 2011 between the Registrant and CHDI Foundation, Inc. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and incorporated herein by reference. | | | | 10.29 | | Amendment No. 1 to Amended and Restated License Agreement between the Registrant and OncoGenex Technologies Inc. dated December 18, 2009. - Filed as an exhibit to the Registrant’s Annual Report as Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. | | | | 10.30 | | Development, Option and License Agreement between the Registrant and Biogen Idec International Holding Ltd. dated January 3, 2012. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference. | | | | 10.31 | | DMPK Research, Development, Option and License Agreement between the Registrant and Biogen Idec MA Inc. dated June 27, 2012. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and incorporated herein by reference. | | | | 10.32 | | Amendment #2 to Research, Development and License Agreement between the Registrant and Glaxo Group Limited dated October 30, 2012. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 and incorporated herein by reference. | | | | 10.33 | | Collaboration, License and Development Agreement between the Registrant and AstraZeneca AB dated December 7, 2012. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 and incorporated herein by reference. |
10.34 | | Neurology Drug Discovery and Development Collaboration, Option and License Agreement between the Registrant and Biogen Idec MA Inc. dated December 10, 2012. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 and incorporated herein by reference. | | | | 10.35 | | HTT Research, Development, Option and License Agreement among the Registrant, F. Hoffmann-La Roche Ltd and Hoffman-La Roche Inc. dated April 8, 2013. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and incorporated herein by reference. | | | | 10.36 | | Letter Agreement between the Registrant and CHDI Foundation, Inc. dated April 8, 2013. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and incorporated herein by reference. | | | | 10.37 | | Strategic Neurology Drug Discovery and Development Collaboration, Option and License Agreement between the Registrant and Biogen Idec MA Inc. dated September 5, 2013. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference. | | | | 10.38 | | Amendment #1 to Collaboration, License and Development Agreement between the Registrant and AstraZeneca AB dated August 13, 2013. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference. | | | |
10.39 | | Letter Agreement Amendment between the Registrant and Biogen Idec International Holding Ltd dated January 27, 2014. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and incorporated herein by reference. | | | | 10.40 | | Amendment No. 3 to the Research, Development and License Agreement between the Registrant and Glaxo Group Limited dated July 10, 2013. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference. | | | | 10.41 | | Amendment #4 to the Research, Development and License Agreement between the Registrant and Glaxo Group Limited dated April 10, 2014. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference. | | | | 10.42 | | Amendment #5 to the Research, Development and License Agreement among the Registrant, Glaxo Group Limited and GlaxoSmithKline Intellectual Property Development Limited dated June 27, 2014. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference. | | | | 10.43 | | Exclusive License Agreement between the Registrant and the University of Massachusetts dated January 14, 2010. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. | | | | 10.44 | | Amended and Restated Collaboration and License Agreement between the Registrant and Cold Spring Harbor Laboratory dated October 26, 2011. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. | | | | 10.45 | | Amendment to Amended and Restated Collaboration and License Agreement between the Registrant and Cold Spring Harbor Laboratory dated March 14, 2014. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. | | | | 10.46 | | Amendment #1 to the Development, Option and License Agreement between the Registrant and Biogen Idec International Holding Ltd. dated December 15, 2014. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. | | | | 10.47 | | Research Collaboration, Option and License Agreement between the Registrant and Janssen Biotech Inc. dated December 22, 2014. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. | | | | 10.48 | | Amendment No.2 to the Collaboration, License and Development Agreement between the Registrant and AstraZeneca AB dated October 15, 2014. Portions of this exhibit have been omitted and separately filed with the SEC with a request for confidential treatment. - Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. | | | | 10.49 | | Strategic Collaboration Agreement between the Registrant and AstraZeneca AB dated July 31, 2015. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference. | | | | 10.50 | | Amendment #6 to Research, Development and License Agreement between the Registrant, Glaxo Group Limited and GlaxoSmithKline Intellectual Property Development Limited dated September 2, 2015. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference. | | | | 10.51 | | Amendment Number One to the Second Amended and Restated Strategic Collaboration and License Agreement between the Registrant and Alnylam Pharmaceuticals, Inc. dated July 13, 2015. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference. | | | |
10.52 | | License Agreement between the Registrant and Bayer Pharma AG dated May 1, 2015. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and incorporated herein by reference. |
10.53 | | Line of Credit Agreement between the Registrant and Morgan Stanley Private Bank, National Association dated June 16, 2015. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and incorporated herein by reference. | | | | 10.54 | | Second Amended and Restated Strategic Collaboration and License Agreement between the Registrant and Alnylam Pharmaceuticals, Inc. dated January 8, 2015. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference. | | | | 10.55 | | Amendment #1 to HTT Research, Development, Option and License Agreement between the Registrant, F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. dated January 9, 2015. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference. | | | | 10.56 | | Amendment No.1 to Loan Documents between the Registrant and Morgan Stanley Private Bank, National Association dated December 30, 2015. - Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed January 5, 2016 and incorporated herein by reference.
| 10.57 | | Amendment No.2 to Line of Credit Agreement between the Registrant and Morgan Stanley Private Bank, National Association dated February 24, 2016. Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference. | | | | 10.58 | | Amendment No.3 to the Collaboration, License and Development Agreement between the Registrant and AstraZeneca AB dated January 18, 2016. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and incorporated herein by reference. | | | | 10.59 | | Amendment #7 to the Research, Development and License Agreement among the Registrant, Glaxo Group Limited and GlaxoSmithKline Intellectual Property Development Limited dated March 4, 2016. Portions of this exhibit have been omitted and separately filed with the SEC. - Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and incorporated herein by reference. | | | | 10.60 | | First Amendment to Research Collaboration, Option and License Agreement between the Registrant and Janssen Biotech Inc. dated December 21, 2016. Portions of this exhibit have been omitted and separately filed with the SEC. | | | | 10.61 | | Letter Agreement between the Registrant and Biogen MA Inc. dated October 28, 2016. Portions of this exhibit have been omitted and separately filed with the SEC. Portions of this exhibit have been omitted and separately filed with the SEC. | | | | 14.1 | | Registrant’s Code of Ethics and Business Conduct. | | | | 21.1 | | List of Subsidiaries for the Registrant. | | | | 23.1 | | Consent of Independent Registered Public Accounting Firm. | | | | 24.1 | | Power of Attorney - Filed as part of the Annual Report on Form 10-K for the year ended December 31, 2013, and incorporated herein by reference. | | | | 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 Officer 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 Ionis Pharmaceuticals, Inc. Annual Report on Form 10-K for the year ended December 31, 2016, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of stockholders’ equity, (iv) consolidated statements of cash flows, and (v) notes to consolidated financial statements (detail tagged). | * | | Indicates management compensatory plans and arrangements as required to be filed as exhibits to this Report pursuant to Item 14(c).
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IONIS PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | Page | Report of Independent Registered Public Accounting Firm | F-2 | Consolidated Balance Sheets at December 31, 20162018 and 20152017 (as revised) | F-3 | Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 2015 and 2014(as revised) | F-4 | Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 2017 and 2016 2015 and 2014(as revised) | F-5 | Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 2015 and 2014(as revised) | F-6 | Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 2015 and 2014(as revised) | F-7 | Notes to Consolidated Financial Statements | F-9 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The To the Stockholders and Board of Directors and Stockholders of Ionis Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ionis Pharmaceuticals, Inc. (the Company) as of December 31, 20162018 and 2015, and2017, the related consolidated statements of operations, comprehensive loss,income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. These2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09, Revenue Recognition As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue for all years presented, 2016 through 2018, due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ionis Pharmaceuticals, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
We also have audited, in accordance withserved as the standards of the Public Company Accounting Oversight Board (United States), Ionis Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2017 expressed an unqualified opinion thereon.Company’s auditor since 1989
San Diego, California March 1, 20172019
IONIS PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
| | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | ASSETS | | | | | | | | | | | (as revised*) | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 84,685 | | | $ | 128,797 | | | $ | 278,820 | | | $ | 129,630 | | Short-term investments | | | 580,538 | | | | 650,386 | | | | 1,805,252 | | | | 893,085 | | Contracts receivable | | | 108,043 | | | | 11,356 | | | | 12,759 | | | | 62,955 | | Inventories | | | 7,489 | | | | 6,899 | | | | 8,582 | | | | 9,982 | | Investment in Regulus Therapeutics Inc. | | | 2,414 | | | | 24,792 | | | Other current assets | | | 14,763 | | | | 14,773 | | | | 102,473 | | | | 73,082 | | Total current assets | | | 797,932 | | | | 837,003 | | | | 2,207,886 | | | | 1,168,734 | | Property, plant and equipment, net | | | 92,845 | | | | 90,233 | | | | 132,160 | | | | 121,907 | | Patents, net | | | 20,365 | | | | 19,316 | | | | 24,032 | | | | 22,004 | | Long-term deferred tax assets | | | | 290,796 | | | | — | | Deposits and other assets | | | 1,325 | | | | 1,348 | | | | 12,910 | | | | 10,129 | | Total assets | | $ | 912,467 | | | $ | 947,900 | | | $ | 2,667,784 | | | $ | 1,322,774 | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Accounts payable | | $ | 21,120 | | | $ | 28,355 | | | $ | 28,660 | | | $ | 24,886 | | Accrued compensation | | | 24,186 | | | | 16,065 | | | | 29,268 | | | | 25,151 | | Accrued liabilities | | | 36,013 | | | | 28,105 | | | | 48,361 | | | | 66,618 | | Current portion of long-term obligations | | | 1,185 | | | | 9,029 | | | | 13,749 | | | | 1,621 | | Current portion of deferred contract revenue | | | 51,280 | | | | 67,322 | | | | 160,256 | | | | 125,336 | | Total current liabilities | | | 133,784 | | | | 148,876 | | | | 280,294 | | | | 243,612 | | Long-term deferred contract revenue | | | 91,198 | | | | 134,306 | | | | 567,359 | | | | 108,026 | | 1 percent convertible senior notes | | | 500,511 | | | | 339,847 | | | | 568,215 | | | | 533,111 | | 2¾ percent convertible senior notes | | | 124 | | | | 49,523 | | | Long-term obligations, less current portion | | | 14,926 | | | | 2,341 | | | | 4,914 | | | | 12,974 | | Long-term financing liability for leased facility | | | 72,359 | | | | 72,217 | | | Long-term mortgage debt | | | | 59,842 | | | | 59,771 | | Total liabilities | | | 812,902 | | | | 747,110 | | | | 1,480,624 | | | | 957,494 | | Stockholders’ equity: | | | | | | | | | | | | | | | | | Common stock, $0.001 par value; 300,000,000 shares authorized, 121,636,273 and 120,351,480 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | | | 122 | | | | 120 | | | Common stock, $0.001 par value; 300,000,000 shares authorized, 137,928,828 and 124,976,373 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively | | | | 138 | | | | 125 | | Additional paid-in capital | | | 1,311,229 | | | | 1,309,107 | | | | 2,047,250 | | | | 1,553,681 | | Accumulated other comprehensive income (loss) | | | (30,358 | ) | | | (13,565 | ) | | Accumulated other comprehensive loss | | | | (32,016 | ) | | | (31,759 | ) | Accumulated deficit | | | (1,181,428 | ) | | | (1,094,872 | ) | | | (967,293 | ) | | | (1,241,034 | ) | Total Ionis stockholders’ equity | | | | 1,048,079 | | | | 281,013 | | Noncontrolling interest in Akcea Therapeutics, Inc. | | | | 139,081 | | | | 84,267 | | Total stockholders’ equity | | | 99,565 | | | | 200,790 | | | | 1,187,160 | | | | 365,280 | | Total liabilities and stockholders’ equity | | $ | 912,467 | | | $ | 947,900 | | | $ | 2,667,784 | | | $ | 1,322,774 | |
* | Our 2017 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 1, Organization and Significant Accounting Policies, for further information. |
See accompanying notes.
IONIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except for per share amounts)
| | Years Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | Revenue: | | | | | | | | | | Research and development revenue under collaborative agreements | | $ | 325,898 | | | $ | 281,360 | | | $ | 202,514 | | Licensing and royalty revenue | | | 20,722 | | | | 2,343 | | | | 11,647 | | Total revenue | | | 346,620 | | | | 283,703 | | | | 214,161 | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | Research, development and patent expenses | | | 344,320 | | | | 322,292 | | | | 241,751 | | General and administrative | | | 48,616 | | | | 37,173 | | | | 20,140 | | Total operating expenses | | | 392,936 | | | | 359,465 | | | | 261,891 | | | | | | | | | | | | | | | Loss from operations | | | (46,316 | ) | | | (75,762 | ) | | | (47,730 | ) | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | Investment income | | | 5,416 | | | | 4,302 | | | | 2,682 | | Interest expense | | | (38,795 | ) | | | (36,732 | ) | | | (22,209 | ) | Gain on investments, net | | | 56 | | | | 75 | | | | 1,256 | | Gain on investment in Regulus Therapeutics Inc. | | | — | | | | 20,211 | | | | 19,902 | | Loss on early retirement of debt | | | (3,983 | ) | | | — | | | | (8,292 | ) | | | | | | | | | | | | | | Loss before income tax (expense) benefit | | | (83,622 | ) | | | (87,906 | ) | | | (54,391 | ) | | | | | | | | | | | | | | Income tax (expense) benefit | | | (2,934 | ) | | | (372 | ) | | | 15,407 | | | | | | | | | | | | | | | Net loss | | $ | (86,556 | ) | | $ | (88,278 | ) | | $ | (38,984 | ) | | | | | | | | | | | | | | Basic and diluted net loss per share | | $ | (0.72 | ) | | $ | (0.74 | ) | | $ | (0.33 | ) | Shares used in computing basic and diluted net loss per share | | | 120,933 | | | | 119,719 | | | | 117,691 | |
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | Revenue: | | | | | (as revised*) | | Commercial revenue: | | | | | | | | | | SPINRAZA royalties | | $ | 237,930 | | | $ | 112,540 | | | $ | 883 | | TEGSEDI product sales, net | | | 2,237 | | | | — | | | | — | | Licensing and other royalty revenue | | | 14,755 | | | | 7,474 | | | | 21,884 | | Total commercial revenue | | | 254,922 | | | | 120,014 | | | | 22,767 | | Research and development revenue under collaborative agreements | | | 344,752 | | | | 394,165 | | | | 350,009 | | Total revenue | | | 599,674 | | | | 514,179 | | | | 372,776 | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | Cost of products sold | | | 1,820 | | | | — | | | | — | | Research, development and patent | | | 414,604 | | | | 374,644 | | | | 344,320 | | Selling, general and administrative | | | 244,622 | | | | 108,488 | | | | 48,616 | | Total operating expenses | | | 661,046 | | | | 483,132 | | | | 392,936 | | | | | | | | | | | | | | | Income (loss) from operations | | | (61,372 | ) | | | 31,047 | | | | (20,160 | ) | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | Investment income | | | 30,187 | | | | 8,179 | | | | 5,472 | | Interest expense | | | (44,789 | ) | | | (44,752 | ) | | | (38,795 | ) | Loss on extinguishment of financing liability for leased facility | | | — | | | | (7,689 | ) | | | — | | Loss on early retirement of debt | | | — | | | | — | | | | (3,983 | ) | Other expenses | | | (182 | ) | | | (3,548 | ) | | | — | | | | | | | | | | | | | | | Loss before income tax benefit (expense) | | | (76,156 | ) | | | (16,763 | ) | | | (57,466 | ) | | | | | | | | | | | | | | Income tax benefit (expense) | | | 291,141 | | | | 5,980 | | | | (2,934 | ) | | | | | | | | | | | | | | Net income (loss) | | | 214,985 | | | | (10,783 | ) | | | (60,400 | ) | | | | | | | | | | | | | | Net loss attributable to noncontrolling interest in Akcea Therapeutics, Inc. | | | 58,756 | | | | 11,129 | | | | — | | | | | | | | | | | | | | | Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders | | $ | 273,741 | | | $ | 346 | | | $ | (60,400 | ) | Basic net income (loss) per share | | $ | 2.09 | | | $ | 0.15 | | | $ | (0.50 | ) | Shares used in computing basic net income (loss) per share | | | 132,320 | | | | 124,016 | | | | 120,933 | | Diluted net income (loss) per share | | $ | 2.07 | | | $ | 0.15 | | | $ | (0.50 | ) | Shares used in computing diluted net income (loss) per share | | | 134,056 | | | | 126,098 | | | | 120,933 | |
* | Our 2017 and 2016 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 1, Organization and Significant Accounting Policies, for further information. |
See accompanying notes.
IONIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS) (In thousands)
| | Years Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | Net loss | | $ | (86,556 | ) | | $ | (88,278 | ) | | $ | (38,984 | ) | Unrealized (losses) gains on investments, net of tax | | | (17,219 | ) | | | (33,101 | ) | | | 40,079 | | Reclassification adjustment for realized gains (losses) included in net loss | | | 447 | | | | (20,211 | ) | | | (21,412 | ) | Currency translation adjustment | | | (21 | ) | | | — | | | | — | | | | | | | | | | | | | | | Comprehensive loss | | $ | (103,349 | ) | | $ | (141,590 | ) | | $ | (20,317 | ) |
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised*) | | Net income (loss) | | $ | 214,985 | | | $ | (10,783 | ) | | $ | (60,400 | ) | Unrealized losses on investments, net of tax | | | (280 | ) | | | (960 | ) | | | (17,219 | ) | Reclassification adjustment for realized (gains) losses included in net loss | | | — | | | | (374 | ) | | | 447 | | Currency translation adjustment | | | 23 | | | | (67 | ) | | | (21 | ) | | | | | | | | | | | | | | Comprehensive income (loss) | | | 214,728 | | | | (12,184 | ) | | | (77,193 | ) | Comprehensive loss attributable to noncontrolling interest in Akcea Therapeutics, Inc. | | | (58,781 | ) | | | (11,224 | ) | | | — | | Comprehensive income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders | | $ | 273,509 | | | $ | (960 | ) | | $ | (77,193 | ) |
* | Our 2017 and 2016 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 1, Organization and Significant Accounting Policies, for further information. |
See accompanying notes.
IONIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS’ EQUITY Years Ended December 31, 2018, 2017 (*as revised) and 2016 2015 and 2014(*as revised) (In thousands)
| | Common Stock | | | | | | | | | | | | | | | Common Stock | | | Additional Paid in | | | Accumulated Other Comprehensive | | | Accumulated | | | Total Ionis Stockholders’ | | | Noncontrolling Interest in Akcea | | | Total Stockholders’ | | Description | | Shares | | | Amount | | | Additional Paid In Capital | | | Accumulated Other Comprehensive Income (Loss) | | | Accumulated Deficit | | | Total Stockholders’ Equity | | | Shares | | | Amount | | | Capital | | | Loss | | | Deficit | | | Equity | | | Therapeutics, Inc. | | | Equity | | Balance at December 31, 2013 | | | 116,471 | | | $ | 116 | | | $ | 1,324,804 | | | $ | 21,080 | | | $ | (967,610 | ) | | $ | 378,390 | | | Net loss | | | — | | | | — | | | | — | | | | — | | | | (38,984 | ) | | | (38,984 | ) | | Change in unrealized gains (losses), net of tax | | | — | | | | — | | | | — | | | | 18,667 | | | | — | | | | 18,667 | | | Issuance of common stock in connection with employee stock plans | | | 1,972 | | | | 2 | | | | 23,071 | | | | — | | | | — | | | | 23,073 | | | 2¾ percent convertible senior notes redemption, equity portion | | | — | | | | — | | | | (326,444 | ) | | | — | | | | — | | | | (326,444 | ) | | 1 percent convertible senior notes, equity portion, net of issuance costs | | | — | | | | — | | | | 170,232 | | | | — | | | | — | | | | 170,232 | | | Share-based compensation expense | | | — | | | | — | | | | 31,383 | | | | — | | | | — | | | | 31,383 | | | Excess tax benefits from share-based compensation awards | | | — | | | | — | | | | 1,463 | | | | — | | | | — | | | | 1,463 | | | Balance at December 31, 2014 | | | 118,443 | | | $ | 118 | | | $ | 1,224,509 | | | $ | 39,747 | | | $ | (1,006,594 | ) | | $ | 257,780 | | | Net loss | | | — | | | | — | | | | — | | | | — | | | | (88,278 | ) | | | (88,278 | ) | | Change in unrealized gains (losses), net of tax | | | — | | | | — | | | | — | | | | (53,312 | ) | | | — | | | | (53,312 | ) | | Issuance of common stock in connection with employee stock plans | | | 1,908 | | | | 2 | | | | 24,888 | | | | — | | | | — | | | | 24,890 | | | Share-based compensation expense | | | — | | | | — | | | | 59,314 | | | | — | | | | — | | | | 59,314 | | | Excess tax benefits from share-based compensation awards | | | — | | | | — | | | | 396 | | | | — | | | | — | | | | 396 | | | Balance at December 31, 2015 | | | 120,351 | | | $ | 120 | | | $ | 1,309,107 | | | $ | (13,565 | ) | | $ | (1,094,872 | ) | | $ | 200,790 | | | | 120,351 | | | $ | 120 | | | $ | 1,309,107 | | | $ | (13,565 | ) | | $ | (1,094,872 | ) | | $ | 200,790 | | | $ | — | | | $ | 200,790 | | Cumulative adjustment related to adopting Topic 606 revenue recognition guidance | | | | — | | | | — | | | | — | | | | — | | | | (86,108 | ) | | | (86,108 | ) | | | — | | | | (86,108 | ) | Net loss | | | — | | | | — | | | | — | | | | — | | | | (86,556 | ) | | | (86,556 | ) | | | — | | | | — | | | | — | | | | — | | | | (60,400 | ) | | | (60,400 | ) | | | — | | | | (60,400 | ) | Change in unrealized gains (losses), net of tax | | | — | | | | — | | | | — | | | | (16,772 | ) | | | — | | | | (16,772 | ) | | | — | | | | — | | | | — | | | | (16,772 | ) | | | — | | | | (16,772 | ) | | | — | | | | (16,772 | ) | Foreign currency translation | | | — | | | | — | | | | — | | | | (21 | ) | | | — | | | | (21 | ) | | | — | | | | — | | | | — | | | | (21 | ) | | | — | | | | (21 | ) | | | — | | | | (21 | ) | Issuance of common stock in connection with employee stock plans | | | 1,285 | | | | 2 | | | | 13,706 | | | | — | | | | — | | | | 13,708 | | | | 1,285 | | | | 2 | | | | 13,706 | | | | — | | | | — | | | | 13,708 | | | | — | | | | 13,708 | | 2¾ percent convertible senior notes redemption, equity portion | | | — | | | | — | | | | (128,888 | ) | | | — | | | | — | | | | (128,888 | ) | | | — | | | | — | | | | (128,888 | ) | | | — | | | | — | | | | (128,888 | ) | | | — | | | | (128,888 | ) | 1 percent convertible senior notes, equity portion, net of issuance costs | | | — | | | | — | | | | 43,335 | | | | — | | | | — | | | | 43,335 | | | | — | | | | — | | | | 43,335 | | | | — | | | | — | | | | 43,335 | | | | — | | | | 43,335 | | Stock-based compensation expense | | | | — | | | | — | | | | 72,108 | | | | — | | | | — | | | | 72,108 | | | | — | | | | 72,108 | | Excess tax benefits from stock-based compensation awards | | | | — | | | | — | | | | 1,861 | | | | — | | | | — | | | | 1,861 | | | | — | | | | 1,861 | | Balance at December 31, 2016 | | | | 121,636 | | | $ | 122 | | | $ | 1,311,229 | | | $ | (30,358 | ) | | $ | (1,241,380 | ) | | $ | 39,613 | | | $ | — | | | $ | 39,613 | | Net income | | | | — | | | | — | | | | — | | | | — | | | | 346 | | | | 346 | | | | — | | | | 346 | | Change in unrealized gains (losses), net of tax | | | | — | | | | — | | | | — | | | | (1,334 | ) | | | — | | | | (1,334 | ) | | | — | | | | (1,334 | ) | Foreign currency translation | | | | — | | | | — | | | | — | | | | (67 | ) | | | — | | | | (67 | ) | | | — | | | | (67 | ) | Novartis stock purchase | | | | 1,631 | | | | 2 | | | | 71,737 | | | | — | | | | — | | | | 71,739 | | | | — | | | | 71,739 | | Issuance of common stock in connection with employee stock plans | | | | 1,709 | | | | 1 | | | | 22,931 | | | | — | | | | — | | | | 22,932 | | | | — | | | | 22,932 | | Stock-based compensation expense | | | | — | | | | — | | | | 85,975 | | | | — | | | | — | | | | 85,975 | | | | — | | | | 85,975 | | Issuance of Akcea Therapeutics, Inc. common stock in conjunction with initial public offering | | | | — | | | | — | | | | 157,270 | | | | — | | | | — | | | | 157,270 | | | | — | | | | 157,270 | | Noncontrolling interest in Akcea Therapeutics, Inc. in conjunction with initial public offering | | | | — | | | | — | | | | (90,351 | ) | | | — | | | | — | | | | (90,351 | ) | | | 90,381 | | | | 30 | | Noncontrolling interest in Akcea Therapeutics, Inc. | | | | — | | | | — | | | | (5,110 | ) | | | — | | | | — | | | | (5,110 | ) | | | (6,114 | ) | | | (11,224 | ) | Balance at December 31, 2017 | | | | 124,976 | | | $ | 125 | | | $ | 1,553,681 | | | $ | (31,759 | ) | | $ | (1,241,034 | ) | | $ | 281,013 | | | $ | 84,267 | | | $ | 365,280 | | Net income | | | | — | | | | — | | | | — | | | | — | | | | 273,741 | | | | 273,741 | | | | — | | | | 273,741 | | Change in unrealized gains (losses), net of tax | | | | — | | | | — | | | | — | | | | (280 | ) | | | — | | | | (280 | ) | | | — | | | | (280 | ) | Foreign currency translation | | | | — | | | | — | | | | — | | | | 23 | | | | — | | | | 23 | | | | — | | | | 23 | | Biogen stock purchase | | | | 11,502 | | | | 11 | | | | 447,954 | | | | — | | | | — | | | | 447,965 | | | | — | | | | 447,965 | | Issuance of common stock in connection with employee stock plans | | | | 1,451 | | | | 2 | | | | 27,898 | | | | — | | | | — | | | | 27,900 | | | | — | | | | 27,900 | | Share-based compensation expense | | | — | | | | — | | | | 72,108 | | | | — | | | | — | | | | 72,108 | | | | — | | | | — | | | | 131,312 | | | | — | | | | — | | | | 131,312 | | | | — | | | | 131,312 | | Excess tax benefits from share-based compensation awards | | | — | | | | — | | | | 1,861 | | | | — | | | | — | | | | 1,861 | | | Balance at December 31, 2016 | | | 121,636 | | | | 122 | | | | 1,311,229 | | | | (30,358 | ) | | | (1,181,428 | ) | | | 99,565 | | | Noncontrolling interest in Akcea Therapeutics, Inc. | | | | — | | | | — | | | | (113,595 | ) | | | — | | | | — | | | | (113,595 | ) | | | 54,814 | | | | (58,781 | ) | Balance at December 31, 2018 | | | | 137,929 | | | $ | 138 | | | $ | 2,047,250 | | | $ | (32,016 | ) | | $ | (967,293 | ) | | $ | 1,048,079 | | | $ | 139,081 | | | $ | 1,187,160 | |
* | Our 2017 and 2016 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 1, Organization and Significant Accounting Policies, for further information. |
See accompanying notes.
IONIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
| | | Years Ended December 31, | | | | Years Ended December 31, | | | 2018 | | | 2017 | | | 2016 | | | | 2016 | | | 2015 | | | 2014 | | | | | | (as revised*) | | Operating activities: | | | | | | | | | | | | | | | | | | | Net loss | | $ | (86,556 | ) | | $ | (88,278 | ) | | $ | (38,984 | ) | | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | Net income (loss) | | | $ | 214,985 | | | $ | (10,783 | ) | | $ | (60,400 | ) | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | Depreciation | | | 7,481 | | | | 6,984 | | | | 6,380 | | | | 10,706 | | | | 6,708 | | | | 7,481 | | Amortization of patents | | | 1,552 | | | | 1,381 | | | | 1,142 | | | | 1,822 | | | | 1,641 | | | | 1,552 | | Amortization of licenses | | | — | | | | 1,873 | | | | 1,882 | | | Amortization of premium on investments, net | | | 6,813 | | | | 7,812 | | | | 7,470 | | | Amortization of premium (discount) on investments, net | | | | (1,013 | ) | | | 6,752 | | | | 6,813 | | Amortization of debt issuance costs | | | 1,225 | | | | 1,133 | | | | 595 | | | | 1,810 | | | | 1,616 | | | | 1,225 | | Amortization of 2¾ convertible senior notes discount | | | 2,564 | | | | 2,347 | | | | 6,723 | | | Amortization of 1 percent convertible senior notes discount | | | 21,326 | | | | 19,728 | | | | 2,256 | | | Amortization of convertible senior notes discount | | | | 33,363 | | | | 30,920 | | | | 23,890 | | Amortization of long-term financing liability for leased facility | | | 6,693 | | | | 6,665 | | | | 6,622 | | | | — | | | | 3,659 | | | | 6,693 | | Share-based compensation expense | | | 72,108 | | | | 59,314 | | | | 31,383 | | | Stock-based compensation expense | | | | 131,312 | | | | 85,975 | | | | 72,108 | | Gain on investment in Regulus Therapeutics Inc. | | | — | | | | (20,211 | ) | | | (19,902 | ) | | | — | | | | (374 | ) | | | — | | Loss on extinguishment of financing liability for leased facility | | | | — | | | | 7,689 | | | | — | | Loss on early retirement of debt | | | 3,983 | | | | — | | | | 8,292 | | | | — | | | | — | | | | 3,983 | | Gain on investments, net | | | (56 | ) | | | (75 | ) | | | (1,256 | ) | | Non-cash losses related to patents, licensing and property, plant and equipment | | | 2,297 | | | | 1,881 | | | | 1,305 | | | Tax benefit from other unrealized gains on securities | | | — | | | | — | | | | (12,835 | ) | | Deferred income taxes (including benefit from valuation allowance release) | | | | (290,516 | ) | | | — | | | | — | | Non-cash losses related to patents, licensing, property, plant and equipment and strategic investments | | | | 1,012 | | | | 3,302 | | | | 2,297 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Contracts receivable | | | (96,687 | ) | | | (7,453 | ) | | | 7,199 | | | | 47,595 | | | | 45,088 | | | | (96,687 | ) | Inventories | | | (590 | ) | | | (609 | ) | | | 1,743 | | | | 1,400 | | | | (2,493 | ) | | | (590 | ) | Other current and long-term assets | | | 1,659 | | | | (4,319 | ) | | | (1,750 | ) | | | (29,348 | ) | | | (58,367 | ) | | | 1,603 | | Long-term income tax receivable | | | | (223 | ) | | | (9,114 | ) | | | — | | Accounts payable | | | (10,677 | ) | | | 9,211 | | | | 4,824 | | | | (655 | ) | | | 1,784 | | | | (10,677 | ) | Income taxes | | | 1,069 | | | | — | | | | (4,034 | ) | | | (710 | ) | | | 435 | | | | 1,069 | | Accrued compensation | | | 8,121 | | | | 3,763 | | | | 134 | | | | 4,117 | | | | 965 | | | | 8,121 | | Deferred rent | | | 125 | | | | 205 | | | | 153 | | | Accrued liabilities | | | 4,595 | | | | (2,345 | ) | | | 8,358 | | | Accrued liabilities and deferred rent | | | | (17,023 | ) | | | 28,564 | | | | 4,720 | | Deferred contract revenue | | | (59,150 | ) | | | 22,118 | | | | (11,415 | ) | | | 494,254 | | | | 30,182 | | | | (85,306 | ) | Net cash provided by (used in) operating activities | | | (112,105 | ) | | | 21,125 | | | | 6,285 | | | | 602,888 | | | | 174,149 | | | | (112,105 | ) | Investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Purchases of short-term investments | | | (300,912 | ) | | | (493,467 | ) | | | (391,883 | ) | | | (1,794,735 | ) | | | (877,810 | ) | | | (300,912 | ) | Proceeds from the sale of short-term investments | | | 364,572 | | | | 419,584 | | | | 294,727 | | | | 882,824 | | | | 557,369 | | | | 364,572 | | Purchases of property, plant and equipment | | | (7,107 | ) | | | (7,692 | ) | | | (7,518 | ) | | | (13,608 | ) | | | (34,764 | ) | | | (7,107 | ) | Acquisition of licenses and other assets, net | | | (4,421 | ) | | | (4,056 | ) | | | (3,586 | ) | | | (4,044 | ) | | | (3,093 | ) | | | (4,421 | ) | Purchase of strategic investments | | | | — | | | | (2,500 | ) | | | — | | Proceeds from the sale of Regulus Therapeutics, Inc. | | | 4,467 | | | | 25,527 | | | | 22,949 | | | | — | | | | 2,507 | | | | 4,467 | | Proceeds from the sale of strategic investments | | | — | | | | 52 | | | | 2,463 | | | Net cash provided by (used in) investing activities | | | 56,599 | | | | (60,052 | ) | | | (82,848 | ) | | Net cash (used in) provided by investing activities | | | | (929,563 | ) | | | (358,291 | ) | | | 56,599 | | Financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from equity, net | | | 12,599 | | | | 24,888 | | | | 23,071 | | | | 27,900 | | | | 22,931 | | | | 13,417 | | Proceeds from issuance of 1 percent convertible senior notes, net of issuance costs | | | — | | | | — | | | | 487,035 | | | Repurchase of $140 million of the principal amount of the 2¾ percent convertible senior notes | | | — | | | | — | | | | (441,394 | ) | | Proceeds from issuance of common stock in Akcea Therapeutics, Inc. from its initial public offering, net of underwriters’ discount | | | | — | | | | 110,438 | | | | — | | Proceeds from building mortgage debt, net of issuance costs | | | | — | | | | 59,750 | | | | — | | Proceeds from the issuance of common stock to Biogen | | | | 447,965 | | | | — | | | | — | | Proceeds from the issuance of common stock to Novartis | | | | — | | | | 71,737 | | | | — | | Proceeds from borrowing on line of credit facility | | | 4,000 | | | | 8,500 | | | | — | | | | — | | | | — | | | | 4,000 | | Excess tax benefits from share-based compensation awards | | | 1,861 | | | | 396 | | | | 1,463 | | | Proceeds from the sale of Akcea Therapeutics, Inc. common stock to Novartis in a private placement | | | | — | | | | 50,000 | | | | — | | Offering costs paid | | | | — | | | | (2,037 | ) | | | (818 | ) | Payment to settle financing liability for leased facility | | | | — | | | | (80,133 | ) | | | — | | Excess tax benefits from stock-based compensation awards | | | | — | | | | — | | | | 1,861 | | Principal payments on debt and capital lease obligations | | | (7,066 | ) | | | (9,058 | ) | | | (10,587 | ) | | | — | | | | (3,599 | ) | | | (7,066 | ) | Net cash provided by financing activities | | | 11,394 | | | | 24,726 | | | | 59,588 | | | | 475,865 | | | | 229,087 | | | | 11,394 | | Net decrease in cash and cash equivalents | | | (44,112 | ) | | | (14,201 | ) | | | (16,975 | ) | | Net increase (decrease) in cash and cash equivalents | | | | 149,190 | | | | 44,945 | | | | (44,112 | ) | Cash and cash equivalents at beginning of year | | | 128,797 | | | | 142,998 | | | | 159,973 | | | | 129,630 | | | | 84,685 | | | | 128,797 | | Cash and cash equivalents at end of year | | $ | 84,685 | | | $ | 128,797 | | | $ | 142,998 | | | $ | 278,820 | | | $ | 129,630 | | | $ | 84,685 | |
IONIS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
| | | Years Ended December 31, | | | | | 2018 | | | 2017 | | | 2016 | | | | | | | | (as revised*) | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | Interest paid | | $ | 7,313 | | | $ | 6,800 | | | $ | 6,353 | | | $ | 9,592 | | | $ | 8,035 | | | $ | 7,313 | | Supplemental disclosures of non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Amounts accrued for capital and patent expenditures | | $ | 3,439 | | | $ | 1,162 | | | $ | 2,151 | | | $ | 4,428 | | | $ | 1,983 | | | $ | 3,439 | | Purchases of property, plant and equipment included in long-term obligations | | | $ | 3,350 | | | $ | — | | | $ | — | | 1 percent convertible senior notes principal issued related to our December 2016 debt exchange | | $ | 185,450 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 185,450 | | 2¾ percent convertible senior notes principal extinguished related to our December 2016 debt exchange | | $ | 61,099 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 61,099 | | Unpaid deferred offering costs | | | $ | — | | | $ | — | | | $ | 291 | |
* | Our 2017 and 2016 amounts are revised to reflect the new revenue recognition accounting guidance, which we adopted retrospectively in the first quarter of 2018. Refer to Note 1, Organization and Significant Accounting Policies, for further information. |
See accompanying notes.
IONIS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Basis of presentationPresentation TheIn our consolidated financial statements includewe included the accounts of Ionis Pharmaceuticals, Inc. ("we"(“we”, "us"“us” or "our"“our”) and the consolidated results of our wholly owned subsidiary,majority-owned affiliate, Akcea Therapeutics, Inc., which we formed in December 20142014. In July 2017, Akcea completed an initial public offering, or IPO, and its whollytherefore beginning in July 2017, we no longer own 100 percent of Akcea. From the closing of Akcea’s IPO in July 2017 through mid-April 2018, we owned subsidiaries,approximately 68 percent of Akcea. In the second, third and fourth quarters of 2018, we received additional shares of Akcea’s stock related to our license of TEGSEDI and AKCEA-TTR-LRx to Akcea, Therapeutics UK Ltd, whichincreasing our ownership percentage to approximately 75 percent. We reflected the increase in our ownership in these financial statements. In the first quarter of 2019, Akcea formedwill pay us a $75 million sublicense fee in August 2016 and Akcea Intl Ltd., which Akcea formedcommon stock, as a result of Novartis’ license of AKCEA-APO(a)-LRx in February 2017.2019. We will receive 2.8 million shares of Akcea common stock for the sublicense fee. Refer to the noncontrolling interest in Akcea section in this note for further information related to our accounting for our investment in Akcea.
Organization and Business Activity We incorporated in California on January 10, 1989. In conjunction with our IPO, we reorganized as a Delaware corporation in April 1991. We were organized principally to develop human therapeutic medicines using antisense technology. In December 2015, we changed our name from Isis Pharmaceuticals, Inc. to Ionis Pharmaceuticals, Inc.
OrganizationBasic and business activity We incorporated in California on January 10, 1989. In conjunction with our initial public offering, we reorganized as a Delaware corporation in April 1991. We were organized principally to develop human therapeutic drugs using antisense technology.Diluted Net Income (Loss) per Share
Basic and diluted net lossincome (loss) per share
We compute basic net lossincome (loss) per share by dividing the total net lossincome (loss) attributable to our common stockholders by theour weighted-average number of common shares outstanding during the period.
The calculation of total net income (loss) attributable to our common stockholders for 2018 and 2017 considered our net income for Ionis on a stand-alone basis plus our share of Akcea’s net loss for the period. During 2016, we owned 100 percent of Akcea. To calculate the portion of Akcea’s net loss attributable to our ownership for 2018 and 2017, we multiplied Akcea’s loss per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income (loss) available to Ionis common stockholders for the calculation of net income (loss) per share is different than net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders in our consolidated statements of operations for 2018 and 2017.
Our basic net income per share for 2018, was calculated as follows (in thousands, except per share amounts):
Year Ended December 31, 2018 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Income (Loss) Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | Common shares | | | 59,812 | | | $ | (2.74 | ) | | $ | (163,938 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (163,938 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 440,806 | | Net income available to Ionis common stockholders | | | | | | | | | | $ | 276,868 | | Weighted average shares outstanding | | | | | | | | | | | 132,320 | | Basic net income per share | | | | | | | | | | $ | 2.09 | |
Prior to Akcea’s IPO in July 2017, we owned Akcea series A convertible preferred stock, which included a six percent cumulative dividend. Upon completion of Akcea’s IPO in July 2017, our preferred stock was converted into common stock on a 1:1 basis. The preferred stock dividend was not paid at the IPO because the IPO was not a liquidation event or a change in control. During 2017, Akcea used a two-class method to compute its net income (loss) per share because it had both common and preferred shares outstanding during the periods. The two-class method required Akcea to calculate its net income (loss) per share for each class of stock by dividing total distributable losses applicable to preferred and common stock, including the six percent cumulative dividend contractually due to series A convertible preferred shareholders, by the weighted-average of preferred and common shares outstanding during the requisite period. Since Akcea used the two-class method, accounting rules required us to include our portion of Akcea’s net income (loss) per share for both Akcea’s common and preferred shares that we owned in our calculation of basic and diluted net income (loss) per share for year ended December 31, 2017.
We calculated our basic net income per share for 2017 as follows (in thousands, except per share amounts):
Year Ended December 31, 2017 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Loss Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | Common shares | | | 20,669 | | | $ | (3.08 | ) | | $ | (63,638 | ) | Preferred shares | | | 15,748 | | | | (1.80 | ) | | | (28,346 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (91,984 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 110,776 | | Net income available to Ionis common stockholders | | | | | | | | | | $ | 18,792 | | Weighted average shares outstanding | | | | | | | | | | | 124,016 | | Basic net income per share | | | | | | | | | | $ | 0.15 | |
Dilutive net income (loss per share)
For 2018 and 2017, we had net income available to Ionis common stockholders. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during those periods.
We calculated our diluted net income per share for 2018 as follows (in thousands except per share amounts):
Year Ended December 31, 2018 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | Net income available to Ionis common stockholders | | $ | 276,868 | | | | 132,320 | | | $ | 2.09 | | Effect of dilutive securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 1,216 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 514 | | | | | | Shares issuable related to our ESPP | | | — | | | | 6 | | | | | | Income available to Ionis common stockholders, plus assumed conversions | | $ | 276,868 | | | | 134,056 | | | $ | 2.07 | |
We calculated our diluted net income per share for 2017 as follows (in thousands except per share amounts):
Year Ended December 31, 2017 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | Net income available to Ionis common stockholders | | $ | 18,792 | | | | 124,016 | | | $ | 0.15 | | Effect of dilutive securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 1,619 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 459 | | | | | | Shares issuable related to our ESPP | | | — | | | | 4 | | | | | | Income available to Ionis common stockholders, plus assumed conversions | | $ | 18,792 | | | | 126,098 | | | $ | 0.15 | |
For 2018 and 2017, the calculation excluded our convertible notes because the effect on diluted earnings per share was anti-dilutive.
For 2016, we incurred a net loss for 2016, 2015 and 2014,loss; therefore, we did not include dilutive common equivalent shares in the computation of diluted net loss per share because the effect would have been anti-dilutive. Common stock from the following would have had an anti-dilutive effect on net loss per share:
| ● | 1 percent convertible senior notes;
|
| ● | 2¾ percent convertible senior notes; |
| ● | Dilutive stock options; |
| ● | Unvested restricted stock units; and |
| ● | Employee Stock Purchase Plan, or ESPP. |
Revenue Recognition
Adoption of New Revenue Recognition Accounting Standard (Topic 606)
In May 2014, the FASB issued accounting guidance on the recognition of revenue from customers. This guidance supersedes the revenue recognition requirements we previously followed in Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, or Topic 605, and created a new Topic 606, Revenue from Contracts with Customers, or Topic 606. Under Topic 606, an entity will recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects what the entity expects to receive in exchange for the goods or services. Further, an entity will recognize revenue upon satisfying the performance obligation(s) under the related contract. We adopted Topic 606 on January 1, 2018 under the full retrospective approach, which required us to revise our prior period revenue. Under Topic 606, we were required to review all of our ongoing collaboration agreements in which we recognized revenue after January 1, 2016. We were required to assess what our revenue would have been for the period from January 1, 2016 to December 31, 2017 under Topic 606. As a result of this analysis, we determined that the cumulative revenue we would have recognized under Topic 606 decreased by $86.1 million. We recorded this amount as a cumulative adjustment to our accumulated deficit as of January 1, 2016 on our revised statement of stockholders’ equity. We have labeled our prior period financial statements “as revised” to indicate the change required under the accounting rules.
The following tables summarize the adjustments we were required to make to amounts we originally reported in 2017 and 2016 to adopt Topic 606 (in thousands, except per share amounts):
Consolidated Balance Sheet
| | At December 31, 2017 | | | | As Previously Reported under Topic 605 | | | Topic 606 Adjustment | | | As Revised | | Current portion of deferred contract revenue | | $ | 106,465 | | | $ | 18,871 | | | $ | 125,336 | | Long-term portion of deferred contract revenue | | $ | 72,708 | | | $ | 35,318 | | | $ | 108,026 | | Accumulated deficit | | $ | (1,187,398 | ) | | $ | (53,636 | ) | | $ | (1,241,034 | ) | Noncontrolling interest in Akcea Therapeutics, Inc. | | $ | 87,847 | | | $ | (3,580 | ) | | $ | 84,267 | | Total stockholders’ equity | | $ | 418,719 | | | $ | (53,439 | ) | | $ | 365,280 | |
Consolidated Statements of Operations
| | Year Ended December 31, 2017 | | | | As Previously Reported under Topic 605 | | | Topic 606 Adjustment | | | As Revised | | Revenue: | | | | | | | | | | Commercial revenue: | | | | | | | | | | SPINRAZA royalties | | $ | 112,540 | | | $ | - | | | $ | 112,540 | | Licensing and other royalty revenue | | | 9,519 | | | | (2,045 | ) | | | 7,474 | | Total commercial revenue | | | 122,059 | | | | (2,045 | ) | | | 120,014 | | Research and development revenue under collaborative agreements | | | 385,607 | | | | 8,558 | | | | 394,165 | | Total revenue | | $ | 507,666 | | | $ | 6,513 | | | $ | 514,179 | | Income from operations | | $ | 24,534 | | | $ | 6,513 | | | $ | 31,047 | | Net income (loss) | | $ | (17,296 | ) | | $ | 6,513 | | | $ | (10,783 | ) | Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders | | $ | (5,970 | ) | | $ | 6,316 | | | $ | 346 | | Net income per share, basic and diluted | | $ | 0.08 | | | $ | 0.07 | | | $ | 0.15 | |
| | Year Ended December 31, 2016 | | | | As Previously Reported under Topic 605 | | | Topic 606 Adjustment | | | As Revised | | Revenue: | | | | | | | | | | Commercial revenue: | | | | | | | | | | SPINRAZA royalties | | $ | 883 | | | $ | — | | | $ | 883 | | Licensing and other royalty revenue | | | 19,839 | | | | 2,045 | | | | 21,884 | | Total commercial revenue | | | 20,722 | | | | 2,045 | | | | 22,767 | | Research and development revenue under collaborative agreements | | | 325,898 | | | | 24,111 | | | | 350,009 | | Total revenue | | $ | 346,620 | | | $ | 26,156 | | | $ | 372,776 | | Income (loss) from operations | | $ | (46,316 | ) | | $ | 26,156 | | | $ | (20,160 | ) | Net income (loss) | | $ | (86,556 | ) | | $ | 26,156 | | | $ | (60,400 | ) | Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders | | $ | (86,556 | ) | | $ | 26,156 | | | $ | (60,400 | ) | Net income (loss) per share, basic and diluted | | $ | (0.72 | ) | | $ | 0.22 | | | $ | (0.50 | ) |
Consolidated Statements of Cash Flows
| | Year Ended December 31, 2017 | | | | As Previously Reported under Topic 605 | | | Topic 606 Adjustment | | | As Revised | | Net income (loss) | | $ | (17,296 | ) | | $ | 6,513 | | | $ | (10,783 | ) | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Deferred contract revenue | | $ | 36,695 | | | $ | (6,513 | ) | | $ | 30,182 | | Cash and cash equivalents at beginning of year | | $ | 84,685 | | | $ | — | | | $ | 84,685 | | Cash and cash equivalents at end of year | | $ | 129,630 | | | $ | — | | | $ | 129,630 | |
| | Year Ended December 31, 2016 | | | | As Previously Reported under Topic 605 | | | Topic 606 Adjustment | | | As Revised | | Net income (loss) | | $ | (86,556 | ) | | $ | 26,156 | | | $ | (60,400 | ) | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Deferred contract revenue | | $ | (59,150 | ) | | $ | (26,156 | ) | | $ | (85,306 | ) | Cash and cash equivalents at beginning of year | | $ | 128,797 | | | $ | — | | | $ | 128,797 | | Cash and cash equivalents at end of year | | $ | 84,685 | | | $ | — | | | $ | 84,685 | |
Under Topic 606, compared to Topic 605, our total revenue increased $6.5 million for 2017 and $26.2 million for 2016. The change in our revenue was primarily due to:
| ● | A change in how we recognize milestone payments: Topic 606 requires us to amortize more of the milestone payments we achieve, rather than recognizing the milestone payments in full in the period in which we achieved the milestone event as we did under Topic 605. This change resulted in an increase in R&D revenue recognized for 2017 and 2016 of $23.7 million and $24.1 million, respectively. |
| ● | A change in how we calculate revenue for payments we are recognizing into revenue over time: Under Topic 605, we amortized payments into revenue evenly over the period of our obligations. When we made a change to our estimated completion period, we recognized that change on a prospective basis. Under Topic 606, we are required to use an input method to determine the amount we amortize each reporting period. Each period we review our “inputs” such as our level of effort expended, including the time we estimate it will take us to complete the activities or costs incurred, relative to the total expected inputs to satisfy the performance obligation. For certain collaborations, such as Bayer and Novartis, the input method resulted in a change to the revenue we had previously recognized using a straight-line amortization method. This change resulted in a decrease in our R&D revenue of $15.1 million for 2017. This change did not result in an impact to our 2016 R&D revenue. |
Our updated revenue recognition policy reflecting Topic 606 is as follows:
Our Revenue Sources
We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our consolidated balance sheet.
Arrangements with multiple deliverablesCommercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships.
Commercial Revenue: TEGSEDI Product Sales, net
We began adding product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018. In the U.S., TEGSEDI is distributed through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Germany, TEGSEDI is distributed through a non-exclusive distribution model with a 3PL that takes title to TEGSEDI. The 3PL is our sole customer in Germany. The 3PL in Germany then distributes TEGSEDI to hospitals and pharmacies.
Research and development revenue under collaborative agreements
We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or deliverables,performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services.
Our collaboration agreements are detailed in certainNote 6, Collaborative Arrangements and Licensing Agreements. Under each collaboration note we discuss our specific revenue recognition conclusions, including our significant performance obligations under each collaboration.
Steps to Recognize Revenue
We use a five step process to determine the amount of revenue we should recognize and when we should recognize it. The five step process is as follows:
Accounting rules require us to first determine if we have a contract with our partner, including confirming that we have met each of the following criteria:
| ● | We and our partner approved the contract and we are both committed to perform our obligations; |
| ● | We have identified our rights, our partner’s rights and the payment terms; |
| ● | We have concluded that the contract has commercial substance, meaning that the risk, timing, or amount of our future cash flows is expected to change as a result of the contract; and |
| ● | We believe collectability is probable. |
| 2. | Identify the performance obligations |
We next identify the distinct goods and services we are required to provide under the contract. Accounting rules refer to these as our performance obligations. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services.
Often times we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights. These items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item.
In some cases, manufacturing services,we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.
| 3. | Determine the transaction price |
We then determine the transaction price by reviewing the amount of consideration we are eligible to earn under the collaboration agreement, including any variable consideration. Under our collaboration agreements, consideration typically includes fixed consideration in the form of an upfront payment and variable consideration in the form of potential milestone payments, license fees and royalties. At the start of an agreement, our transaction price usually consists of only the upfront payment. We do not typically include any payments we may receive in the future in our initial transaction price because the payments are not probable. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price.
Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the first quarter of 2019, we earned a $35 million milestone payment from Roche when it dosed the first patient in the Phase 3 study of IONIS-HTTRx. At December 31, 2018, we determined it was not probable that we could earn this milestone payment. As such, we did not recognize any revenue associated with it in 2018.
| 4. | Allocate the transaction price |
Next, we allocate the considerationtransaction price to each unit of accountingour performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price.
We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of each deliverable.these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:
Identifying deliverables and units of accounting | ● | Estimated future product sales; |
| ● | Estimated royalties on future product sales; |
| ● | Contractual milestone payments; |
| ● | Expenses we expect to incur; |
We evaluatetypically estimate the deliverablesselling price of R&D services by using our internal estimates of the cost to perform the specific services. The significant inputs we use to determine the selling price of our R&D services include:
| ● | The number of internal hours we estimate we will spend performing these services; |
| ● | The estimated cost of work we will perform; |
| ● | The estimated cost of work that we will contract with third parties to perform; and |
| ● | The estimated cost of API we will use. |
For purposes of determining the stand-alone selling price of the R&D services we perform and the API we will deliver, accounting guidance requires us to include a markup for a reasonable profit margin.
We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.
We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner.
For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
The following are examples of when we typically recognize revenue based on the types of payments we receive.
Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We recognize royalty revenue in the period in which the counterparty sells the related product, which in certain cases may require us to estimate our royalty revenue. We recognize royalties from SPINRAZA sales in the period Biogen records the sale of SPINRAZA. Our accounting for SPINRAZA royalties did not change as a result of adopting Topic 606.
Commercial Revenue: TEGSEDI Product Sales, net
We recognize TEGSEDI product sales in the period when our customer obtains control of TEGSEDI, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our consolidated statements of operations. Otherwise payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues, taxes collected from customers relating to product sales and remitted to governmental authorities.
Reserves for TEGSEDI Product Sales
We record TEGSEDI product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as reductions of accounts receivable when the amount is payable to our customer or a current liability when the amount is payable to a party other than our customer in our consolidated balance sheet. In certain cases, our estimates include a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net TEGSEDI product sales in the respective period.
The following are the components of variable consideration related to TEGSEDI product sales:
Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We record reserves for these chargebacks related to TEGSEDI product sales to our U.S. customer during the reporting period. We also estimate the amount of product remaining in the distribution channel inventory at the end of the reporting period that we expect our customer to sell to wholesalers in future periods.
Government rebates: We are subject to discount obligations under government programs, including Medicaid programs and Medicare in the U.S. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability-weighted for the estimated payer mix. We record these reserves as an accrued liability on our consolidated balance sheet with a corresponding offset reducing our TEGSEDI product sales in the same period we recognize the related sale. For Medicare rebates, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments. In Germany, pharmaceutical companies must grant a specified rebate percentage to the German government. We include this rebate in the same period we recognize the related TEGSEDI product sales, resulting in a reduction of product sales.
Trade discounts and allowances: We provide customary invoice discounts on TEGSEDI product sales to our U.S. customer for prompt payment. We record this discount as a reduction of TEGSEDI product sales in the period in which we recognize the related product revenue. In addition, we receive and pay for various distribution services from our U.S. customer and wholesalers in our U.S. distribution channel. For services we receive that are either not distinct from the sale of TEGSEDI or for which we cannot reasonably estimate the fair value, we classify such fees as a reduction of TEGSEDI product sales.
Product Returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the expiration date of the TEGSEDI product. We estimate the amount of TEGSEDI product sales that our customer may return. We record our return estimate as an accrued refund liability on our consolidated balance sheet with a corresponding offset reducing our TEGSEDI product sales, in the same period we recognize the related sale. Based on our distribution model for TEGSEDI, contractual inventory limits with our customer and wholesalers and the price of TEGSEDI, we believe we will have minimal returns. Our customer in Germany only takes title to the product once it receives an order from a hospital or pharmacy and therefore does not maintain any inventory of TEGSEDI, as such we do not estimate returns in Germany.
Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to TEGSEDI product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our consolidated balance sheet with a corresponding offset reducing our TEGSEDI product sales, in the same period we recognize the related sale.
Research and development revenue under collaboration agreementsagreements:
Upfront Payments
When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our new collaboration agreement with Roche to develop IONIS-FB-LRx for the treatment of complement-mediated diseases, we received a $75 million upfront payment in the fourth quarter of 2018. We allocated the upfront payment to our single performance obligation, R&D services. We are amortizing the $75 million upfront payment using an input method over the estimated period of time we are providing R&D services. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, for further discussion. Under Topic 605, we amortized upfront payments evenly over the period of our obligation.
Milestone Payments
We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments under our collaboration agreements. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales based milestone payments in the period we achieve the milestone under the sales-based royalty exception allowed under accounting rules.
We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the third quarter of 2017, we initiated a Phase 1/2a clinical study of IONIS-MAPTRx in patients with mild Alzheimer’s disease. We earned a $10 million milestone payment from Biogen related to the initiation of this study. Under Topic 606, we added this payment to the transaction price and allocated it to our R&D services performance obligation. We are recognizing revenue from this milestone payment over our estimated period of performance. Under Topic 605, this milestone payment was recognized in full in the third quarter of 2017, which was the period in which we achieved the milestone event.
Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event. For example, in the third quarter of 2018, we recognized a $10 million milestone payment when AstraZeneca initiated a Phase 1 study of IONIS-AZ4-2.5-LRx. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized this milestone payment in full in the third quarter of 2018 because we do not have any performance obligations related to this milestone payment. Our revenue recognition of milestone payments we earn based on our partners’ activities did not change as a result of adopting Topic 606.
License Fees
We generally recognize as revenue the total amount we determine to be the stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the fourth quarter of 2018, we earned a $35 million license fee when Biogen licensed IONIS-SOD1Rx from us. Our recognition of license fees did not change as a result of adopting Topic 606.
Amendments to Agreements
From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine whether they meet the criteria to be accountedaccounting for as separate units of accounting the amendment:
| 1) | If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and |
| 2) | If the goods and/or services are at a stand-alone selling price. |
If we conclude the goods and/or whether they should be combined with other deliverablesservices in the amendment are distinct from the performance obligations in the original agreement and accounted for asat a single unit of accounting. When the delivered items in an arrangement have "stand-alone value" to our customer,stand-alone selling price, we account for the deliverablesamendment as a separate units of accounting. Delivered itemsagreement. If we conclude the goods and/or services are not distinct and at their stand-alone selling price, we then assess whether the remaining goods or services are distinct from those already provided. If the goods and/or services are distinct from what we have stand-alone value if theyalready provided, then we allocate the remaining transaction price from the original agreement and the additional transaction price from the amendment to the remaining goods and/or services. If the goods and/or services are sold separately bynot distinct from what we have already provided, we update the transaction price for our single performance obligation and recognize any vendor or the customer could resell the delivered items onchange in our estimated revenue as a stand-alone basis. cumulative adjustment.
For example, in May 2015, we entered into an exclusive license agreement with Bayer to develop and commercialize IONIS-FXIRx for the prevention of thrombosis. As part of the agreement, Bayer paid us a $100 million upfront paymentpayment. At the onset of the agreement, we were responsible for completing a Phase 2 study of IONIS-FXIRx in people with end-stage renal disease on hemodialysis and for providing an initial supply of API. In February 2017, we amended our agreement with Bayer to advance IONIS-FXIRx and to initiate development of IONIS-FXI-LRx, which Bayer licensed. As part of the second quarter of 2015.2017 amendment, Bayer paid us $75 million. We are also eligible to receive milestone payments and tiered royalties on gross margins of IONIS-FXIRx. At the onset of the agreement, we were responsible for completing the development services for IONIS-FXI and IONIS-FXI-LRx. Under the 2017 amendment, we concluded we had a new agreement with three performance obligations. These performance obligations were to deliver the license of IONIS-FXI-LRx, to provide R&D services and for providing an initial supply of active pharmaceutical ingredient, orto deliver API. SinceWe allocated the agreement had multiple elements, we evaluated the deliverables in this arrangement when we entered into the agreement and determined that certain deliverables have stand-alone value. In February 2017, we expanded our collaboration with Bayer, refer$75 million transaction price to these performance obligations. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in the Notes to the Consolidated Financial Statements for further information. Below is a listdiscussion of our accounting treatment for our Bayer collaboration. Our allocation of the three units of accounting under our original agreement:
| | The exclusive license we granted to Bayer to develop and commercialize IONIS-FXIRx for the treatment of thrombosis;
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| | The development services we agreed to perform for IONIS-FXIRx; and
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| | The initial supply of API. |
We determined that each of these three units of accounting have stand-alone value. The licenseconsideration we granted to Bayer has stand-alone value because it gives Bayer the exclusive right to develop IONIS-FXIRx or to sublicense its rights. The development services and the initial supply of API each have stand-alone value because Bayer or another third party could provide these items without our assistance.
Measurement and allocation of arrangement consideration
Our collaborations may provide for various types of payments to us including upfront payments, funding of research and development, milestone payments, licensing fees and royalties on product sales. We initially allocate the amount of consideration that is fixed and determinable at the time the agreement is entered into and exclude contingent consideration. 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. 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 certain deliverables as a single unit of accounting, then we recognize the revenue ratably over our estimated period of performance.
We determined that the allocable arrangement considerationreceived for the Bayer collaboration was $100 million and we allocated it based on the relative BESP of each unit of accounting. We engaged a third party, independent valuation expert to assist us with determining BESP. We estimated the selling price of the license granted for IONIS-FXIRx by using the relief from royalty method. Under this method, we estimated the amount of income, net of taxes, for IONIS-FXIRx. We then discounted the projected income to present value. The significant inputs we used to determine the projected income of the license included:
| | Estimated future product sales; |
| | Estimated royalties on future product sales; |
| | Contractual milestone payments; |
| | Expenses we expect to incur; |
| | An appropriate discount rate. |
We estimated the selling price of the development services by using our internal estimates of the cost to perform the specific services and estimates of expected cash outflows to third parties for services and supplies over the expected period that we will perform the development services. The significant inputs we used to determine the selling price of the development services included:
| | The number of internal hours we will spend performing these services; |
| | The estimated cost of work we will perform; |
| | The estimated cost of work that we will contract with third parties to perform; and |
| | The estimated cost of drug product we will use. |
We determine the selling price of our API consistently for all of our partnerships. On an annual basis, we calculate our fully absorbed cost to manufacture API. We then determine the unit price we will charge our partners by dividing our fully absorbed costs by the quantity of API we expect to produce during the year.
For purposes of determining BESP of the services we performed and the API we delivered in our Bayer transaction, accounting guidance required us to include a markup for a reasonable profit margin.
Based on the units of accounting under the agreement, we allocated the $100 million upfront payment from Bayer as follows:
| | $91.2 million to the IONIS-FXIRx exclusive license;
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| | $4.3 million for development services; and |
| | $4.5 million for the delivery of API.
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Assuming a constant selling price for the other elements in the arrangement, if there was an assumed 10 percent increase or decrease in the estimated selling price of the IONIS-FXIRx license, we determined that the revenue we would have allocated to the IONIS-FXIRx license would change by approximately one percent, or $0.9 million, from the amount we recorded.
Timing of revenue recognition
We recognize revenue as we deliver each item under the arrangement and the related revenue is realizable and earned. For example, we recognized revenue for the exclusive license we granted Bayer for IONIS-FXIRx in the second quarter of 2015 because that was when we delivered the license. We also recognize revenue over time. Our collaborative agreements typically include a research and/or development project plan outlining the activities the agreement requires each party to perform during the collaboration. We must estimate our period of performance when the agreements we enter into doamendment did not clearly define such information. 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. We then recognize revenue ratably over such period. We have made estimates of our continuing obligations under numerous agreements and in certain instances the timing of satisfying these obligations change as a result of adopting Topic 606. However, the development plans for our drugs progress. Accordingly, our estimates may changemethod in the future. If our estimates and judgments change over the course of our collaboration agreements, it may affect the timing and amount of revenue that we recognize in future periods.
The following are the periods over which we are recognizing revenue for each ofrelated to our units of accountingR&D services performance obligation did change. We are amortizing revenue related to our R&D services performance obligation using the input method under our Bayer agreement:Topic 606.
| | We recognized the portion of the consideration attributed to the IONIS-FXIRx license immediately in the second quarter of 2015 because we delivered the license and earned the revenue;
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| | We recognized the amount attributed to the development services for IONIS-FXIRx over the period of time we performed the services; and
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| | We are recognizing the amount attributed to the API supply as we deliver it to Bayer. |
Multiple agreementsAgreements
From time to time, we may enter into separate agreements at or near the same time with the same partner. We evaluate such agreements to determine whether theywe should be accountedaccount for them individually as distinct arrangements or whether the separate agreements are, in substance, a single multiple element arrangement.should be combined and accounted for together. We evaluate whether the negotiations are conducted jointly as part of a single negotiation, whetherfollowing to determine the deliverables are interrelated or interdependent, whether fees in one arrangement are tied to performance in another arrangement, and whether elements in one arrangement are essential to another arrangement. accounting for the agreements:
| ● | Whether the agreements were negotiated together with a single objective; |
| ● | Whether the amount of consideration in one contract depends on the price or performance of the other agreement; or |
| ● | Whether the goods and/or services promised under the agreements are a single performance obligation. |
Our evaluation involves significant judgment to determine whether a group of agreements might be so closely related that they are, in effect, part ofaccounting guidance requires us to account for them as a singlecombined arrangement.
For example, in 2012 and 2013,the second quarter of 2018, we entered into several collaboration agreements with Biogen:
| | In January 2012, we entered into a collaboration agreement with Biogen to develop and commercialize SPINRAZA (nusinersen) for spinal muscular atrophy, or SMA. As part of the collaboration, we received a $29 million upfront payment and we were responsible for global development of SPINRAZA through completion of Phase 2/3 clinical trials. |
| | In June 2012, we entered into a second andtwo separate collaboration agreement with Biogen to develop and commercialize a novel antisense drug targeting DMPK, or dystrophia myotonica-protein kinase. As part of the collaboration, we received a $12 million upfront payment and we are responsible for global development of the drug through the completion of a Phase 2 clinical trial. |
| | In December 2012, we entered into a third and separate collaboration agreement with Biogen to discover and develop antisense drugs against three targets to treat neurological or neuromuscular disorders. As part of the collaboration, we received a $30 million upfront payment and we are responsible for the discovery of a lead antisense drug for each of three targets. |
| | In September 2013, we entered into a fourth and separate collaboration agreement with Biogen to leverage antisense technology to advance the treatment of neurodegenerative diseases. We granted Biogen exclusive rights to the use of our antisense technology to develop therapies for neurological diseases as part of this broad collaboration. We received a $100 million upfront payment and we are responsible for discovery and early development through the completion of a Phase 2 clinical trial for each antisense drug identified during the six-year term of this collaboration, while Biogen is responsible for the creation and development of small molecule treatments and biologics. |
Under our collaboration agreement, in July 2016, Biogen exercised its option to license SPINRAZA. Our other collaboration agreements with Biogen give Biogenat the option to license one or more drugs resulting from the specific collaboration. Similar to oursame time: a new strategic neurology collaboration agreement for SPINRAZA, if Biogen exercises an option, it will pay usand a license fee and will assume future global development, regulatory and commercialization responsibilities for the licensed drug. We are also eligible to receive milestone payments associated with the research and/stock purchase agreement, or development of the drugs prior to licensing, milestone payments if Biogen achieves pre-specified regulatory milestones, and royalties on any product sales from any drugs resulting from these collaborations.
SPA. We evaluated all of the Biogen agreements to determine whether we should account for them as separate agreements.treat the agreements separately or combine them. We determinedconsidered that the agreements were negotiated concurrently and in contemplation of one another. Based on these facts and circumstances, we concluded that we should account forevaluate the provisions of the agreements separately because we conducted the negotiations independently of one another, each agreement focuses on different drugs, there are no interrelated or interdependent deliverables, there are no provisions in any of these agreements that are essentiala combined basis. Refer to the other agreement, and the payment terms and fees under each agreement are independent of each other.
Milestone payments
Our collaborations often include contractual milestones, which typically relate to the achievement of pre-specified development, regulatory and/ or 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 paragraphs.
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 that 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 Investigational New Drug, or IND,
-enabling studies, which are animal studies intended to support an 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 authorization 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 authorization. This stage of the drug’s life-cycle is the regulatory stage.
If a drug achieves marketing authorization, 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 partnered 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 us or 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 marketing authorization 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 authorization 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 authorization 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 authorization from the applicable regulatory agency. |
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 immediately. 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 access to new technologies we discover, we have determined that the majority of future development, regulatory and commercialization milestones are substantive. For example, we consider most of the milestones associated with our strategic alliance with Biogen substantive because we are using our antisense drug discovery platform to discover and develop new drugs against targets for neurological diseases. 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 in 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 do not consider the milestone to be substantive and we defer recognition of the milestone payment and recognize it as revenue over our estimated period of performance, if any. Further information about our collaborative arrangements can be found in Note 6, Collaborative Arrangements and Licensing Agreements. for further discussion of the accounting treatment for the 2018 strategic neurology collaboration with Biogen.
Option to licenseContracts Receivable
In severalOur contracts receivable balance represents the amounts we have billed our partners for goods we have delivered or services we have performed that are due to us unconditionally. When we bill our partners with payment terms based on the passage of time, we consider the contract receivable to be unconditional. We typically receive payment within one quarter of billing our partner. Our contracts receivable balance as of December 31, 2017 did not change when we adopted Topic 606.
Unbilled SPINRAZA Royalties
Our unbilled SPINRAZA royalties represent our right to receive consideration from Biogen in advance of when we are eligible to bill Biogen for SPINRAZA royalties. We include these unbilled amounts in other current assets on our consolidated balance sheet. Our unbilled SPINRAZA royalties as of December 31, 2017 did not change when we adopted Topic 606.
Deferred Revenue
We are often entitled to bill our customers and receive payment from our customers in advance of our collaboration agreements,obligation to provide services or transfer goods to our partners. In these instances, we provideinclude the amounts in deferred revenue on our partner with an optionconsolidated balance sheet. During the years ended December 31, 2018 and 2017, we recognized $105.3 million and $95.1 million of revenue from amounts that were in our beginning deferred revenue balances for those periods, respectively. Refer to obtain a licenseour revenue recognition policy above detailing how we recognize revenue for further discussion.
The following table summarizes the adjustments we were required to one ormake to our deferred revenue amounts to adopt Topic 606 (in thousands):
| | At December 31, 2017 | | | | As Previously Reported under Topic 605 | | | Topic 606 Adjustment | | | As Revised | | Current portion of deferred contract revenue | | $ | 106,465 | | | $ | 18,871 | | | $ | 125,336 | | Long-term portion of deferred contract revenue | | | 72,708 | | | | 35,318 | | | | 108,026 | | Total deferred revenue | | $ | 179,173 | | | $ | 54,189 | | | $ | 233,362 | |
Our deferred revenue balance increased $54.2 million at December 31, 2017 under Topic 606, compared to Topic 605. The increase was primarily related to the change in the accounting for certain milestone payments and the way in which we amortize payments. Under Topic 605, we previously recognized the majority of the milestone payments we earned in the period we achieved the milestone event, which did not impact our deferred revenue balance. Under Topic 606 we are now amortizing more milestone payments over the period of our drugs. Whenperformance obligation, which adds to our deferred revenue balance. Additionally, under Topic 605 we haveamortized payments evenly over the period of our obligation. Under Topic 606, we are required to use an input method to determine the amount we amortize each reporting period. The increase in deferred revenue relates to agreements with the following partners:
| ● | $24.2 million from Biogen; |
| ● | $15.9 million from AstraZeneca; |
| ● | $11.8 million from Novartis; and |
| ● | $ 2.3 million from other partners. |
Cost of Products Sold
We obtained the first regulatory approval for TEGSEDI in July 2018, as a multiple element arrangement thatresult we began recognizing cost of products sold expenses related to TEGSEDI. Our cost of products sold includes an optionmanufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of TEGSEDI. We also may include certain period costs related to obtainmanufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval, we expensed a license, we evaluate if the option is a deliverable at the inceptionsignificant portion of the arrangement. We do not considercosts we incurred to produce the option to be a deliverable if we conclude that it is substantive and not priced at a significant and incremental discount. We consider an option substantive if, at the inception of the arrangement,TEGSEDI supply we are at risk as to whether our collaborative partner will choose to exercise its option to obtain the license. In those circumstances, we do not include the associated license feeusing in the allocable consideration at the inception of the agreement. Rather, we account for the license fee when our partner exercises its option. For example, during 2016, we earned license fee revenue when three of our partners, AstraZeneca, Biogen and Janssen, exercised their option to license three of our drugs, which under the respective agreements we concluded to be substantive options at inception. As a result, in 2016 we recognized $98 million incommercial launch as research and development expense. We previously recognized $0.1 million of costs to produce TEGSEDI related to the TEGSEDI commercial revenue under collaborative agreements on our statement of operations as these amounts relate to drugswe recognized in development under research and development collaboration arrangements.2018.
LicensingResearch, Development and royalty revenuePatent Expenses
We often enter into agreements to license and sell our proprietary patent rights on an exclusive or non-exclusive basis in exchange for upfront fees, milestone payments and/or royalties. We generally recognize as revenue immediately those payments for which we have no significant future performance obligations and for which we are reasonably assured of collecting the resulting receivable.
Research, development and patent expenses
Our research and development expenses include wages, benefits, facilities, supplies, external services, clinical trial and manufacturing costs and other expenses that are directly related to our research and development operations. We expense research and development costs as we incur them. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our consolidated balance sheet and we expense them as the services are provided. For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, research and development expenses were $340.4$411.9 million, $319.5$372.5 million and $238.9$340.4 million, respectively. A portion of the costs included in research and development expenses are costs associated with our partner agreements. For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, research and development costs of approximately $187.1$58.7 million, $161.7$59.5 million and $85.6$187.1 million, respectively, were related to our partner agreements.
We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the United StatesU.S. Patent and Trademark Office, or foreign equivalent, issues the patent. The weighted average remaining amortizable life of our issued patents was 10.1 years at December 31, 2016.2018.
The cost of our patents capitalized on our consolidated balance sheet at December 31, 20162018 and 20152017 was $28.8$32.7 million and $27.5$30.8 million, respectively. Accumulated amortization related to patents was $8.4$8.7 million and $8.2$8.8 million at December 31, 20162018 and 2015,2017, respectively.
Based on our existing patents, estimatedwe estimate amortization expense related to patents in each of the next five years is as follows:to be the following:
Years Ending December 31, | | Amortization (in millions) | | | Amortization (in millions) | | 2017 | | $ | 1.4 | | | 2018 | | $ | 1.3 | | | 2019 | | $ | 1.2 | | | $ | 1.7 | | 2020 | | $ | 1.1 | | | $ | 1.6 | | 2021 | | $ | 1.0 | | | $ | 1.5 | | 2022 | | | $ | 1.4 | | 2023 | | | $ | 1.3 | |
We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. When we identify patents and patent applications that we are not actively pursuing, we write off any associated costs. In 2016, 20152018, 2017 and 2014,2016, patent expenses were $3.9$2.6 million, $2.8$2.1 million and $2.9$3.9 million, respectively, and included non-cash charges related to the write-down of our patent costs to their estimated net realizable values of $2.3$0.8 million, $1.1$0.4 million and $1.3$2.3 million, respectively.
Our accrued liabilities consisted of the following (in thousands):
| | December 31, | | | | 2018 | | | 2017 | | Clinical expenses | | $ | 22,125 | | | $ | 16,347 | | In-licensing expenses | | | 12,298 | | | | 33,790 | | Other miscellaneous expenses | | | 13,938 | | | | 16,481 | | Total accrued liabilities | | $ | 48,361 | | | $ | 66,618 | |
Noncontrolling Interest in Akcea Therapeutics, Inc.
Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. From the closing of Akcea’s IPO in July 2017 through mid-April 2018, we owned approximately 68 percent of Akcea. In the second, third and fourth quarters of 2018, we received additional shares of Akcea’s stock related to our license of TEGSEDI and AKCEA-TTR-LRx to Akcea, increasing our ownership percentage to approximately 75 percent. We reflected this increase in our ownership percentage in these financial statements as an adjustment to noncontrolling interest. The shares third parties own represent an interest in Akcea’s equity that is not controlled by us. However, as we continue to maintain overall control of Akcea through our voting interest, we reflect the assets, liabilities and results of operations of Akcea in our consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized.
Concentration of credit riskCredit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, short-term investments and receivables. We place our cash equivalents and short-term investments with reputable financial institutions. We primarily invest 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, or S&P, or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.
Cash, cash equivalentsCash Equivalents and short-term investmentsShort-Term Investments
We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices for identical or similar items on the last day of the fiscal period.period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold.
We also have equity investments of less than 20 percent ownership in privatelypublicly and publiclyprivately held biotechnology companies that we have received as part of a technology license or partner agreement. At December 31, 2016, we held ownership interests of less than 20 percent in each of the respective companies.
We account for our equity investments in publicly held companies at fair value and record unrealized gains and losses related to temporary increases and decreases in the stock of these publicly held companies as a separate component of comprehensive income (loss). At December 31, 2016,2018, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in four privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Seventh Sense Biosystems and Regulus Therapeutics. We accountSuzhou Ribo Life Science Co, Ltd.
In January 2018, we adopted the amended accounting guidance related to the recognition, measurement, presentation, and disclosure of certain financial instruments. The amended guidance requires us to measure and record our equity investments at fair value. Additionally, the amended accounting guidance requires us to recognize the changes in fair value in our consolidated statement of operations, instead of through accumulated other comprehensive income. Prior to 2018, we accounted for our equity investments in privately held companies under the cost method of accounting becauseaccounting. Under the amended guidance we own less than 20 percent and doaccount for our equity investments in privately held companies at their cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Our adoption of this guidance did not have significant influence over their operations. At December 31, 2016,we heldan impact on our results.
Inventory Valuation
We reflect our inventory on our consolidated balance sheet at the lower of cost method investments in three companies, Atlantic Pharmaceuticals Limited, Kastle Therapeutics and Dynacure, SAS. Realization of our equity position in these private companies is uncertain. When realization of our investment is uncertain, we record a full valuation allowance. In determining if and when a decrease inor market value below our cost in our equity positions is temporaryunder the first-in, first-out method, 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. 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.
Inventory valuation
FIFO. We capitalize the costs of raw materials that we purchase for use in producing our drugsmedicines because until we use these raw materials they have alternative future uses. We include in inventory raw material costs for drugsmedicines 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.medicine. For example, if one of our drugsmedicines failed, we could use the raw materials for that drugmedicine to manufacture our other drugs.medicines. We expense these costs as R&D expenses when we deliverbegin to manufacture API for a particular medicine if the drugsmedicine has not been approved for marketing by a regulatory agency.
We obtained the first regulatory approval for TEGSEDI in July 2018. At December 31, 2018, our physical inventory for TEGSEDI included API that we produced prior to our partners, orwhen we obtained regulatory approval and accordingly has no cost basis as we provide these drugs for our own clinical trials. We reflect our inventory onhad previously expensed the balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. costs as R&D expenses.
We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value.value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of raw materials,our inventory, alternative uses for our drugs and clinical trial materials,medicines in development and historical write-offs. We did not record any inventory write-offs for the years ended December 31, 2016, 20152018, 2017 or 2014.2016. Total inventory was $7.5$8.6 million and $6.9$10.0 million as of December 31, 20162018 and 2015,2017, respectively.
Property, plantPlant and equipmentEquipment
We carry our property, plant and equipment at cost and depreciate it on the straight-line method over its estimated useful life, which consists of the following (in thousands):
| | | | | December 31, | | | Estimated Useful Lives | | | December 31, | | | | Estimated Useful Lives (in years) | | | 2016 | | | 2015 | | | (in years) | | | 2018 | | | 2017 | | Computer software, laboratory, manufacturing and other equipment | | 3 to 10 | | | $ | 63,287 | | | $ | 56,822 | | | 3 to 10 | | | $ | 53,496 | | | $ | 66,558 | | Building and building systems | | 25 to 40 | | | | 48,909 | | | | 48,163 | | | Building, building improvements and building systems | | | 15 to 40 | | | | 97,528 | | | | 92,770 | | Land improvements | | | 20 | | | | 2,853 | | | | 2,853 | | | | 20 | | | | 2,853 | | | | 2,853 | | Leasehold improvements | | 5 to 20 | | | | 41,736 | | | | 39,061 | | | 5 to 15 | | | | 18,981 | | | | 26,748 | | Furniture and fixtures | | 5 to 10 | | | | 5,937 | | | | 5,842 | | | 5 to 10 | | | | 6,283 | | | | 6,161 | | | | | | | | | 162,722 | | | | 152,741 | | | | | | | | 179,141 | | | | 195,090 | | Less accumulated depreciation | | | | | | | (80,075 | ) | | | (72,706 | ) | | | | | | | (61,474 | ) | | | (87,676 | ) | | | | | | | | 82,647 | | | | 80,035 | | | | | | | | 117,667 | | | | 107,414 | | Land | | | | | | | 10,198 | | | | 10,198 | | | | | | | | 14,493 | | | | 14,493 | | Total | | | | | | $ | 92,845 | | | $ | 90,233 | | | | | | | $ | 132,160 | | | $ | 121,907 | |
We depreciate our leasehold improvements using the shorter of the estimated useful life or remaining lease term.
Fair valueValue of financial instrumentsFinancial Instruments We have estimated the fair value of our financial instruments. The amounts reported for cash, accounts receivable, accounts payable and accrued expenses approximate the fair value because of their short maturities. We report our investment securities at their estimated fair value based on quoted market prices for identical or similar instruments.
Long-lived assetsLong-Lived Assets We evaluate long-lived assets, which include property, plant and equipment and 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. We recorded charges of $2.3$0.8 million, $1.9$0.8 million and $1.3$2.3 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively, related primarily to the write-down of intangible assets.
Use of estimatesEstimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United StatesU.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Stock-based compensation expenseStock-Based Compensation Expense
We measure stock-based compensation expense for equity-classified awards, principally related to stock options, restricted stock units, or RSUs, and stock purchase rights under our ESPP based on the estimated fair value of the award on the date of grant. We recognize the value of the portion of the award that we ultimately expect to vest as stock-based compensation expense over the requisite service period in our Consolidated Statements of Operations. We reduce stock-based compensation expense for estimated forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates.
We use the Black-Scholes model as our method of valuing option awards and stock purchase rights under our ESPP. On the grant date, we use our stock price and assumptions regarding a number of highly complex and subjective variables to determine the estimated fair value of stock-based payment awards. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although we determine the estimated fair value of employee stock options using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
We recognize compensation expense for option awards and RSUs using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), an entity recognizeswe recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.
The fair value of RSUs is based on the market price of our common stock on the date of grant. The RSUs we have granted vest annually over a four-year period.
See Note 4, Stockholders’ Equity, for additional information regarding our share-basedstock-based compensation plans.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss)loss is primarily comprised of unrealized gains and losses on investments, net of taxes and adjustments we made to reclassify realized gains and losses on investments from other accumulated comprehensive incomeloss to our Consolidated Statement of Operations. The following table summarizes changes in accumulated other comprehensive incomeloss for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands):
| | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | Beginning balance accumulated other comprehensive (loss) income | | $ | (13,565 | ) | | $ | 39,747 | | | $ | 21,080 | | Unrealized (losses) gains on securities, net of tax (1) | | | (17,219 | ) | | | (33,101 | ) | | | 40,079 | | Amounts reclassified from accumulated other comprehensive (loss) income (2) | | | 447 | | | | (20,211 | ) | | | (21,412 | ) | Currency translation adjustment | | | (21 | ) | | | — | | | | — | | Net other comprehensive (loss) income for the period | | | (16,793 | ) | | | (53,312 | ) | | | 18,667 | | Ending balance accumulated other comprehensive (loss) income | | $ | (30,358 | ) | | $ | (13,565 | ) | | $ | 39,747 | |
| | Year Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | Beginning balance accumulated other comprehensive loss | | $ | (31,759 | ) | | $ | (30,358 | ) | | $ | (13,565 | ) | Unrealized losses on securities, net of tax (1) | | | (280 | ) | | | (960 | ) | | | (17,219 | ) | Amounts reclassified from accumulated other comprehensive loss | | | — | | | | (374 | ) | | | 447 | | Currency translation adjustment | | | 23 | | | | (67 | ) | | | (21 | ) | Net other comprehensive loss for the period | | | (257 | ) | | | (1,401 | ) | | | (16,793 | ) | Ending balance accumulated other comprehensive loss | | $ | (32,016 | ) | | $ | (31,759 | ) | | $ | (30,358 | ) |
(1) | OtherA tax benefit of $0.3 million was included in other comprehensive income includes income tax expense of $12.8 millionloss for the year ended December 31, 2014.2018. There was no tax benefit or expense for other comprehensive incomeloss for the years ended December 31, 20162017 or 2015.2016. |
(2) | Amounts for 2015 are included in the separate line called “Gain on investment in Regulus Therapeutics Inc.” on our Consolidated Statement of Operations. For 2014, $19.9 million is included in a separate line called “Gain on investment in Regulus Therapeutics Inc.”, with the remaining amount included in a separate line called “Gain on investments, net” on our Consolidated Statement of Operations. |
Convertible debtDebt
We account for convertible debt instruments, including our 1 percent and 2¾ percent notes that may be settled in cash upon conversion (including partial cash settlement) by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. We determine the carrying amount of the liability component by measuring the fair value of similar debt instruments that do not have the conversion feature. If no similar debt instrument exists, we estimate fair value by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. DeterminingWe use accounting estimates and assumptions when we determine the fair value of the debt component requires the use of accounting estimates and assumptions.component. These estimates and assumptions we use are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense.
We assigned a value to the debt component of our convertible notes equal to the estimated fair value of similar debt instruments without the conversion feature, which resulted in us recording our debt at a discount. At January 1, 2016, we adopted the amended accounting guidance to simplify the presentation of debt issuance costs. As a result of this amended guidance, we reclassed our debt issuance costs in all periods presented from other assets to the net carrying amount of the related debt liability on our consolidated balance sheet. We are amortizing our debt issuance costs and debt discount over the life of the convertible notes as additional non-cash interest expense utilizing the effective interest method. For additional information, see Note 3, Long-Term Obligations and Commitments.
Segment Information
Segment information
In 2015, we beganWe have two operating as two segments, our Ionis Core segment and Akcea Therapeutics, which includes the consolidated operations of our wholly owned subsidiary,majority-owned affiliate. Akcea Therapeutics, Inc. We formed Akcea to developis a biopharmaceutical company focused on developing and commercialize drugscommercializing medicines to treat patients with rare and serious cardiometabolic diseases caused by lipid disorders.. We provide segment financial information and results for our Ionis Core segment and our Akcea Therapeutics segment based on the segregation of revenues and expenses that our chief decision maker reviews to assess operating performance and to make operating decisions. We use judgmentsallocate a portion of Ionis’ development, R&D support and estimates in determining the allocation of sharedgeneral and administrative expenses to the two segments.Akcea for work Ionis performs on behalf of Akcea.
Fair value measurementsValue Measurements
We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities and our investment in equity securities in publicly heldpublicly-held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. TheWe classify the majority of our securities have been classified as Level 2. We obtain the fair value of our Level 2 investments from our custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by understanding the pricing model used by the custodian banks or professional pricing service provider and comparing that fair value to the fair value based on observable market prices. During 20162018 and 2015,2017, there were no transfers between our Level 1 and Level 2 investments. When we recognize transfers between levels of the fair value hierarchy, we recognize the transfer on the date the event or change in circumstances that caused the transfer occurs. During 2016 and 2015, we did not have any investments that were classified as Level 3 investments.
The following tables present the major security types we held at December 31, 20162018 and 20152017 that are regularly measured and carried at fair value. At December 31, 2018, our ProQR investment was subject to trading restrictions through the fourth quarter of 2019, as a result we included a lack of marketability discount in valuing this investment, which is a Level 3 input. At December 31, 2017, we did not have any financial instruments that we valued using Level 3 inputs. The tables segregate each security type by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities’ fair value (in thousands):
| | At December 31, 2016 | | | Quoted Prices in Active Markets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | Cash equivalents (1) | | $ | 54,137 | | | $ | 54,137 | | | $ | — | | Corporate debt securities (2) | | | 396,221 | | | | — | | | | 396,221 | | Debt securities issued by U.S. government agencies (2) | | | 55,179 | | | | — | | | | 55,179 | | Debt securities issued by the U.S. Treasury (2) | | | 29,286 | | | | 29,286 | | | | — | | Debt securities issued by states of the U.S. and political subdivisions of the states (3) | | | 109,111 | | | | — | | | | 109,111 | | Investment in Regulus Therapeutics Inc. | | | 2,414 | | | | 2,414 | | | | — | | Total | | $ | 646,348 | | | $ | 85,837 | | | $ | 560,511 | |
| | At December 31, 2018 | | | Quoted Prices in Active Markets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | Cash equivalents (1) | | $ | 146,281 | | | $ | 146,281 | | | $ | — | | | $ | — | | Corporate debt securities (2) | | | 1,252,960 | | | | — | | | | 1,252,960 | | | | — | | Debt securities issued by U.S. government agencies (3) | | | 276,612 | | | | — | | | | 276,612 | | | | — | | Debt securities issued by the U.S. Treasury (4) | | | 260,154 | | | | 260,154 | | | | — | | | | — | | Debt securities issued by states of the U.S. and political subdivisions of the states (3) | | | 79,942 | | | | — | | | | 79,942 | | | | — | | Investment in ProQR Therapeutics N.V. (5) | | | 1,349 | | | | — | | | | — | | | | 1,349 | | Total | | $ | 2,017,298 | | | $ | 406,435 | | | $ | 1,609,514 | | | $ | 1,349 | |
| | At December 31, 2015 | | | Quoted Prices in Active Markets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | At December 31, 2017 | | | Quoted Prices in Active Markets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | Cash equivalents (1) | | $ | 88,902 | | | $ | 88,902 | | | $ | — | | | $ | 86,262 | | | $ | 86,262 | | | $ | — | | Corporate debt securities (2)(6) | | | 438,426 | | | | — | | | | 438,426 | | | | 647,461 | | | | — | | | | 647,461 | | Debt securities issued by U.S. government agencies (2)(3) | | | 89,253 | | | | — | | | | 89,253 | | | | 136,325 | | | | — | | | | 136,325 | | Debt securities issued by the U.S. Treasury (2)(3) | | | 2,601 | | | | 2,601 | | | | — | | | | 30,818 | | | | 30,818 | | | | — | | Debt securities issued by states of the U.S. and political subdivisions of the states (4)(7) | | | 127,656 | | | | — | | | | 127,656 | | | | 93,932 | | | | — | | | | 93,932 | | Investment in Regulus Therapeutics Inc. | | | 24,792 | | | | 24,792 | | | | — | | | Total | | $ | 771,630 | | | $ | 116,295 | | | $ | 655,335 | | | $ | 994,798 | | | $ | 117,080 | | | $ | 877,718 | |
(1) | Included in cash and cash equivalents on our consolidated balance sheet. |
(2) | $50.2 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet. |
(3) | Included in short-term investments on our consolidated balance sheet. |
(4) | $14.2 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet. |
(5) | Included in other current assets on our consolidated balance sheet. |
(6) | $11.9 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet. |
(7) | $3.5 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet. |
Novartis Future Stock Purchase
In January 2017, we and Akcea entered into a SPA with Novartis. As part of the SPA, Novartis was required to purchase $50 million of Akcea’s common stock at the IPO price or our common stock at a premium if an IPO did not occur by April 2018. Therefore, at the inception of the SPA, we recorded a $5.0 million asset representing the fair value of the potential future premium we could have received if Novartis purchased our common stock. We determined the fair value of the future premium by calculating the value based on the stated premium in the SPA and estimating the probability of an Akcea IPO. We also included a lack of marketability discount when we determined the fair value of the premium because we would have issued unregistered shares to Novartis if they had purchased our common stock. We measured this asset using Level 3 inputs and recorded it in other assets on our consolidated balance sheet, withsheet. Because Akcea completed its IPO before April 2018, Novartis will not purchase additional shares of Ionis stock. Therefore, this asset no longer had any value and we wrote-off the difference included in short-term investmentsremaining balance to other expenses on our third quarter 2017 consolidated balance sheet.statement of operations.
(4)$7.5 million included in cash and cash equivalents on our consolidated balance sheet, with the difference included in short-term investments on our consolidated balance sheet.F-22
In November 2014, we participated as a selling shareholder in Regulus' equity offering and as a result we were subject to trading restrictions on our remaining shares through January 2015. Therefore, our investment in Regulus included a lack of marketability discount, and as a result, we classified it as a Level 3 investment at the beginning of 2015. We determined the lack of marketability discount by using a Black-Scholes model to value a hypothetical put option to approximate the cost of hedging the stock until the restriction ends. We transferred these securities to Level 1 in the first quarter of 2015, when the trading restrictions ended.
The following is a summaryreconciliation of our investmentsthe potential premium we would have received if Akcea had not completed its IPO, measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 20152017 (in thousands):
| | Year Ended December 31, | | | | 2015 | | Beginning balance of Level 3 investments | | $ | 81,881 | | Transfers into Level 3 investments | | | — | | Total gains (losses) included in accumulated other comprehensive income (loss) | | | 22,377 | | Transfers out of Level 3 investments | | | (104,258 | ) | Ending balance of Level 3 investments | | $ | — | |
| | Year Ended December 31, 2017 | | Beginning balance of Level 3 instruments | | $ | — | | Value of the potential premium we will receive from Novartis at inception of the SPA (January 2017) | | | 5,035 | | Write-off of premium to other expenses | | | (5,035 | ) | Ending balance of Level 3 instruments | | $ | — | |
Impact of recently issued accounting standards
In May 2014,We account for income taxes using the FASB issued accounting guidance onasset and liability method, which requires the recognition of revenue from customers. Under thisdeferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. We record a valuation allowance when necessary to reduce deferred tax assets to the amount we expect to realize.
We apply the authoritative accounting guidance an entityprescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will recognize revenue when it transfers promised goodsbe sustained on audit, including resolution of related appeals or serviceslitigation processes, if any. The second step requires us to customers in anestimate and measure the tax benefit as the largest amount that reflects whatis more than 50 percent likely to be realized upon ultimate settlement.
We are required to use significant judgment in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the entity expectsfinal tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves for changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.
We are also required to receiveuse significant judgment in exchangedetermining any valuation allowance recorded against our deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including scheduled reversal of deferred tax liabilities, past operating results, the goods or services. Underfeasibility of tax planning strategies and estimates of future taxable income. We base our estimates of future taxable income on assumptions that are consistent with our plans. The assumptions we use represent our best estimates and involve inherent uncertainties and the current accounting guidance,application of our judgment. Should actual amounts differ from our estimates, the amount of our tax expense and liabilities we recognize revenue from milestone paymentscould be materially impacted. We record a valuation allowance to reduce the balance of our net deferred tax assets to the amount we earn under the milestone method. Under the new guidance, the milestone method of revenue recognitionbelieve is eliminated. This new guidance also requires more detailed disclosuresmore-likely-than-not to enable users of the financial statementsbe realized.
For U.S. federal income tax purposes, we are required to understand the nature, amount, timingfile separate U.S. federal income tax returns for Ionis and uncertainty of revenue and cash flows arising from contracts with customers. The guidance as originally issued is effectiveAkcea. We began deconsolidating Akcea for fiscal years, and interim periods within that year, beginning after December 15, 2016. In July 2015, the FASB issued updated accounting guidance to allow for an optional one year deferral from the original effective date.U.S. federal income tax purposes upon Akcea’s initial public offering. As a result, we will adopt this guidance beginning on January 1, 2018. The guidance allows usare required to select one of two methods of adoption, either the full retrospective approach, meaning the guidance would be applied to all periods presented, or modified retrospective approach, meaning the cumulative effect of applying the guidance would be recognized as an adjustment toassess our opening accumulated deficit balance. AsIonis stand-alone and Akcea’s valuation allowances separately even though we have a significant number of collaborations that span several years with associated revenue, we are currently evaluating which adoption method we will use and assessing the impact the adoption will have onconsolidate Akcea’s financial results in our consolidated financial statements and disclosures.statements. We continue to file combined state tax returns in most jurisdictions. As a result, we continue to assess the state portion of our valuation allowance for those jurisdictions on a consolidated basis.
In August 2014, the FASB issued accounting guidance on how and whenWe have historically recorded a valuation allowance against all our net deferred tax assets due to disclose going-concern uncertaintiescumulative financial statement losses. However, in the financial statements. This guidance requiresfourth quarter of 2018, we reversed the valuation allowance previously recorded against our Ionis stand-alone U.S. federal net deferred tax assets, resulting in a one-time non-cash tax benefit of $332.1 million. Given our current stand-alone Ionis pre-tax income, and assuming we maintain this current level of Ionis stand-alone pre-tax income, we expect to generate income before taxes in the U.S. in future periods at a level that would result in us fully utilizing our U.S. federal net operating loss carryforwards and most of our Research and Development and Orphan Drug tax credit carryforwards over the next three years.
We continue to perform interimmaintain a full valuation allowance of $234.2 million against all of Akcea’s net deferred tax assets and annual assessmentsthe net state deferred tax assets of Ionis at December 31, 2018 due to determineuncertainties related to our ability to continuerealize the tax benefits associated with these assets.
We evaluate our deferred tax assets regularly to determine whether adjustments to the valuation allowance are appropriate due to changes in facts or circumstances, such as a going concern within one year from the date thatchanges in expected future pre-tax earnings, tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we issue our financial statements. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. We adopted this guidance in these financial statements for our year ended December 31, 2016. This guidance did not have any effectrely on our consolidated financial statementsrecent history of pre-tax earnings. Our material assumptions are our forecasts of future pre-tax earnings and disclosures.the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. Although we believe our estimates are reasonable, we are required to use significant judgment in determining the appropriate amount of valuation allowance recorded against our deferred tax assets.
In January 2016, the FASB issued amended accounting guidance related to the recognition, measurement, presentation,We do not provide for a U.S. income tax liability and disclosureforeign withholding taxes on undistributed foreign earnings of certain financial instruments. The amended guidance requires us to measure and record equity investments, except those accounted for under the equity methodour foreign subsidiaries.
Impact of accounting that have a readily determinable fair value, at fair value and for us to recognize the changes in fair value in our net income (loss), instead of recognizing unrealized gains and losses through accumulated other comprehensive income, as we currently do under the existing guidance. The amended guidance also changes several disclosure requirements for financial instruments, including the methods and significant assumptions we use to estimate fair value. The guidance is effective for fiscal years, and interim periods within that year, beginning after December 15, 2017. We will adopt this guidance on January 1, 2018 and we will make any adjustments to beginning balances through a cumulative-effect adjustment to accumulated deficit on that date. We are currently determining the effects the adoption will have on our consolidated financial statements and disclosures.Recently Issued Accounting Standards
In February 2016, the FASB issued amended accounting guidance related to leasing,lease accounting, which requireswill require us to record all leases with a term longer than one year on our balance sheet. When we record leases on our balance sheet under the new guidance, we will record a liability with a value equal to the present value of payments we will make over the life of the lease (lease liability) and an asset representing the underlying leased asset.asset (right of use asset). The new accounting guidance requires us to determine if our leases are operating or financing leases, similar to current accounting guidance.leases. We will record expense for operating type leases on a straight-line basis as an operating expense andexpense. If we determine a lease is a financing lease, we will record both interest and amortization expense for finance type leases as interest expense. The new lease standard is effective for annual and interimgenerally the expense will be higher in the earlier periods beginning after December 15, 2018, with early adoption permitted. We must adoptof the new standard on a modified retrospective basis, which requires us to reflect our leases on our consolidated balance sheet for the earliest comparative period presented. We are currently assessing the timing of adoption as well as the effects it will have on our consolidated financial statements and disclosures.
In March 2016, the FASB issued amended guidance to simplify certain aspects of share-based payment accounting. Under the amended guidance, we will recognize excess tax benefits and tax deficiencies as income tax expense or benefit in our statement of operations on a prospective basis. As we have a valuation allowance, this change will impact our net operating loss carryforward and our valuation allowance disclosures. Additionally, we will classify excess tax benefits as an operating activity and classify amounts we withhold in shares for the payment of employee taxes as a financing activity on our statement of cash flows for each period we present. Lastly, the amended guidance allows us to account for forfeitures when they occur or continue to estimate them. We will continue to estimate our forfeitures. The amended share-based payment standard is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted in any interim or annual period.lease. We adopted this guidance on January 1, 2017.2019 and adjusted our opening balance sheet on that date. We elected the available practical expedients. The amended guidancemost significant impact was the recognition of right of use assets and lease liabilities for our operating leases. We are in the process of finalizing the impact of the adoption. The adoption will not have an impact on our financial results.consolidated statement of operations or statement of cash flows.
In June 2016, the FASB issued guidance that changes the measurement of credit losses for most financial assets and certain other instruments. If we have credit losses, this updated guidance requires us to record allowances for these instruments under a new expected credit loss model. This model requires us to estimate the lifetime expected credit loss of an instrument over its lifetime, which represents the portion of the amortized cost basis we do not expect to collect. This change will result inThe new guidance requires us remeasuringto remeasure our allowance in each reporting period we have credit losses. The new standard is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. When we adopt the new standard, we will make any adjustments to beginning balances through a cumulative-effect adjustment to accumulated deficit on that date. We plan to adopt this guidance on January 1, 2020. We are currently assessing the timing of adoption as well as the effects it will have on our consolidated financial statements and disclosures.
F-18
In February 2018, the FASB issued updated guidance for reclassification of tax effects from accumulated other comprehensive income (loss). The updated guidance gives entities an option to reclassify amounts included in accumulated other comprehensive income (loss) that under the Tax Act do not have a way to be relieved, and allows a one-time reclassification to retained earnings. The updated guidance is effective for all entities for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. We have decided not to record the reclassification adjustments provided by this guidance.
In June 2018, the FASB issued updated guidance to simplify the accounting for stock-based compensation expense for nonemployees. Specifically, we are now expensing grants to nonemployees in a similar manner as grants to employees. Previously, we had to re-value these grants at each reporting period to reflect the current fair value. Under the amended guidance, we value grants to nonemployees when we grant them and we will not adjust their value for future changes. We adopted this guidance in the second quarter of 2018. The updated guidance did not have a material impact to our financial results.
In November 2018, the FASB issued clarifying guidance of the interaction between the collaboration accounting guidance and the new revenue recognition guidance we adopted on January 1, 2018 (Topic 606). The clarifying guidance included the following:
| 1) | When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied; |
| 2) | Adds “unit of account” concept to collaboration accounting guidance to align with Topic 606. This is used to determine if revenue is recognized or if a contra expense is recognized from consideration received under a collaboration; and |
| 3) | Precludes revenue from being recognized under Topic 606 when a transaction with a collaborative partner is determined not be a customer and is not directly related to the sales to third parties. |
The updated guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our consolidated financial statements and disclosures.
2. Investments
As of December 31, 2016,2018, we had primarily invested our excess cash in debt instruments of the U.S. Treasury, financial institutions, corporations, and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody’s, Standard & Poor’s, or S&P, or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.
The following table summarizes the contract maturity of the available-for-sale securities we held as of December 31, 2016:2018:
One year or less | | 55 | 77 | % | After one year but within two years | | 32 | 20 | % | After two years but within three and aone half years | | 13 | 3 | % | Total | | | 100 | % |
As illustrated above, at December 31, 2016, 872018, 97 percent of our available-for-sale securities had a maturity of less than two years.
All of our available-for-sale securities are available to us for use in our current operations. As a result, we categorize all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.
At December 31, 2016,2018, we had an ownership interest of less than 20 percentin threefour private companies and two public companies with which we conduct business. The privately heldprivately-held companies are Atlantic Pharmaceuticals Limited, Kastle Therapeutics and Dynacure SAS, Seventh Sense Biosystems and theSuzhou Ribo Life Science Co, Ltd.The publicly traded companies are Antisense Therapeutics LimitedATL and Regulus. We account for equity investments in the privately held companies under the cost method of accounting and we account for equity investments in the publicly traded companies at fair value. We record unrealized gains and losses as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments.ProQR.
During 2015 and 2014, we realized a net gain on investments of $20.3 million, and $21.2 million, respectively. Our net gain for 2015 and 2014 was primarily from the $20.2 million and $19.9 million gain we realized when we sold a portion of our stock in Regulus, respectively. We have reflected this gain in a separate line called “Gain on investment in Regulus Therapeutics Inc.”, on our Consolidated Statements of Operations. During 2016, we recognized nominal gains from sales of our investments. As of December 31, 2016, our carrying balance of our investment in Regulus was $2.4 million on our consolidated balance sheet.
The following is a summary of our investments (in thousands):
| | | | | Gross Unrealized | | | | | | December 31, 2016 | | Cost (1) | | | Gains | | | Losses | | | Estimated Fair Value | | | December 31, 2018 | | | Cost (1) | | | Gains | | | Losses | | | Fair Value | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | Corporate debt securities (2) | | | $ | 956,879 | | | $ | 13 | | | $ | (1,858 | ) | | $ | 955,034 | | Debt securities issued by U.S. government agencies | | | | 168,839 | | | | 3 | | | | (104 | ) | | | 168,738 | | Debt securities issued by the U.S. Treasury (2) | | | | 244,640 | | | | 15 | | | | (77 | ) | | | 244,578 | | Debt securities issued by states of the U.S. and political subdivisions of the states | | | | 63,572 | | | | — | | | | (323 | ) | | | 63,249 | | Total securities with a maturity of one year or less | | | | 1,433,930 | | | | 31 | | | | (2,362 | ) | | | 1,431,599 | | Corporate debt securities | | $ | 195,087 | | | $ | 25 | | | $ | (161 | ) | | $ | 194,951 | | | | 299,018 | | | | 194 | | | | (1,286 | ) | | | 297,926 | | Debt securities issued by U.S. government agencies | | | 26,548 | | | | — | | | | (10 | ) | | | 26,538 | | | | 107,789 | | | | 194 | | | | (109 | ) | | | 107,874 | | Debt securities issued by the U.S. Treasury | | | 29,298 | | | | 2 | | | | (14 | ) | | | 29,286 | | | | 15,600 | | | | — | | | | (24 | ) | | | 15,576 | | Debt securities issued by states of the U.S. and political subdivisions of the states (2) | | | 72,775 | | | | 2 | | | | (134 | ) | | | 72,643 | | | Total securities with a maturity of one year or less | | | 323,708 | | | | 29 | | | | (319 | ) | | | 323,418 | | | Corporate debt securities | | | 202,408 | | | | 36 | | | | (1,174 | ) | | | 201,270 | | | Debt securities issued by U.S. government agencies | | | 28,807 | | | | 1 | | | | (167 | ) | | | 28,641 | | | Debt securities issued by states of the U.S. and political subdivisions of the states | | | 36,816 | | | | 1 | | | | (349 | ) | | | 36,468 | | | | 16,980 | | | | — | | | | (287 | ) | | | 16,693 | | Total securities with a maturity of more than one year | | | 268,031 | | | | 38 | | | | (1,690 | ) | | | 266,379 | | | | 439,387 | | | | 388 | | | | (1,706 | ) | | | 438,069 | | Total available-for-sale securities | | $ | 591,739 | | | $ | 67 | | | $ | (2,009 | ) | | $ | 589,797 | | | $ | 1,873,317 | | | $ | 419 | | | $ | (4,068 | ) | | $ | 1,869,668 | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Regulus Therapeutics Inc. | | $ | 2,133 | | | $ | 281 | | | $ | — | | | $ | 2,414 | | | Total equity securities | | $ | 2,133 | | | $ | 281 | | | $ | — | | | $ | 2,414 | | | Total equity securities included in other current assets (3) | | | $ | 1,212 | | | | 137 | | | | — | | | | 1,349 | | Total available-for-sale and equity securities | | $ | 593,872 | | | $ | 348 | | | $ | (2,009 | ) | | $ | 592,211 | | | $ | 1,874,529 | | | $ | 556 | | | $ | (4,068 | ) | | $ | 1,871,017 | |
| | | | | Gross Unrealized | | | Estimated | | December 31, 2017 | | Cost (1) | | | Gains | | | Losses | | | Fair Value | | Available-for-sale securities: | | | | | | | | | | | | | Corporate debt securities (2) | | $ | 500,599 | | | $ | 2 | | | $ | (752 | ) | | $ | 499,849 | | Debt securities issued by U.S. government agencies | | | 83,926 | | | | — | | | | (212 | ) | | | 83,714 | | Debt securities issued by the U.S. Treasury | | | 29,428 | | | | — | | | | (17 | ) | | | 29,411 | | Debt securities issued by states of the U.S. and political subdivisions of the states (2) | | | 29,240 | | | | 4 | | | | (122 | ) | | | 29,122 | | Total securities with a maturity of one year or less | | | 643,193 | | | | 6 | | | | (1,103 | ) | | | 642,096 | | Corporate debt securities | | | 148,663 | | | | 8 | | | | (1,059 | ) | | | 147,612 | | Debt securities issued by U.S. government agencies | | | 52,779 | | | | — | | | | (168 | ) | | | 52,611 | | Debt securities issued by the U.S. Treasury | | | 1,409 | | | | — | | | | (2 | ) | | | 1,407 | | Debt securities issued by states of the U.S. and political subdivisions of the states | | | 65,550 | | | | — | | | | (740 | ) | | | 64,810 | | Total securities with a maturity of more than one year | | | 268,401 | | | | 8 | | | | (1,969 | ) | | | 266,440 | | Total available-for-sale securities | | $ | 911,594 | | | $ | 14 | | | $ | (3,072 | ) | | $ | 908,536 | |
| | | | | Gross Unrealized | | | | | December 31, 2015 | | Cost (1) | | | Gains | | | Losses | | | Estimated Fair Value | | Available-for-sale securities: | | | | | | | | | | | | | Corporate debt securities | | $ | 181,670 | | | $ | 5 | | | $ | (250 | ) | | $ | 181,425 | | Debt securities issued by U.S. government agencies | | | 50,559 | | | | 1 | | | | (19 | ) | | | 50,541 | | Debt securities issued by the U.S. Treasury | | | 2,604 | | | | — | | | | (3 | ) | | | 2,601 | | Debt securities issued by states of the U.S. and political subdivisions of the states (2) | | | 79,414 | | | | 18 | | | | (88 | ) | | | 79,344 | | Total securities with a maturity of one year or less | | | 314,247 | | | | 24 | | | | (360 | ) | | | 313,911 | | Corporate debt securities | | | 258,703 | | | | 3 | | | | (1,705 | ) | | | 257,001 | | Debt securities issued by U.S. government agencies | | | 38,956 | | | | — | | | | (244 | ) | | | 38,712 | | Debt securities issued by states of the U.S. and political subdivisions of the states | | | 48,552 | | | | 3 | | | | (243 | ) | | | 48,312 | | Total securities with a maturity of more than one year | | | 346,211 | | | | 6 | | | | (2,192 | ) | | | 344,025 | | Total available-for-sale securities | | $ | 660,458 | | | $ | 30 | | | $ | (2,552 | ) | | $ | 657,936 | | Equity securities: | | | | | | | | | | | | | | | | | Regulus Therapeutics Inc. | | $ | 7,162 | | | $ | 17,630 | | | $ | — | | | $ | 24,792 | | Total equity securities | | $ | 7,162 | | | $ | 17,630 | | | $ | — | | | $ | 24,792 | | Total available-for-sale and equity securities | | $ | 667,620 | | | $ | 17,660 | | | $ | (2,552 | ) | | $ | 682,728 | |
| (1) | OurWe hold our available-for-sale securities are held at amortized cost. |
| (2) | Includes investments classified as cash equivalents on our consolidated balance sheet. |
(3) | We recognize our equity securities at cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer on our consolidated balance sheet. |
Investments we consider to be temporarily impaired at December 31, 20162018 are as follows (in thousands):
| | | | | Less than 12 months of Temporary Impairment | | | More than 12 months of Temporary Impairment | | | Total Temporary Impairment | | | | | | Less than 12 Months of Temporary Impairment | | | More than 12 Months of Temporary Impairment | | | Total Temporary Impairment | | | | Number of Investments | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Number of Investments | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | Corporate debt securities | | | 255 | | | $ | 280,393 | | | $ | (1,197 | ) | | $ | 32,753 | | | $ | (138 | ) | | $ | 313,146 | | | $ | (1,335 | ) | | | 546 | | | $ | 1,000,461 | | | $ | (1,936 | ) | | $ | 126,357 | | | $ | (1,208 | ) | | $ | 1,126,818 | | | $ | (3,144 | ) | Debt securities issued by U.S. government agencies | | | 29 | | | | 43,851 | | | | (177 | ) | | | — | | | | — | | | | 43,851 | | | | (177 | ) | | | 50 | | | | 161,312 | | | | (109 | ) | | | 34,403 | | | | (104 | ) | | | 195,715 | | | | (213 | ) | Debt securities issued by the U.S. Treasury | | | 2 | | | | 18,782 | | | | (14 | ) | | | — | | | | — | | | | 18,782 | | | | (14 | ) | | | 36 | | | | 183,212 | | | | (100 | ) | | | 1,413 | | | | (1 | ) | | | 184,625 | | | | (101 | ) | Debt securities issued by states of the U.S. and political subdivisions of the states | | | 135 | | | | 80,896 | | | | (398 | ) | | | 6,934 | | | | (85 | ) | | | 87,830 | | | | (483 | ) | | | 49 | | | | 13,868 | | | | (14 | ) | | | 62,883 | | | | (596 | ) | | | 76,751 | | | | (610 | ) | Total temporarily impaired securities | | | 421 | | | $ | 423,922 | | | $ | (1,786 | ) | | $ | 39,687 | | | $ | (223 | ) | | $ | 463,609 | | | $ | (2,009 | ) | | | 681 | | | $ | 1,358,853 | | | $ | (2,159 | ) | | $ | 225,056 | | | $ | (1,909 | ) | | $ | 1,583,909 | | | $ | (4,068 | ) |
We believe that the decline in value of theseour debt 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 theirour debt securities’ amortized cost basis at maturity.
3. Long-Term Obligations and Commitments
The carrying value of our long-term obligations was as follows (in thousands):
| | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | 1 percent convertible senior notes | | $ | 500,511 | | | $ | 339,847 | | | $ | 568,215 | | | $ | 533,111 | | 2¾ percent convertible senior notes | | | 124 | | | | 49,523 | | | Long-term financing liability for leased facility | | | 72,359 | | | | 72,217 | | | Fixed rate note with Morgan Stanley | | | 12,500 | | | | — | | | Long-term mortgage debt | | | | 59,842 | | | | 59,771 | | Principal balance of fixed rate note with Morgan Stanley (1) | | | | 12,500 | | | | 12,500 | | Leases and other obligations | | | 3,611 | | | | 2,856 | | | | 6,163 | | | | 2,095 | | Total | | $ | 589,105 | | | $ | 464,443 | | | $ | 646,720 | | | $ | 607,477 | | Less: current portion | | | (1,185 | ) | | | (515 | ) | | | (13,749 | ) | | | (1,621 | ) | Total Long-Term Obligations | | $ | 587,920 | | | $ | 463,928 | | | $ | 632,971 | | | $ | 605,856 | |
(1) | Our $12.5 million fixed rate note with Morgan Stanley is included in our current portion of long-term obligations on our consolidated balance sheet at December 31, 2018. |
Convertible Notes
In November 2014, we completed a $500 million offering of convertible senior notes, which mature in 2021 and bear interest at 1 percent. We raised $487 million of proceeds, net of issuance costs. We used a substantial portion of the net proceeds from the issuance of the 1 percent convertible senior notes to repurchase $140 million in principal of our 2¾ percent convertible senior notes at a price of $441.9 million, including accrued interest. As a result, the new principal balance of the 2¾ percent notes was $61.2 million. We recognized an $8.3 million non-cash loss as a result of the early retirement of a portion of the 2¾ percent notes.
In December 2016, we issued an additional $185.5 million of 1 percent convertible senior notes in exchange for the redemption of $61.1 million of our 2¾ percent convertible senior notes. As a result of the debt exchange we completed in December 2016, we recorded a $4.0 million non-cash loss on early retirement of debt, reflecting the early retirement of the majority of our remaining 2¾ percent convertible notes in December 2016.
At December 31, 2016,2018, we had a nominal amount of our 2¾ percent convertible senior notes outstanding. At December 31, 20162018, we had the following 1 percent convertible senior notes outstanding (amounts in millions except price per share data):
| | 1 Percent Convertible Senior Notes | | Outstanding balance | | $ | 685.5 | | Original issue date ($500 million of principal) | | November 2014 | | Additional issue date ($185.5 million of principal) | | December 2016 | | Maturity date | | November 2021 | | Interest rate | | 1 percent | | Conversion price per share | | $ | 66.81 | | Total shares of common stock subject to conversion | | | 10.3 | |
Interest is payable semi-annually in arrears on May 15 and November 15 of each year for the 1 percent notes. The 1 percent notes are convertible at the option of the note holders prior to July 1, 2021 only under certain conditions. On or after July 1, 2021, the notes are initially convertible into approximately 10.3 million shares of common stock at a conversion price of approximately $66.81 per share. We will settle conversions of the notes, at our election, in cash, shares of our common stock or a combination of both. We may not redeem the 1 percent notes prior to maturity, and no sinking fund is provided for them. If we undergo a fundamental change, holders may require us to purchase for cash all or any portion of their 1 percent notes at a purchase price equal to 100 percent of the principal amount of the notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
We account for our convertible notes using an accounting standard that requires us to assign a value to our convertible debt equal to the estimated fair value of similar debt instruments without the conversion feature and to record the remaining portion in equity. As a result, we recorded our convertible notes at a discount, which we are amortizing as additional non-cash interest expense over the expected life of the respective debt. We determined our nonconvertible debt borrowing rate using a combination of the present value of the debt’s cash flows and a Black-Scholes valuation model. The following table summarizes the nonconvertible borrowing rate, effective interest rate and amortization period of our debt discount for our convertible notes:
| 1 Percent Convertible Senior Notes Issued in November 2014 | | 1 Percent Convertible Senior Notes Issued in December 2016 | Nonconvertible debt borrowing rate | 7.4 percent | | 6.8 percent | Effective interest rate | 7.8 percent | | 7.2 percent | Amortization period of debt discount | 7 years | | 5 years |
Interest expense for the yearyears ended December 31, 2018, 2017 and 2016 2015 and 2014 included $25.1$35.2 million, $23.2$32.5 million and $9.6$25.1 million, respectively, of non-cash interest expense related to the amortization of the debt discount and debt issuance costs for our convertible notes.
The following table summarizes information about the equity and liability components of our outstanding 1 percent convertible notes (in thousands). We measured the fair values of the convertible notes outstanding based on quoted market prices, which is a Level 2 measurement:
| | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | Fair value of outstanding notes | | $ | 700,969 | | | $ | 555,000 | | | $ | 724,966 | | | $ | 727,420 | | Principal amount of convertible notes outstanding | | $ | 685,450 | | | $ | 500,000 | | | $ | 685,450 | | | $ | 685,450 | | Unamortized portion of debt discount | | $ | 175,699 | | | $ | 152,786 | | | $ | 110,817 | | | $ | 144,112 | | Long-term debt | | $ | 500,511 | | | $ | 339,847 | | | $ | 568,215 | | | $ | 533,111 | | Carrying value of equity component | | $ | 219,011 | | | $ | 174,770 | | | $ | 219,011 | | | $ | 219,011 | |
F-21
Financing Arrangements
Financing ArrangementsLine of Credit Arrangement
In June 2015, we entered into a five-year revolving line of credit agreement with Morgan Stanley Private Bank, National Association, or Morgan Stanley. We amended the credit agreement in February 2016 to increase the amount available for us to borrow. Under the amended credit agreement, we can borrow up to a maximum of $30 million of revolving credit for general working capital purposes. Under the credit agreement interest is payable monthly in arrears on the outstanding principal at a borrowing rate based on our option of:
(i) | a floating rate equal to the one-month London Interbank Offered Rate, or LIBOR, in effect plus 1.25 percent per annum; |
(ii) | a fixed rate equal to LIBOR plus 1.25 percent for a period of one, two, three, four, six, or twelve months as elected by us; or |
(iii) | a fixed rate equal to the LIBOR swap rate during the period of the loan. |
Additionally, after June 1, 2016, we pay 0.25 percent per annum, payable quarterly in arrears, for any amount unused under the credit facility. As of December 31, 20162018, we had $12.5 million in outstanding borrowings under the credit facility with a 2.31 percent fixed interest rate and a maturity date of September 2019, which werewe used to fund our capital equipment needs and is consistent with our historical practice to finance these costs.needs.
The credit agreement includes customary affirmative and negative covenants and restrictions. We are in compliance with all covenants of the credit agreement.
Research and Development and Manufacturing Facilities
In July 2017, we purchased the building that houses our primary R&D facility for $79.4 million. As a result of the purchase, we extinguished the financing liability we had previously recorded on our balance sheet. The difference between the purchase price of the facility and the carrying value of our financing liability at the time of the purchase was $7.7 million. We recognized this amount as a non-cash loss on extinguishment of financing liability for leased facility in our consolidated results of operations in the third quarter of 2017.
We also purchased our manufacturing facility in July 2017 for $14.0 million. We previously accounted for the lease on this facility as an operating lease. We capitalized the purchase price of the building as a fixed asset in the third quarter of 2017.
We financed the purchase of our primary R&D facility and our manufacturing facility, with mortgage debt of $51.3 million and $9.1 million, respectively. Our primary R&D facility mortgage has an interest rate of 3.88 percent. Our manufacturing facility mortgage has an interest rate of 4.20 percent. During the first five years of both mortgages we are only required to make interest payments. Both mortgages mature in August 2027.
Maturity Schedules
Annual debt and other obligation maturities, including fixed and determinable interest, at December 31, 20162018 are as follows (in thousands):
2017 | | $ | 7,271 | | | 2018 | | | 7,211 | | | 2019 | | | 19,801 | | | $ | 22,067 | | 2020 | | | 6,915 | | | | 9,330 | | 2021 | | | 692,365 | | | | 694,774 | | 2022 | | | | 2,809 | | 2023 | | | | 3,494 | | Thereafter | | | 840 | | | | 68,108 | | Subtotal | | $ | 734,403 | | | $ | 800,582 | | Less: current portion | | | (52 | ) | | | (12,890 | ) | Less: fixed and determinable interest | | | (35,959 | ) | | | (41,837 | ) | Less: unamortized portion of debt discount | | | (175,721 | ) | | | (111,426 | ) | Plus: Deferred rent | | | 2,130 | | | | 4,960 | | Total | | $ | 524,801 | | | $ | 639,389 | |
Operating Leases
OperatingIonis Leases
We lease office, laboratory and manufacturing space under non-cancelable operating leases with terms through December 2031. We are located in three buildings in Carlsbad, California, which consists of laboratory, manufacturing and office space. Our facilities include a primary research and development facility, a manufacturing facility and a building adjacent to our manufacturing facility. We account for the lease of our primary research and development facility as a financing obligation as discussed below. Our manufacturing facility is used for our drug development business and was built to meet current Good Manufacturing Practices and the facility adjacent to our manufacturing facility that has laboratory and office space that we use to support our manufacturing activities. Thefacility. We lease for our manufacturing facility expires in 2031 and has four five-year options to extend. Under thethis space under a non-cancelable operating lease agreement, we have the option to purchase the facility at the end of each year from 2016 through 2020, and at the end of 2026 and 2031. The lease for the facility adjacent to our manufacturing facility haswith an initial term ending in June 2021 withand an option to extend the lease for up to two five-year periods.
Additionally, Akcea leaseswe lease office space that we sublease to Akcea. We lease this space under a non-cancelable operating lease with an initial term ending in a building in Cambridge, Massachusetts. TheJune 2023 and an option to extend the lease for one five-year period. The sublease with Akcea has a three-year term and expiresis eliminated in July 2018.our consolidated financial statements. We also lease office equipment under non-cancelable operating leases with terms through January 2019.2021.
Akcea Lease
On April 5, 2018, Akcea entered into an operating lease agreement for office space located in Boston, Massachusetts for its new corporate headquarters. The lease commencement date was August 15, 2018 and Akcea took occupancy in September 2018. Akcea is leasing this space under a non-cancelable operating lease with an initial term ending after 123 months and an option to extend the lease for an additional five-year term. Under the lease agreement, Akcea received a three-month free rent period, which commenced on August 15, 2018, and a tenant improvement allowance up to $3.8 million. Akcea provided the lessor with a letter of credit to secure its obligations under the lease in the initial amount of $2.4 million, to be reduced to $1.8 million on the third anniversary of the rent commencement date and to $1.2 million on the fifth anniversary of the rent commencement date if Akcea meets certain conditions set forth in the lease at each such time. The letter of credit amount is included in deposits and other assets in our consolidated balance sheet.
Annual future minimum payments under our operating leases as of December 31, 20162018 are as follows (in thousands):
| | Operating Leases | | | Operating Leases | | 2017 | | $ | 1,954 | | | 2018 | | | 1,690 | | | 2019 | | | 1,474 | | | $ | 3,129 | | 2020 | | | 1,527 | | | | 3,008 | | 2021 | | | 1,411 | | | | 2,725 | | 2022 | | | | 2,539 | | 2023 | | | | 2,505 | | Thereafter | | | 14,714 | | | | 11,862 | | Total minimum payments | | $ | 22,770 | | | $ | 25,768 | |
Rent expense was $2.6 million, $1.7 million and $2.0 million each offor the years ended December 31, 20162018, 2017 and 2015. Rent expense for 2014 was $1.8 million.2016. We recognizerecognized rent expense on a straight line basis over the lease term for the lease on our manufacturing facility, the lease on our building adjacent to our manufacturing facility, the office building that Akcea subleases and Akcea’s office space, which resulted in a deferred rent balance of $2.1$5.0 million and $2.0$0.1 million at December 31, 20162018 and 2015,2017, respectively.
Research and Development Facility Lease Obligation
F-28 In March 2010, we entered into a lease agreement with an affiliate of BioMed Realty, L.P., or BioMed. Under the lease, BioMed constructed our primary research and development facility in Carlsbad, California. The lease expires in 2031 and has four five-year options to extend. Under the lease agreement, we have the option to purchase the facility and land at the end of each year from 2016 through 2020, and at the end of 2026 and 2031. To gain early access to the facility, we agreed to modify our lease with BioMed to accept additional responsibility. As a result, we recorded the costs for the facility as a fixed asset and we also recorded a corresponding liability in our non-current liabilities as a long-term financing obligation. In July 2011, we took possession of the facility and began depreciating the cost of the facility over its economic useful life. At December 31, 2016 and 2015, the facility and associated parcel of land had a net book value of $60.0 million and $62.2 million, respectively, which included $12.1 million and $9.9 million, respectively, of accumulated depreciation. We are applying our rent payments, which began on January 1, 2012, against the liability over the term of the lease.
In conjunction with the lease agreement with BioMed, we purchased a parcel of land for $10.1 million and subsequently sold it to BioMed. Since we have the option to purchase the facility, including the land, we have continuing involvement in the land, which requires us to account for the purchase and sale of the land as a financing transaction. As such, our property, plant and equipment at December 31, 2016 and 2015 included the value of the land. Additionally, we have recorded a corresponding amount in our non-current liabilities as a long-term financing obligation. Since land is not a depreciable asset, the value of the land and financing obligation we recorded will not change until we exercise our purchase option or the lease terminates.
Annual future rent payments as of December 31, 2016 for our primary research and development facility are as follows (in thousands):
| | Future Rent Payments | | 2017 | | $ | 6,550 | | 2018 | | | 6,943 | | 2019 | | | 6,943 | | 2020 | | | 7,359 | | 2021 | | | 7,359 | | Thereafter | | | 83,846 | | Total minimum payments | | $ | 119,000 | |
4. Stockholders’Stockholders’ Equity
Preferred Stock
We are authorized to issue up to 15,000,000 shares of “blank check” Preferred Stock. As of December 31, 2016,2018, there were no shares of Preferred Stock outstanding. We have designated Series C Junior Participating Preferred Stock but have no issued or outstanding shares as of December 31, 2016.2018.
Common Stock
At December 31, 20162018 and 2015,2017, we had 300,000,000 shares of common stock authorized, of which 121,636,273137,928,828 and 120,351,480124,976,373 were issued and outstanding, respectively. As of December 31, 2016,2018, total common shares reserved for future issuance were 14,703,837.14,839,373.
During the years ended December 31, 2016, 20152018, 2017 and 2014,2016, we issued 1,285,000, 1,908,0001,451,000, 1,709,000 and 1,972,0001,285,000 shares of common stock, respectively, for stock option exercises, vesting of restricted stock units, and ESPP purchases. We received net proceeds from these transactions of $27.9 million, $22.9 million and $13.7 million $24.9 millionin 2018, 2017 and $23.1 million in 2016, 2015 and 2014, respectively.
Stock Plans
1989 Stock Option Plan
In June 1989, our Board of Directors adopted, and the stockholders subsequently approved, a stock option plan that, as amended, provides for the issuance of non-qualified and incentive stock options for the purchase of up to 20,000,000 shares of common stock to our employees, directors, and consultants. The plan expires in January 2024. The 1989 Plan does not allow us to grant stock bonuses or restricted stock awards and prohibits us from repricing any options outstanding under the plan unless our stockholders approve the repricing. Options vest over a four-year period, with 25 percent exercisable at the end of one year from the date of the grant and the balance vesting ratably, on a monthly basis, thereafter and have a term of seven years. At December 31, 2016,2018, a total of 2,732,089848,753 options were outstanding, of which options to purchase 2,542,372831,656 shares were exercisable, and 25,55242,925 shares were available for future grant under the 1989 Plan.
2011 Equity Incentive Plan
In March 2011, our Board of Directors adopted, and the stockholders subsequently approved, a stock option plan that provides for the issuance of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and performance cash awards to our employees, directors, and consultants. In June 2015 and in May 2017, after receiving approval from our stockholders, we amended our 2011 Equity Incentive Plan to increase the total number of shares reserved for issuance. We increased the shares available under our 2011 Equity Incentive Plan from 5,500,000 to 11,000,000.11,000,000 in June 2015 and from 11,000,000 to 16,000,000 in May 2017. The plan expires in June 2021. The 2011 Plan does not allow us to reduce the exercise price of any outstanding stock options or stock appreciation rights or cancel any outstanding stock options or stock appreciation rights that have an exercise price or strike price greater than the current fair market value of the common stock in exchange for cash or other stock awards unless our stockholders approve such action. Currently we anticipate awarding only options and restricted stock unit awards to our employees, directors and consultants. Under the 2011 Plan, stock options cannot vest in a period of less than two years and restricted stock unit awards cannot vest in a period of less than three years. We have granted restricted stock unit awards to our employees under the 2011 Plan which vest annually over a four-year period. At December 31, 2016,2018, a total of 5,830,0789,705,441 options were outstanding, of which 1,827,2644,801,904 were exercisable, 737,1131,183,154 restricted stock unit awards were outstanding, and 3,661,5383,340,351 shares were available for future grant under the 2011 Plan.
Under the 2011 Plan, we may issue a stock award with additional acceleration of vesting and exercisability upon or after a change in control. In the absence of such provisions, no such acceleration will occur. The stock options and restricted stock unit awards we issue to our chief executive officer and issued to B. Lynne Parshall in her former role as chief operating officer will accelerate upon a change of control, as defined in the 2011 Plan. In addition, we implemented a change of control and severance benefit plan that provides for change of control and severance benefits to our executive officers, including our chief executive officer and chief financial officer. If we terminate one of our executive officers or if an executive officer resigns for good reason during the period that begins three months before and ends twelve months following a change in control of the company, the impacted executive officers’ stock options and RSUs vesting will accelerate for options and RSUs outstanding as of the termination date.
Corporate Transactions and Change in Control under 2011 Plan
In the event of certain significant corporate transactions, our Board of Directors has the discretion to take one or more of the following actions with respect to outstanding stock awards under the 2011 Plan:
| ● | arrange for assumption, continuation, or substitution of a stock award by a surviving or acquiring entity (or its parent company); |
| ● | arrange for the assignment of any reacquisition or repurchase rights applicable to any shares of our common stock issued pursuant to a stock award to the surviving or acquiring corporation (or its parent company); |
| ● | accelerate the vesting and exercisability of a stock award followed by the termination of the stock award; |
| ● | arrange for the lapse of any reacquisition or repurchase rights applicable to any shares of our common stock issued pursuant to a stock award; |
| ● | cancel or arrange for the cancellation of a stock award, to the extent not vested or not exercised prior to the effective date of the corporate transaction, in exchange for cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and |
| ● | arrange for the surrender of a stock award in exchange for a payment equal to the excess of (a) the value of the property the holder of the stock award would have received upon the exercise of the stock award, over (b) any exercise price payable by such holder in connection with such exercise. |
2002 Non-Employee Directors’ Stock Option Plan
In September 2001, our Board of Directors adopted, and the stockholders subsequently approved, an amendment and restatement of the 1992 Non-Employee Directors’ Stock Option Plan, which provides for the issuance of non-qualified stock options and restricted stock units to our non-employee directors. The name of the resulting plan is the 2002 Non-Employee Directors’ Stock Option Plan, (theor the 2002 Plan).Plan. In June 2015, after receiving approval from our stockholders, we amended our 2002 Non-Employee Directors Stock Option Plan to increase the total number of shares reserved for issuance. We increased the shares available under our 2002 Non-Employee Directors Stock Option Plan from 1,200,000 to 2,000,000. Options under this plan expire ten years from the date of grant. Options granted become exercisable in four equal annual installments beginning one year after the date of grant. At December 31, 2016,2018, a total of 615,812757,750 options were outstanding, of which 368,877437,750 were exercisable, 41,15163,099 restricted stock unit awards were outstanding, and 747,869420,762 shares were available for future grant under the 2002 Plan.
Employee Stock Purchase Plan
In June 2009, our Board of Directors adopted, and the stockholders subsequently approved, the amendment and restatement of the ESPP and we reserved an additional 150,000 shares of common stock for issuance thereunder. In each of the subsequent years, we reserved an additional 150,000 shares of common stock for the ESPP resulting in a total of 3,374,596 million3,674,596 shares authorized under the plan as of December 31, 2016.2018. The ESPP permits full-time employees to purchase common stock through payroll deductions (which cannot exceed 10 percent of each employee’s compensation) at the lower of 85 percent of fair market value at the beginning of the purchase period or the end of each six-month purchase period. Under the amended and restated ESPP, employees must hold the stock they purchase for a minimum of six months from the date of purchase. During 2016,2018, employees purchased and we issued to employees 46,05143,416 shares under the ESPP at a weighted average price of $30.47$39.03 per share. At December 31, 2016,2018, there were 585,713774,816 shares available for purchase under the ESPP.
Stock Option Activity
The following table summarizes the stock option activity under our stock plans for the year ended December 31, 20162018 (in thousands, except per share and contractual life data):
| | Number of Shares | | | Weighted Average Exercise Price Per Share | | Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | | | Number of Shares | | | Weighted Average Exercise Price Per Share | | | Average Remaining Contractual Term (Years) | | | Aggregate Intrinsic Value | | Outstanding at December 31, 2015 | | | 8,041 | | | $ | 33.21 | | | | | | | Outstanding at December 31, 2017 | | | | 9,397 | | | $ | 44.52 | | | | | | | | Granted | | | 2,428 | | | $ | 54.79 | | | | | | | | 3,518 | | | $ | 48.40 | | | | | | | | Exercised | | | (994 | ) | | $ | 12.63 | | | | | | | | (1,064 | ) | | $ | 17.78 | | | | | | | | Cancelled/forfeited/expired | | | (297 | ) | | $ | 53.65 | | | | | | | | (540 | ) | | $ | 52.47 | | | | | | | | Outstanding at December 31, 2016 | | | 9,178 | | | $ | 40.48 | | | | 4.46 | | | $ | 122,738 | | | Exercisable at December 31, 2016 | | | 4,898 | | | $ | 28.73 | | | | 3.40 | | | $ | 107,969 | | | Outstanding at December 31, 2018 | | | | 11,311 | | | $ | 47.85 | | | | 4.41 | | | $ | 93,663 | | Exercisable at December 31, 2018 | | | | 6,071 | | | $ | 46.83 | | | | 3.22 | | | $ | 63,756 | |
The weighted-average estimated fair values of options granted were $26.72, $27.44$25.49, $25.42 and $17.54$26.72 for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 2015 and 2014 were $28.0$34.8 million, $84.7$49.5 million and $62.8$28.0 million, respectively, which we determined as of the date of exercise. The amount of cash received from the exercise of stock options was $12.6$18.9 million, $23.6$21.2 million and $22.4$12.6 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. For the year ended December 31, 2016,2018, the weighted-average fair value of options exercised was $40.83.$50.50. As of December 31, 2016,2018, total unrecognized compensation cost related to non-vested stock-based compensation plans was $48.1$118.3 million. We will adjust the total unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of 1.11.2 years.
Restricted Stock Unit Activity
The following table summarizes the RSU activity for the year ended December 31, 20162018 (in thousands, except per share data):
| | Number of Shares | | | Weighted Average Grant Date Fair Value Per Share | | | Number of Shares | | | Weighted Average Grant Date Fair Value Per Share | | Non-vested at December 31, 2015 | | | 751 | | | $ | 47.47 | | | Non-vested at December 31, 2017 | | | | 863 | | | $ | 49.55 | | Granted | | | 346 | | | $ | 41.79 | | | | 789 | | | $ | 51.06 | | Vested | | | (270 | ) | | $ | 39.22 | | | | (324 | ) | | $ | 50.21 | | Cancelled/forfeited | | | (49 | ) | | $ | 49.38 | | | | (82 | ) | | $ | 51.59 | | Non-vested at December 31, 2016 | | | 778 | | | $ | 47.68 | | | Non-vested at December 31, 2018 | | | | 1,246 | | | $ | 50.20 | |
For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, the weighted-average grant date fair value of RSUs granted was $41.79, $65.69$51.06, $48.88 and $44.94$41.79 per RSU, respectively. As of December 31, 2016,2018, total unrecognized compensation cost related to RSUs was $13.3$27.9 million. We will adjust the total unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of 1.21.4 years.
Stock-based Compensation Expense and Valuation Information
The following table summarizes stock-based compensation expense for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands), which was allocated as follows and includes $10.1$44.3 million, $17.5 million and $6.5$10.1 million of stock-based compensation expense for Akcea employees in 20162018, 2017 and 2015,2016, respectively:
| Year Ended December 31, | | | 2016 | | 2015 | | 2014 | | Research, development and patents | | $ | 55,099 | | | $ | 43,638 | | | $ | 25,843 | | General and administrative | | | 17,009 | | | | 15,676 | | | | 5,540 | | Total | | $ | 72,108 | | | $ | 59,314 | | | $ | 31,383 | |
| | Year Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | Cost of products sold | | $ | 160 | | | $ | — | | | $ | — | | Research, development and patent | | | 76,557 | | | | 64,521 | | | | 55,099 | | Selling, general and administrative | | | 54,595 | | | | 21,454 | | | | 17,009 | | Total | | $ | 131,312 | | | $ | 85,975 | | | $ | 72,108 | |
Determining Fair Value
Valuation. We measure stock-based compensation expense for equity-classified awards, principally related to stock options, RSUs, and stock purchase rights under the 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 value RSUs based on the market price of our common stock on the date of grant.
We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under our ESPP. The expected term of stock options granted represents the period of time that we expect them to be outstanding. We estimate the expected term of options granted based on actual and projected exercise patterns. We recognize compensation expense for stock options granted, RSUs, and stock purchase rights under the ESPP using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), an entity recognizeswe recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.
For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, we used the following weighted-average assumptions in our Black-Scholes calculations:
Employee Stock Options:
| December 31, | | December 31, | | | 2016 | | 2015 | | 2014 | | 2018 | | | 2017 | | | 2016 | | Risk-free interest rate | 1.5 % | | 1.5 % | | 1.7 % | | | 2.4 | % | | | 1.8 | % | | | 1.5 | % | Dividend yield | 0.0 % | | 0.0 % | | 0.0 % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Volatility | 58.7 % | | 53.8 % | | 50.1 % | | | 63.0 | % | | | 65.9 | % | | | 58.7 | % | Expected life | 4.5 years | | 4.5 years | | 4.7 years | | 4.6 years | | | 4.5 years | | | 4.5 years | |
Board of Director Stock Options:
| December 31, | | December 31, | | | 2016 | | 2015 | | 2014 | | 2018 | | | 2017 | | | 2016 | | Risk-free interest rate | 1.3 % | | 2.1 % | | 2.2 % | | | 2.8 | % | | | 2.2 | % | | | 1.3 | % | Dividend yield | 0.0 % | | 0.0 % | | 0.0 % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Volatility | 53.1 % | | 52.2 % | | 54.2 % | | | 61.5 | % | | | 61.2 | % | | | 53.1 | % | Expected life | 6.5 years | | 6.9 years | | 6.9 years | | 6.6 years | | | 6.6 years | | | 6.5 years | |
ESPP:
| December 31, | | December 31, | | | 2016 | | 2015 | | 2014 | | 2018 | | | 2017 | | | 2016 | | Risk-free interest rate | 0.4 % | | 0.1 % | | 0.1 % | | | 1.8 | % | | | 0.8 | % | | | 0.4 | % | Dividend yield | 0.0 % | | 0.0 % | | 0.0 % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Volatility | 86.4 % | | 51.7 % | | 60.1 % | | | 47.3 | % | | | 59.9 | % | | | 86.4 | % | Expected life | 6 months | | 6 months | | 6 months | | 6 months | | | 6 months | | | 6 months | |
Risk-Free Interest Rate. We base the risk-free interest rate assumption on observed interest rates appropriate for the term of our stock option plans or ESPP.
Dividend Yield. We base the dividend yield assumption on our history and expectation of dividend payouts. We have not paid dividends in the past and do not expect to in the future.
Volatility. We use an average of the historical stock price volatility of our stock for the Black-Scholes model. We computed the historical stock volatility based on the expected term of the awards.
Expected Life. The expected term of stock options we have granted represents the period of time that we expect them to be outstanding. We estimated the expected term of options we have granted based on actual and projected exercise patterns.
Forfeitures. We reduce stock-based compensation expense for estimated forfeitures. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures based on historical experience. Our historical forfeiture estimates have not been materially different from our actual forfeitures.
In addition to our stock plans, Akcea has its own stock plan under which it grants options and RSUs and under which it derives its stock-based compensation expense. The following are the weighted-average Black-Scholes assumptions Akcea used under its plan for the years ended December 31, 2018, 2017 and 2016:
Employee Stock Options:
| | December 31, | | | | 2018 | | | 2017 | | | 2016 | | Risk-free interest rate | | | 2.8 | % | | | 1.9 | % | | | 1.6 | % | Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Volatility | | | 77.1 | % | | | 79.5 | % | | | 71.4 | % | Expected life | | 6.08 years | | | 6.06 years | | | 6.08 years | |
Board of Director Stock Options:
| | December 31, | | | | 2018 | | | 2017 | | | 2016 | | Risk-free interest rate | | | 2.9 | % | | | 1.9 | % | | | 2.0 | % | Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Volatility | | | 78.2 | % | | | 79.4 | % | | | 79.6 | % | Expected life | | 6.42 years | | | 6.25 years | | | 6.08 years | |
The following summarizes the Black-Scholes input methodology for Akcea options that differs from the methodology we use for Ionis options:
Volatility. Since Akcea does not have sufficient history to estimate the volatility of its common stock, Akcea calculates its expected volatility based on a blend of its historical volatility and reported data from selected publicly traded peer companies for which historical information is available. Akcea plans to continue to use this blend to calculate its volatility until the historical volatility of its common stock is sufficient to measure expected volatility for future option grants.
Expected Life. Since Akcea does not have sufficient historical information, it uses the simplified method for estimating its expected term. Under the simplified method Akcea calculates its expected term as the average time-to-vesting and the contractual life of the options. As Akcea gains additional historical information, it will transition to calculating its expected term based on its exercise patterns.
The provisions forLoss before income taxes ontax (benefit) expense is comprised of (in thousands):
| | Year Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | United States | | $ | (69,576 | ) | | $ | (5,289 | ) | | $ | (57,466 | ) | Foreign | | | (6,580 | ) | | | (11,474 | ) | | | — | | Loss before income tax (benefit) expense | | $ | (76,156 | ) | | $ | (16,763 | ) | | $ | (57,466 | ) |
Our income from continuing operations weretax (benefit) expense was as follows (in thousands):
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | | Current: | | | | | | | | | | | | | | | | | | | Federal | | $ | 1,067 | | | $ | 379 | | | $ | 263 | | | $ | 438 | | | $ | (7,460 | ) | | $ | 1,067 | | State | | | 1,867 | | | | (7 | ) | | | (4,295 | ) | | | (1,442 | ) | | | 1,246 | | | | 1,867 | | Total current | | | 2,934 | | | | 372 | | | | (4,032 | ) | | Foreign | | | | 374 | | | | 234 | | | | — | | Total current income tax (benefit) expense | | | | (630 | ) | | | (5,980 | ) | | | 2,934 | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred: | | | | | | | | | | | | | | | | | | | | | | | | | Federal | | | — | | | | — | | | | (8,948 | ) | | | (290,511 | ) | | | — | | | | — | | State | | | — | | | | — | | | | (2,427 | ) | | | — | | | | — | | | | — | | Total deferred | | | — | | | | — | | | | (11,375 | ) | | Income tax expense (benefit) | | $ | 2,934 | | | $ | 372 | | | $ | (15,407 | ) | | Total deferred income tax (benefit) expense | | | | (290,511 | ) | | | — | | | | — | | Total income tax (benefit) expense | | | $ | (291,141 | ) | | $ | (5,980 | ) | | $ | 2,934 | |
In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as other comprehensive income, intraperiod tax allocation rules require us to allocate the tax provision to the other categories of earnings. We then record a related tax benefit in continuing operations. During 2016 and 2015, we recorded unrealized losses on our investments in available-for-sale securities in other comprehensive income, therefore we did not have to allocate our tax provision to our other categories of earnings. However, during 2014, we recorded unrealized gains on our investments in available-for-sale securities and had to allocate our tax provision between continuing operations and other comprehensive income. As a result, for the year ended December 31, 2014, we recorded a $12.8 million tax benefit, in continuing operations and a $12.8 million tax expense, in other comprehensive income.
The reconciliation between our effective tax rate on loss from continuing operations and the statutory U.S. tax rate is as follows (in thousands):
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | | Pre-tax loss | | $ | (83,622 | ) | | | | | $ | (87,906 | ) | | | | | $ | (54,391 | ) | | | | | $ | (76,156 | ) | | | | | $ | (16,763 | ) | | | | | $ | (57,466 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Statutory rate | | | (29,268 | ) | | | 35.0 | % | | | (30,767 | ) | | | 35.0 | % | | | (19,035 | ) | | | 35.0 | % | | | (15,993 | ) | | | 21.0 | % | | | (5,867 | ) | | | 35.0 | % | | | (20,113 | ) | | | 35.0 | % | State income tax net of federal benefit | | | (276 | ) | | | 0.3 | % | | | 1 | | | | 0.0 | % | | | (3,125 | ) | | | 5.7 | % | | | (2,202 | ) | | | 2.9 | % | | | 820 | | | | (4.9 | )% | | | 95 | | | | (0.2 | )% | Foreign | | | | 1,735 | | | | (2.3 | )% | | | 4,299 | | | | (25.6 | )% | | | — | | | | 0.0 | % | Net change in valuation allowance | | | 55,927 | | | | (66.9 | )% | | | 69,499 | | | | (79.1 | )% | | | 29,547 | | | | (54.3 | )% | | | (277,924 | ) | | | 364.9 | % | | | (86,296 | ) | | | 514.8 | % | | | 46,402 | | | | (80.7 | )% | Loss on debt extinguishment | | | — | | | | 0.0 | % | | | — | | | | 0.0 | % | | | 2,406 | | | | (4.4 | )% | | Net operating loss expiration | | | | 8,864 | | | | (11.6 | )% | | | 3,987 | | | | (23.8 | )% | | | — | | | | 0.0 | % | TEGSEDI licensing gain | | | | 59,583 | | | | (78.2 | )% | | | — | | | | 0.0 | % | | | — | | | | 0.0 | % | Tax credits | | | (26,954 | ) | | | 32.2 | % | | | (41,284 | ) | | | 47.0 | % | | | (23,628 | ) | | | 43.4 | % | | | (73,362 | ) | | | 96.3 | % | | | (32,769 | ) | | | 195.5 | % | | | (26,954 | ) | | | 46.9 | % | California franchise tax refund | | | — | | | | 0.0 | % | | | — | | | | 0.0 | % | | | (2,795 | ) | | | 5.1 | % | | Deferred tax true-up | | | 2,591 | | | | (3.1 | )% | | | 1,496 | | | | (1.7 | )% | | | 977 | | | | (1.8 | )% | | | 9,947 | | | | (13.1 | )% | | | 4,848 | | | | (28.9 | )% | | | 2,591 | | | | (4.5 | )% | Tax rate change | | | | (1,808 | ) | | | 2.4 | % | | | 114,832 | | | | (685.0 | )% | | | — | | | | 0.0 | % | Non-deductible compensation | | | | 3,154 | | | | (4.1 | )% | | | 1,575 | | | | (9.4 | )% | | | 825 | | | | (1.4 | )% | Other non-deductible items | | | | (569 | ) | | | 0.7 | % | | | 2,548 | | | | (15.2 | )% | | | 324 | | | | (0.6 | )% | Akcea deconsolidation adjustment at IPO | | | | — | | | | 0.0 | % | | | 469 | | | | (2.8 | )% | | | — | | | | 0.0 | % | Stock-based compensation | | | | (4,199 | ) | | | 5.5 | % | | | (14,337 | ) | | | 85.5 | % | | | — | | | | 0.0 | % | Other | | | 914 | | | | (1.1 | )% | | | 1,427 | | | | (1.6 | )% | | | 246 | | | | (0.5 | )% | | | 1,633 | | | | (2.1 | )% | | | (89 | ) | | | 0.5 | % | | | (236 | ) | | | 0.4 | % | Effective rate | | $ | 2,934 | | | | (3.5 | )% | | $ | 372 | | | | (0.4 | )% | | $ | (15,407 | ) | | | 28.2 | % | | $ | (291,141 | ) | | | 382.3 | % | | $ | (5,980 | ) | | | 35.7 | % | | $ | 2,934 | | | | (5.1 | )% |
Significant components of our deferred tax assets and liabilities as of December 31, 20162018 and 20152017 are as follows (in thousands):
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | Deferred Tax Assets: | | | | | | | | | | | | | Net operating loss carryovers | | $ | 194,372 | | | $ | 218,493 | | | $ | 89,717 | | | $ | 153,575 | | R&D credits | | | 193,845 | | | | 153,601 | | | | 313,652 | | | | 240,290 | | Deferred revenue | | | 54,203 | | | | 45,110 | | | | 27,381 | | | | 54,302 | | Stock-based compensation | | | 48,209 | | | | 31,093 | | | | 61,027 | | | | 40,090 | | Intangible and capital assets | | | | 49,007 | | | | 672 | | Other | | | 26,228 | | | | 19,655 | | | | 8,275 | | | | 12,164 | | Total deferred tax assets | | $ | 516,857 | | | $ | 467,952 | | | $ | 549,059 | | | $ | 501,093 | | | | | | | | | | | | | | | | | | | Deferred Tax Liabilities: | | | | | | | | | | | | | | | | | Convertible debt | | $ | (62,669 | ) | | $ | (55,928 | ) | | $ | (24,018 | ) | | $ | (32,391 | ) | Unrealized gain in other comprehensive income | | | - | | | | (5,288 | ) | | Intangible and capital assets | | | (2,030 | ) | | | (2,643 | ) | | Net deferred tax asset | | $ | 452,158 | | | $ | 404,093 | | | $ | 525,041 | | | $ | 468,702 | | Valuation allowance | | | (452,158 | ) | | | (404,093 | ) | | | (234,245 | ) | | | (468,702 | ) | | | | | | | | | | | | | | | | | | Net deferreds | | $ | — | | | $ | — | | | Total net deferred tax assets and liabilities | | | $ | 290,796 | | | $ | — | |
We have adjusted all prior year tax amounts to reflect the tax impact of our adoption of Topic 606.
We evaluate our deferred tax assets regularly to determine whether adjustments to the valuation allowance are appropriate due to changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. Our material assumptions are our forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. Although we believe our estimates are reasonable, we are required to use significant judgment in determining the appropriate amount of valuation allowance recorded against our deferred tax assets.
We have historically recorded a valuation allowance against all our net deferred tax assets relating primarilydue to cumulative financial statement losses. However, in the fourth quarter of 2018, we reversed the valuation allowance previously recorded against Ionis’ stand-alone U.S. federal net deferred tax assets, resulting in a one-time non-cash tax benefit of $332.1 million. Given our current stand-alone Ionis pre-tax income, and assuming we maintain this current level of Ionis stand-alone pre-tax income, we expect to generate income before taxes in the U.S. in future periods at a level that would result in us fully utilizing our U.S. federal net operating loss carryforwards or NOL’s, and researchmost of our Research and developmentDevelopment and Orphan Drug tax credit carryforwards. Subjectcarryforwards over the next three years.
We continue to certain limitations, we may use these deferred tax assets to offset taxable income in future periods. Since we have a history of losses and the likelihood of future profitability is not assured as it pertains to the income tax accounting rules, we have providedmaintain a full valuation allowance for theof $234.2 million against all of Akcea’s net deferred tax assets in our balance sheet as of December 31, 2016. If we determine that we are able to realize a portion or all of theseand the net state deferred tax assets inof Ionis at December 31, 2018 due to uncertainties related to our ability to realize the future, we will record an adjustment to increase their recorded value and a corresponding adjustment to increase income or additional paid in capital, as appropriate, in that same period.
Historically, we recognized excess tax benefits associated with share-based compensationthese assets.
Our valuation allowance decreased by $234.5 million from December 31, 2017 to stockholders' equity only when realized. We followedDecember 31, 2018. The net decrease relates primarily to the with-and-without approach excluding any indirect effectsreversal of the excess tax deductions to determine when we should realize excess tax benefits relating to share-based compensation. Under this approach, we did not realize our excess tax benefits related to share-based compensation until after we utilize all our other tax benefits available to us. During the year ended December 31, 2016, we realized $1.9 million of such excess tax benefits, and accordingly, wevaluation allowance previously recorded a corresponding credit to additional paid-in capital.
In March 2016, the FASB issued amended guidance to simplify certain aspects of share-based payment accounting which affects how we account for unrecognized tax benefits. As of December 31, 2016, we had $82.5 million of unrealized excess tax benefits associated with share-based compensation. We adopted this amended guidance on January 1, 2017. Upon adoption we will recognize the balance of these unrecognized tax benefits as aagainst Ionis’ stand-alone U.S. federal net deferred tax asset which will beassets, offset by current year utilization of a portion of our full valuation allowance. The adoption of this guidance did not affect our accumulated loss.net operating loss carry forwards.
At December 31, 2016,2018, we had federal and state, primarily California, tax net operating loss carryforwards of approximately $679.8$284.6 million and $973.1$808.7 million, respectively. Our federal tax loss carryforwards will begin to expire in 2024,2033, unless we use them before then. Our California loss carryforwards continuecontinued to expire in 2016.2018. At December 31, 20162018, we also had federal and California research and development tax credit carryforwards of approximately $189.6$288.9 million and $48.0$68.4 million, respectively. Our Federal research and development tax credit carryforwards beginbegan to expire in 2018. Our California research and development tax credit carryforwards are available indefinitely.
Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate income tax rate to 21 percent, imposing a mandatory one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and eliminating the corporate alternative minimum tax, or AMT, and changing how existing AMT credits can be realized. We were required to recognize the tax effect of the tax law changes the year of enactment. In order to calculate these effects, we were required to determine the transition tax amount, remeasure our U.S. deferred tax assets and liabilities, and consider the impact to our AMT tax credit carryforwards. For the year ended December 31, 2017, we recorded provisional amounts in accordance with that guidance where it was possible for us to make reasonable estimates of the effects of the Tax Act. We evaluated the decrease in our corporate tax rate and recorded a provisional, one-time tax expense of $107.3 million at December 31, 2017. We fully offset our tax effect by a decrease in our valuation allowance which resulted in no net tax effect in 2017. During the fourth quarter of 2018, we completed our accounting for all aspects of the Tax Act. We did not identify material changes from our 2017 provisional analysis.
We analyze filing positions in all of theU.S. federal, state and stateforeign jurisdictions where we file income tax returns, and all open tax years in these jurisdictions to determine if we have any uncertain tax positions on any of our income tax returns. We recognize the impact of an uncertain tax position on an income tax return at the largest amount that the relevant taxing authority is more-likely-than not to sustain upon audit. We do not recognize uncertain income tax positions if they have less than 50 percent likelihood of the applicable tax authority sustaining our position.
The following table summarizes our gross unrecognized tax benefits (in thousands):
| | Year Ended December 31, | | | Years Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | | Beginning balance of unrecognized tax benefits | | $ | 51,257 | | | $ | 27,365 | | | $ | 23,964 | | | $ | 78,014 | | | $ | 66,999 | | | $ | 51,257 | | Settlement of prior period tax positions | | | (4,033 | ) | | | — | | | | — | | | | — | | | | — | | | | (4,033 | ) | Decrease for prior period tax positions | | | — | | | | — | | | | (1,653 | ) | | | (12,814 | ) | | | — | | | | — | | Increase for prior period tax positions | | | 7,928 | | | | 215 | | | | — | | | | — | | | | 1,520 | | | | 7,928 | | Increase for current period tax positions | | | 11,847 | | | | 23,677 | | | | 5,054 | | | | 3,101 | | | | 9,495 | | | | 11,847 | | Ending balance of unrecognized tax benefits | | $ | 66,999 | | | $ | 51,257 | | | $ | 27,365 | | | $ | 68,301 | | | $ | 78,014 | | | $ | 66,999 | |
Included in the balance of unrecognized tax benefits at December 31, 2016,2018, is $46.4$55.5 million that if recognized, would notcould impact our income tax benefit or effective tax rate, as long as our deferred tax asset remains subject to a fullour remaining valuation allowance.
We do not foresee any material changes to our gross unrecognized tax benefits within the next twelve months.
We recognize interest and/or penalties related to income tax matters in income tax expense. We did not recognize any accrued interest and penalties related to gross unrecognized tax benefits during the year ended December 31, 2016.2018.
Due to the carryforward of unutilized net operating losses and research and development credits, weWe are subject to taxation in the United StatesU.S. and various state and foreign jurisdictions. Our tax years for 1998 and forward1999 through 2018 are subject to examination by the U.S. federal, state and foreign tax authoritiesauthorities.
We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries as we consider those earnings to be permanently reinvested. It is not practicable for us to calculate the amount of unrecognized deferred tax years for 2003 and forwardliabilities associated with these earnings.
We are subject to examinationperiodic audits by domestic and foreign tax authorities; however, we are not aware of any audits at this time. We believe that we have appropriate support for the Californiaincome tax authorities.positions taken on our tax returns and our accruals for tax liabilities are adequate for all open audit years. Our conclusions are based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
6. Collaborative Arrangements and Licensing Agreements
Strategic Partnerships
AstraZeneca
Cardiometabolic and Renal Diseases Partnership
In July 2015, we and AstraZeneca formed a strategic collaboration to discover and develop antisense therapies for treating cardiovascular and metabolic diseases primarily focused on targets in the kidney and renal diseases. As part of the agreement, we granted AstraZeneca an exclusive license to a preclinical program and the option to license a drug for each target advanced under this research collaboration. Upon acceptance of a drug development candidate, AstraZeneca will be responsible for all further global development, regulatory and commercialization activities for such drug.
Under the terms of the agreement, we received a $65 million upfront payment. Since this agreement has multiple elements, we evaluated the deliverables in this arrangement and determined that none of the deliverables have stand-alone value because of the early stage of research for this collaboration. Therefore, we concluded there is one unit of accounting and we are amortizing the $65 million upfront payment through August 2021. We are eligible to receive license fees and substantive milestone payments of up to more than $4 billion as drugs under this collaboration advance, including up to $1.1 billion for the achievement of development milestones and up to $2.9 billion for regulatory milestones. In December 2016, we earned a $25 million milestone payment when we moved the first development candidate into preclinical development, IONIS-AZ4-2.5-LRx, our first generation 2.5 plus LIgand-Conjugated Antisense, or LICA, drug. We will earn the next milestone payment of $10 million under this collaboration if we advance a drug under our cardiometabolic research program with AstraZeneca. In addition, we are eligible to receive tiered royalties up to the low teens on sales from any product that AstraZeneca successfully commercializes under this collaboration agreement.
Oncology Partnership
In December 2012, we entered into a collaboration agreement with AstraZeneca to discover and develop antisense drugs for cancer. As part of the agreement, we granted AstraZeneca an exclusive license to develop and commercialize IONIS-STAT3-2.5Rx for the treatment of cancer and an option to license up to three anti-cancer drugs under a separate research program. AstraZeneca is responsible for all global development, regulatory and commercialization activities for IONIS-STAT3-2.5Rx. We and AstraZeneca have evaluated IONIS-STAT3-2.5Rx in patients with advanced metastatic hepatocellular carcinoma and advanced lymphoma. AstraZeneca is evaluating IONIS-STAT3-2.5Rx in combination with MEDI4736, AstraZeneca's investigational anti-PD-L1 drug, in patients with head and neck cancer and in patients with diffuse large B cell lymphoma. For the research program, we are responsible for identifying a development candidate for each of the three anti-cancer research programs. AstraZeneca has the option to license drugs resulting from each of the three anti-cancer research programs, and if AstraZeneca exercises its option for a drug, it will be responsible for all further global development, regulatory and commercialization activities for such drug. The first development candidate identified under the anti-cancer research program was IONIS-KRAS-2.5Rx, which AstraZeneca licensed from us in December 2016. IONIS-KRAS-2.5Rx is a Generation 2.5 antisense drug we designed to directly target KRAS, one of the most frequently mutated genes in cancer.
Under the terms of the agreement, we received $31 million in upfront payments. We recorded revenue of $11.5 million upon receipt of these payments and we have amortized $11.9 million into revenue as we have performed development activities under this collaboration. We are recognizing the remaining $7.6 million related to the option to license three drugs under the research program through February 2018. In January 2016, we and AstraZeneca amended the agreement for the research program.Under the amended terms of the agreement, we can earn an additional $5 million in milestone payments for advancing a drug under our research program.
We are eligible to receive milestone payments and license fees from AstraZeneca as programs advance in development. In addition, we are eligible to receive tiered royalties up to the low to mid-teens on sales from any drugs resulting from these programs. If AstraZeneca successfully develops IONIS-STAT3-2.5Rx,IONIS-KRAS-2.5Rx and two other drugs under the research program, we could receive license fees and substantive milestone payments of up to more than $750 million, including up to $226 million for the achievement of development milestones and up to $485 million for the achievement of regulatory milestones. From inception through December 2016, we have received $76 million in milestone payments and upfront fees under this oncology collaboration, not including the $15 million milestone payment and $13 million license fee we earned for IONIS-KRAS-2.5Rx in December 2016. We will earn the next milestone payment of $17.5 million if we advance a drug under our cancer research program with AstraZeneca.
Each of our agreements with AstraZeneca will continue until the expiration of all payment obligations under the applicable agreement. In addition, the agreement, or any program under the applicable agreement, may terminate early under the following situations:
| ● | AstraZeneca may terminate the agreement or any program at any time by providing written notice to us; |
| ● | AstraZeneca may terminate the agreement or any program by providing written notice if we undergo a change of control with a third party; and |
| ● | Either we or AstraZeneca may terminate the agreement or any program by providing written notice to the other party upon the other party's uncured failure to perform a material obligation under the agreement, or the entire agreement if the other party becomes insolvent. |
During 2016, 2015 and 2014 we earned revenue of $64.9 million, $6.4 million and $27.7 million, respectively, from our relationship with AstraZeneca, which represented 19 percent, 2 percent and 13 percent, respectively, of our total revenue for those periods. Our balance sheets at December 31, 2016 and 2015 included deferred revenue of $51.5 million and $63.3 million, respectively, related to our relationship with AstraZeneca.
Biogen
We have fourseveral strategic collaborations with Biogen focused on using antisense technology to advance the treatment of neurological disorders. These collaborations combine our expertise in creating antisense drugsmedicines with Biogen'sBiogen’s expertise in developing therapies for neurological disorders. We developed and licensed to Biogen SPINRAZA, our recently approved drugmedicine to treat pediatric and adult patientspeople with spinal muscular atrophy, or SMA. In December 2017, we entered into a collaboration with Biogen to identify new antisense medicines for the treatment of SMA. Additionally, we and Biogen are currently developing foursix other drugsmedicines to treat neurodegenerative diseases under these collaborations, including IONIS-SOD1Rx for ALS, IONIS-MAPTRx for Alzheimer’s disease, IONIS-C9Rx for ALS, and IONIS-BIIB6Rx, IONIS-BIIB7Rxand three drugsIONIS-BIIB8Rx to treat undisclosed neurodegenerative diseases, IONIS-BIIB4Rx,IONIS-BIIB5Rx and IONIS-BIIB6Rx.diseases. In addition to these drugs,medicines, we and Biogen are evaluating numerous additional targets to develop drugsmedicines to treat neurological diseases. In April 2018, we entered into a new strategic collaboration for the treatment of neurological diseases with Biogen. From inception through December 2016,2018, we have received nearly $500 millionover $2.0 billion from our Biogen collaborations, not including the $60 million milestone payment we earned for the FDA’s approval of SPINRAZA that$1 billion we received from Biogen in February 2017.the second quarter of 2018 for our 2018 strategic neurology collaboration.
Spinal Muscular Atrophy Collaborations
SPINRAZA (nusinersen)
In January 2012, we entered into a collaboration agreement with Biogen to develop and commercialize SPINRAZA, an RNA-targeted therapy for the treatment of SMA. Biogen reported in January 2019 that SPINRAZA was approved in over 40 countries around the world. In December 2016, the FDAFebruary 2019, SPINRAZA was approved SPINRAZA for the treatment of SMA in pediatric and adult patients. SPINRAZA is currently under Accelerated Assessment with the EMA for marketing authorization.China. Biogen is responsible for all further global development, regulatory and commercialization activities and costs for SPINRAZA. F-29SPINRAZA commercial activities.
Under the terms of our collaboration agreement,From inception through December 2018, we received an upfront payment of $29earned more than $785 million in January 2012, which we amortized through December 2016. Over the term of thetotal revenue under our SPINRAZA collaboration, we are eligible to receive up to $346including more than $350 million in a license feerevenue from SPINRAZA royalties and payments, including up to $121more than $435 million in substantive milestone and other payments associated with the clinical development of SPINRAZA prior to licensing and up to $150 million in substantive milestone payments if Biogen achieves pre-specified regulatory milestones.R&D revenue. We are also eligible to receivereceiving tiered royalties upranging from 11 percent to the mid-teens15 percent on any net sales of SPINRAZA. We have exclusively in-licensed patents related to SPINRAZA from Cold Spring Harbor Laboratory and the University of Massachusetts. We are obligated to pay Cold Spring Harbor Laboratory and the University of Massachusetts nominal amounts for license fees and milestone payments we receive and a low single digit royalty on net sales of SPINRAZA. From inception through December 2016, we have received $259 million in payments for advancing SPINRAZA, including the $75 million license fee we received from Biogen when Biogen licensed SPINRAZA, which we recognized as revenue in the third quarter of 2016. Additionally in February 2017, we received a $60 million substantive milestone payment that we earned in December 2016. We will earn the next milestone payment of up to $50 millionif Biogen receives regulatory approval in Europe or Japan for SPINRAZA.
IONIS-DMPK-2.5Rx
In June 2012, we and Biogen entered into a second and separate collaboration agreement to develop and commercialize a novel antisense drug, IONIS-DMPK-2.5Rx, targeting DMPK for the treatment of myotonic dystrophy type 1, or DM1. We areis responsible for global development of the drug through the completion of the first Phase 2 clinical trial. We completed a Phase 1/2 clinical study in patients with DM1. Based on the data reported in December 2016, we plan to pursue a more potent drug using our LICA technology. From inception through December 2016, we have received nearly $39 million in payments for advancing IONIS-DMPK-2.5Rx.
Neurology
In December 2012, we and Biogen entered into a separate collaboration agreement to develop and commercialize novel antisense drugs to up to three targets to treat neurodegenerative diseases. We are responsible for the development of each of the drugs through the completion of the initial Phase 2 clinical study for such drug. Biogen has the option to license a drug from each of the three programs through the completion of the first Phase 2 study for each program. We are currently advancing IONIS-BIIB4Rx under this collaboration. If Biogen exercises its option for a drug, it will assume all further global development, regulatory and commercialization responsibilitiesactivities and costs for that drug. SPINRAZA.
Over the course of our SPINRAZA collaboration, we identified two performance obligations, which were to perform R&D services and to deliver the SPINRAZA license to Biogen. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance through December 2016. We recognized the $75 million license fee for SPINRAZA as revenue when we delivered the license to Biogen in July 2016 because Biogen had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after we delivered it to Biogen.
We also earned additional milestone payments subsequent to delivering the license to Biogen that we recognized in full in the period each milestone payment became probable because we did not have a performance obligation related to each milestone payment. For example, we received $90 million of milestone payments for the approval of SPINRAZA in the EU and Japan in 2017 and recognized the full amounts into revenue in the period Biogen achieved the milestone events.
New antisense medicines for the treatment of SMA
In December 2017, we entered into a collaboration agreement with Biogen to identify new antisense medicines for the treatment of SMA. Biogen will have the option to license therapies arising out of this collaboration following the completion of preclinical studies. Upon licensing, Biogen will be responsible for all further global development, regulatory and commercialization activities and costs for such therapies. Under the terms of thecollaboration agreement, we received ana $25 million upfront payment of $30 million, which we are amortizing throughin December 2020. Over2017. We will receive development and regulatory milestone payments from Biogen if new medicines advance towards marketing approval. In total over the term of theour collaboration, we are eligible to receive up to $259 million$1.2 billion in a license fee and substantivefees, milestone payments per program. We are eligible to receiveand other payments, including up to $59$80 million infor the achievement of development milestone payments to support research and development of each program, including amounts related to the cost of clinical trials. We are also eligible to receivemilestones, up to $130$180 million in milestone payments per program if Biogen achieves pre-specified regulatoryfor the achievement of commercialization milestones and up to $800 million for the achievement of sales milestones. In addition, we are eligible to receive tiered royalties from the mid-teens to mid-20 percent range on net sales. We will achieve the next payment of up to $60 millionfor the license of a medicine under this collaboration.
At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. We determined the transaction price to be the $25 million upfront payment we received when we entered into the collaboration. We allocated the transaction price to our single performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in December 2020.
Neurology Collaborations
2018 Strategic Neurology
In April 2018, we and Biogen entered into a new strategic collaboration to develop novel antisense medicines for a broad range of neurological diseases and entered into a SPA. As part of the collaboration, Biogen gained exclusive rights to the use of our antisense technology to develop therapies for these diseases for 10 years. We are responsible for the identification of antisense drug candidates based on selected targets. Biogen is responsible for conducting IND-enabling toxicology studies for the selected target. Biogen will have the option to license the selected target after it completes the IND-enabling toxicology study. If Biogen exercises its option for a medicine, it will assume all further global development, regulatory and commercialization responsibilities and costs for that medicine.
In the second quarter of 2018, we received $1 billion from Biogen, comprised of $625 million to purchase our stock at an approximately 25 percent cash premium and $375 million in an upfront payment. We are eligible to receive up to $270 million in milestone payments for each medicine that achieves marketing approval. In addition, we are eligible to receive tiered royalties up to the mid-teens 20 percent range on sales from any drugs resulting from each of the three programs.net sales. From inception through December 2016,2018, we have received $43over $1 billion in payments under this collaboration, including $15 million we received in milestone payments and upfront feesthe fourth quarter of 2018 for advancing two targets under this collaboration. We will earnachieve the next milestone payment of up$7.5 million if Biogen designates a target under this collaboration.
At the commencement of this collaboration, we identified one performance obligation, which was to $10perform R&D services for Biogen. We determined our transaction price to be $552 million, comprised of $375 million from the upfront payment and $177 million for the continued developmentpremium paid by Biogen for its purchase of IONIS-BIIB4Rx.our common stock. We determined the fair value of the premium we received by using the stated premium in the SPA and applying a lack of marketability discount. We included a lack of marketability discount in our valuation of the premium because Biogen received restricted shares. We allocated the transaction price to our single performance obligation. In the fourth quarter of 2018, we received $15 million in milestone payments when we advanced two targets under this collaboration. We added these payments to our transaction price for our R&D services performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in June 2028.
2013 Strategic Neurology
In September 2013, we and Biogen entered into a long-term strategic relationship focused on applying antisense technology to advance the treatment of neurodegenerative diseases. As part of the collaboration, Biogen gained exclusive rights to the use of our antisense technology to develop therapies for neurological diseases and has the option to license drugsmedicines resulting from this collaboration. The exclusivity for neurological diseases will last through September 2019, and may be extended for any drug development programs Biogen is pursuing under the collaboration. We will usually be responsible for drug discovery and early development of antisense drugsmedicines and Biogen will have the option to license antisense drugsmedicines after Phase 2 proof of concept. In October 2016, we expanded our collaboration to include additional research activities we will perform. If Biogen exercises its option for a drug,medicine, it will assume all further global development, regulatory and commercialization responsibilities and costs for that drug.medicine. We are currently advancing three drugs,five medicines, IONIS-SOD1Rx, IONIS-BIIB5IONIS-C9Rx, IONIS-BIIB6Rx, IONIS-BIIB7Rxand IONIS-BIIB6IONIS-BIIB8Rx under this collaboration. In the fourth quarter of 2018, Biogen will belicensed IONIS-SOD1Rx, and as a result Biogen now is responsible for all of the drug discoveryfurther global development, regulatory and developmentcommercialization activities and costs for drugs using other modalities.IONIS-SOD1Rx.
Under the terms of the agreement, we received an upfront payment of $100 million and are eligible to receive milestone payments, license fees and royalty payments for all drugsmedicines developed through this collaboration, with the specific amounts dependent upon the modality of the molecule advanced by Biogen. If we have a change of control during the first six years of the collaboration, we may be required to refund Biogen a portion of the $100 million upfront payment, with the amount of the potential refund decreasing ratably as we progress through the initial six-year term of the collaboration. We are amortizing the $100 million upfront payment through September 2019. Because the amortization period for the upfront payment will never be less than the initial six-year term of the collaboration, the amount of revenue we recognize from the upfront payment will never exceed the amount that Biogen could potentially require us to refund.
For each antisense molecule that is chosen for drug discovery and development under this collaboration, we are eligible to receive up to approximately $260 million in a license fee and substantive milestone payments. We are eligible to receive up topayments per program. The $260 million per program consists of approximately $60 million for the achievement of research andin development milestones, including amounts related to the cost of clinical trials, and up to $130 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on net sales from any antisense medicines developed under this collaboration. From inception through December 2018, we have received over $210 million in upfront fees, milestone payments and other payments under this collaboration, not including a $5 million milestone payment we earned in the fourth quarter of 2018 for Biogen’s initiation of a Proof of Concept study for IONIS-SOD1Rx which we received in the first quarter of 2019. We will achieve the next payment of up to $10 million if we advance a program under this collaboration.
At the commencement of our strategic neurology collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. At inception, we determined the transaction price to be the $100 million upfront payment we received and allocated it to our single performance obligation. As we achieve milestone payments for our R&D services, we include these amounts in our transaction price for our R&D services performance obligation. We are recognizing revenue for our R&D services performance obligation based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in September 2019. From inception through December 2018, we have included $145 million in total payments in the transaction price for our R&D services performance obligation. In the third quarter of 2018, we earned a $10 million milestone payment when Biogen initiated a Phase 1 study of IONIS-C9Rx. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized this milestone payment in full in the third quarter of 2018 because we do not have any performance obligations related to this milestone payment.
We identified a second performance obligation upon Biogen’s license of IONIS-SOD1Rx in the fourth quarter of 2018 because the license we granted to Biogen is distinct from our other performance obligation. We recognized the $35 million license fee for IONIS-SOD1Rx as revenue at that time because Biogen had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after we delivered it to Biogen. Additionally, in the fourth quarter of 2018 we earned a $5 million milestone when Biogen initiated a Proof-of-Concept study for IONIS-SOD1Rx. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized this milestone payment in full in the fourth quarter of 2018 because we do not have any performance obligations related to this milestone payment.
Neurology
In December 2012, we and Biogen entered into a collaboration agreement to develop and commercialize novel antisense medicines to up to three targets to treat neurodegenerative diseases. We are responsible for the development of each of the medicines through the completion of the initial Phase 2 clinical study for such medicine. Biogen has the option to license a medicine from each of the programs through the completion of the first Phase 2 study for each program. We are currently advancing IONIS-MAPTRx for Alzheimer’s disease under this collaboration. If Biogen exercises its option for a medicine, it will assume all further global development, regulatory and commercialization responsibilities and costs for that medicine.
Under the terms of the agreement, we received an upfront payment of $30 million. Over the term of the collaboration, we are eligible to receive up to $210 million in a license fee and milestone payments per program, plus a mark-up on the cost estimate of the Phase 1 and 2 studies. The $210 million per program consists of up to $10 million in development milestone payments, plus a mark-up on the cost estimate of the Phase 1 and 2 studies and up to $130 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on net sales of any medicines resulting from each of the three programs. From inception through December 2018, we have received $58 million in milestone payments and upfront fees under this collaboration. We will achieve the next payment of $7.5 million if we continue to advance IONIS-MAPTRx.
At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Biogen. At inception, we determined the transaction price to be the $30 million upfront payment we received and allocated it to our single performance obligation. As we achieve milestone payments for our R&D services, we include these amounts in our transaction price for our R&D services performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in December 2020. From inception through December 2018, we have included $40 million in total payments in the transaction price for our R&D services performance obligation.
During the years ended December 31, 2018, 2017 and 2016, we earned the following revenue from our relationship with Biogen (in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised) | | SPINRAZA royalties (commercial revenue) | | $ | 237.9 | | | $ | 112.5 | | | $ | 0.9 | | R&D revenue | | | 137.1 | | | | 150.6 | | | | 248.8 | | Total revenue from our relationship with Biogen | | | 375.0 | | | | 263.1 | | | | 249.7 | | Percentage of total revenue | | | 63 | % | | | 51 | % | | | 67 | % |
Our consolidated balance sheet at December 31, 2018 and 2017 included deferred revenue of $580.9 million and $93.6 million, respectively, related to our relationship with Biogen.
Research, Development and Commercialization Partners
AstraZeneca
Cardiac, Renal and Metabolic Diseases Collaboration
In July 2015, we and AstraZeneca formed a collaboration to discover and develop antisense therapies for treating cardiac, renal and metabolic diseases. Under our collaboration, AstraZeneca has licensed three medicines from us: IONIS-AZ4-2.5-LRx, a medicine we designed to treat cardiovascular disease and our first medicine that combines our Generation 2.5 and LICA technology, IONIS-AZ5-2.5Rx, a medicine we designed to treat a genetically associated form of kidney disease and IONIS-AZ6-2.5-LRx, a medicine we designed to inhibit an undisclosed target to treat patients with nonalcoholic steatohepatitis, or NASH. AstraZeneca is responsible for all further global development, regulatory and commercialization activities and costs for each of the medicines it has licensed and any other future medicines AstraZeneca licenses.
Under the terms of the agreement, we received a $65 million upfront payment. We are eligible to receive license fees and milestone payments of up to more than $4 billion as medicines under this collaboration advance, including up to $1.1 billion for the achievement of development milestones and up to $2.9 billion for regulatory milestones. In addition, we are eligible to receive tiered royalties up to the low teens on net sales from any product that AstraZeneca successfully commercializes under this collaboration agreement. From inception through December 2018, we have received over $165 million in upfront fees, license fees, milestone payments, and other payments under this collaboration, including a $10 million milestone payment we earned in the third quarter of 2018 when AstraZeneca initiated a Phase 1 trial for IONIS-AZ4-2.5-LRx. We will achieve the next payment of $10 million under this collaboration if we advance a medicine under this collaboration.
At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for AstraZeneca. We determined the transaction price to be the $65 million upfront payment we received and we allocated it to our single performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy this performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy this performance obligation in August 2021. As we achieve milestone payments for our R&D services, we include these amounts in our transaction price for our R&D services performance obligation. From inception through December 2018, we have included $90 million in payments in the transaction price for our R&D services performance obligation.
We identified separate performance obligations upon AstraZeneca’s license of IONIS-AZ5-2.5Rx and IONIS-AZ6-2.5-LRx in the first quarter of 2018 because the licenses are distinct from our other performance obligation and each other. We recognized each $30 million license fee in the first quarter of 2018 because AstraZeneca had full use of the licenses without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the licenses after we delivered them to AstraZeneca.
In the third quarter of 2018, we earned a $10 million milestone payment when AstraZeneca initiated a Phase 1 study of IONIS-AZ4-2.5-LRx. We concluded that the milestone payment was not related to our R&D services performance obligation. Therefore, we recognized this milestone payment in full in the third quarter of 2018 because we do not have any performance obligations related to this milestone payment.
Oncology Collaboration
In December 2012, we entered into a collaboration agreement with AstraZeneca to discover and develop antisense medicines to treat cancer. As part of the agreement, we granted AstraZeneca an exclusive license to develop and commercialize danvatirsen (formerly IONIS-STAT3-2.5Rx) for the treatment of cancer. AstraZeneca is now responsible for all global development, regulatory and commercialization activities for danvatirsen. We and AstraZeneca have evaluated danvatirsen in people with head and neck cancer, advanced lymphoma and advanced metastatic hepatocellular carcinoma. AstraZeneca is evaluating danvatirsen in combination with durvalumab, AstraZeneca’s PD-L1 blocking drug, in people with head and neck cancer, metastatic bladder cancer and metastatic non-small cell lung cancer. We and AstraZeneca also established an oncology research program. AstraZeneca has the option to license medicines resulting from the program, and if AstraZeneca exercises its option for a medicine, it will be responsible for all further global development, regulatory and commercialization activities and costs for such medicine. In the fourth quarter of 2018, we added IONIS-AZ7-2.5Rx to our preclinical pipeline, a second drug under our oncology collaboration.
Under the terms of this agreement, we received $31 million in upfront payments. We are eligible to receive milestone payments and license fees from AstraZeneca as programs advance in development. If AstraZeneca successfully develops danvatirsen and another medicine under the research program, we could receive license fees and milestone payments of up to more than $450 million, including up to $152 million for the achievement of development milestones and up to $275 million for the achievement of regulatory milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on net sales from any antisense drugs developed under this collaboration. If other modalities are chosen, such as small molecules or monoclonal antibodies, we are eligible to receive up to $90 million in substantive milestone payments, including up to $35 million for the achievement of research and development milestones and up to $55 million for the achievement of regulatory milestones. In addition, we are eligible to receive tiered single-digit royalties on salesmedicines resulting from any drugs using non-antisense modalities developed under this collaboration.these programs. From inception through December 2016,2018, we have received $142over $125 million in upfront fees, milestone payments, and other payments under this oncology collaboration, including nearly $30 million in milestone payments we achieved when AstraZeneca advanced danvatirsen and upfront fees under this collaboration.IONIS-AZ7-2.5Rx, in the fourth quarter of 2018. We will earnachieve the next milestone payment of up to $10$25 million if we choose another target to advance a medicine under this collaboration.our cancer research program with AstraZeneca.
F-30
At the commencement of this collaboration, we identified four performance obligations. We determined the transaction price to be the $31 million upfront payments we received. We allocated the transaction price based on the estimated stand-alone selling price of each of our performance obligations and recognized the associated revenue over the period of our performance. We recognized revenue for three of our obligations over our period of performance, which concluded in March 2014. Our remaining performance obligation was to perform R&D services. We allocated $7.6 million to this performance obligation and recognized the associated revenue over the period of our performance, which ended in February 2018. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation.
EachIn the fourth quarter of 2018, we earned a $17.5 million milestone payment and a $10 million milestone payment when AstraZeneca advanced two programs under our agreements with Biogen will continue untilcollaboration. We recognized these milestone payments in full in the earlier offourth quarter because we do not have any performance obligations related to these milestone payments.
During the date all of Biogen's options to obtain the exclusive licenses under the applicable agreement expire unexercised or, if Biogen exercises its option, until the expiration of all payment obligations under the applicable agreement. In addition, each agreement, or any program under an agreement, may terminate early underyears ended December 31, 2018, 2017 and 2016, we earned the following situations:
| ● | Biogen may terminate the agreement or any program at any time by providing written notice to us; |
| ● | Under specific circumstances, if we are acquired by a third party with a product that directly competes with a compound being developed under the agreement, Biogen may terminate the affected program by providing written notice to us; |
| ● | If, within a specified period of time, any required clearance of a transaction contemplated by an agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, is not received, then either we or Biogen may terminate the affected program by providing written notice to the other party; and |
| ● | Either we or Biogen may terminate any program by providing written notice to the other party upon the other party's uncured failure to perform a material obligation under the agreement with respect to the affected program, or the entire agreement if the other party becomes insolvent. |
During 2016, 2015 and 2014, we earned revenue of $207.9 million, $106.2 million and $123.2 million, respectively, from our relationship with Biogen, which represented 60 percent, 37 percent and 58 percent, respectively, of our total revenue for those periods. AstraZeneca (in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised) | | R&D revenue | | $ | 120.7 | | | $ | 21.6 | | | $ | 41.3 | | Percentage of total revenue | | | 20 | % | | | 4 | % | | | 11 | % |
Our consolidated balance sheetssheet at December 31, 20162018 and 20152017 included deferred revenue of $67.5$40.1 million and $91.6$57.7 million, respectively, related to our relationship with Biogen.AstraZeneca.
Research, Development and Commercialization PartnersBayer
Bayer
In May 2015, we entered into an exclusive license agreement with Bayer to develop and commercialize IONIS-FXIRx for the prevention of thrombosis. We were responsible for completing a Phase 2 study of IONIS-FXIRx in patientspeople with end-stage renal disease on hemodialysis.
Under the terms of the agreement, we received a $100 million upfront payment in the second quarter of 2015. We recorded revenue of $91.2 million related to the license for IONIS-FXIRx in June 2015 and we recognized the majority of the remaining amount related to development activities for IONIS-FXIRx through November 2016.
In February 2017, we amended our agreement with Bayer to advance IONIS-FXIRx and to initiate development of IONIS-FXI-LRx, which Bayer licensed. In conjunction with the decision to advance these programs, we will receivereceived a $75 million payment from Bayer. We plan to conductare conducting a Phase 2b study evaluating IONIS-FXIRx in patientspeople with end-stage renal disease on hemodialysis to finalize dose selection. Additionally, we plan to rapidly developare developing IONIS-FXI-LRx through Phase 1. Following these studies and Bayer'sBayer’s decision to further advance these programs, Bayer will be responsible for all global development, regulatory and commercialization activities and costs for both drugs. medicines.
We are eligible to receive additional milestone payments as each drugmedicine advances toward the market. In total over the term of ourthis collaboration, we are eligible to receive up to $385 million in license fees, milestone payments and other payments, including up to $125 million for the achievement of development milestones and up to $110 million for the achievement of commercialization milestones. In addition, we are eligible to receive tiered royalties in the low to high 20 percent range on gross margins of both drugsmedicines combined. From inception through December 2018, we have received over $175 million from our Bayer collaboration. We will earnachieve the next milestone payment of $10 million if we advance a program advances under this collaboration.
Our agreement with Bayer will continue untilF-39
At the expirationcommencement of allthis collaboration, we identified three performance obligations. We determined the transaction price to be the $100 million upfront payment we received. We allocated the transaction price based on the relative stand-alone selling prices of each of our performance obligations underand recognized the agreement. In addition, the agreement, or any program under the agreement, may terminate early under the following situations:associated revenue as follows:
| ● | We recognized $91.2 million for the exclusive license of IONIS-FXIRx in May 2015 because Bayer may terminatehad full use of the agreement orlicense without any program at any time by providing written notice to us;continuing involvement from us. |
| ● | EitherWe recognized $4.3 million for the R&D services for IONIS-FXIRx over the period of our performance, which ended in November 2016. |
| ● | We allocated $4.5 million for API, which we or Bayer may terminateare recognizing into revenue as we deliver the agreement or any program by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement, or the entire agreement if the other party becomes insolvent.API. |
In February 2017, when we amended our collaboration with Bayer, we identified two new performance obligations, one for the license of IONIS-FXI-LRx and one for R&D services. We determined the transaction price to be the $75 million payment. We allocated $64.9 million to the license of IONIS-FXI-LRx based on its estimated stand-alone selling price and recognized the associated revenue upon our delivery of the license in the first quarter of 2017. We allocated $10.1 million to our R&D services performance obligation based on an estimated stand-alone selling price. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our R&D services performance obligation in May 2019.
During 2016the years ended December 31, 2018, 2017 and 20152016, we earned the following revenue of $5.4 million and $93.4 million, respectively, from our relationship with Bayer which represented two percent and 33 percent, respectively, of our total revenue for those periods. (in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised) | | R&D revenue | | $ | 5.0 | | | $ | 67.1 | | | $ | 5.4 | | Percentage of total revenue | | | 1 | % | | | 13 | % | | | 1 | % |
Our consolidated balance sheet at December 31, 20162018 and 20152017 included deferred revenue of $1.4$4.3 million and $6.7$9.3 million, respectively, related to our relationship with Bayer.
GSK
In March 2010, we entered into an alliance with GSK using our antisense drug discovery platform to discover and develop new drugsmedicines against targets for rare and serious diseases, including infectious diseases and some conditions causing blindness. Our alliance currently comprises four drugs in development, includingUnder the terms of the agreement, we received upfront payments of $35 million.
GSK is advancing two medicines targeting hepatitis B virus, or HBV, under our Phase 3 drug IONIS-TTRRx. We are currently conducting a Phase 3 study for IONIS-TTRcollaboration: IONIS-HBVRx and we plan to report data from this study in the second quarter of 2017.IONIS-HBV-LRx. GSK has the exclusive option to license drugs resulting from this alliance afteris currently conducting Phase 2 proof-of-conceptstudies for a license fee, including IONIS-TTRRx. If GSK exercises its exclusive option for any drugs resulting from this alliance, it will be responsible for all further global development, regulatory and commercialization activities for such drug.
In October 2012, we and GSK amended the original agreement to reflect an accelerated clinical development plan for IONIS-TTRRx. We have completed enrollment in the Phase 3 study we are conducting in patients with TTR familial amyloid polyneuropathy, or FAP. From inception through December 2016, we have earned $70 million from GSK related to the developmentboth of IONIS-TTRRx, primarily in milestone payments. In addition, under the amended agreement, we and GSK increased the regulatory and commercial milestone payments we can earn should IONIS-TTRRx receive marketing authorization and meet pre-agreed sales targets.
In addition to IONIS-TTRRx, we have three drugs in development with GSK, including two antisense drugsthese medicines, which we designed to reduce the production of viral proteins associated with hepatitis B virus, or HBV infection; IONIS-HBVRx and IONIS-HBV-LRx, a follow-on drug using our LICA technology.infection. GSK is currently developing IONIS-HBVRx and IONIS-HBV-LRx, and if GSK exercises itshas the exclusive option to license the medicines resulting from this alliance at Phase 2 proof-of-concept for either of these drugs, it will be responsible for all further global development, regulatory and commercialization activities. We are also developing IONIS-GSK4-LRx which is an antisense drug we designed to treat an ocular disease.a license fee.
Under the terms of the agreement, we received $38 million in upfront and expansion payments, which we are amortizing through September 2017. Under our agreement, if GSK successfully develops all four drugs for one or more indicationsthese medicines and achieves pre-agreed sales targets, we could receive license fees and substantive milestone payments of up to nearly $900$262 million, including up to $157.5$47.5 million for the achievement of development milestones, up to $338.5$120 million for the achievement of regulatory milestones and up to $255$70 million for the achievement of commercialization milestones. Through December 2016, we have received $155 million in milestone payments and upfront fees under this alliance with GSK. We will earn the next milestone payment of up to $1.5 million if we further advance a program under this collaboration and we will earn a payment of $45 million if GSK licenses IONIS-TTRRx. In addition, we are eligible to receive tiered royalties up to the mid-teens on net sales from any product that GSK successfully commercializes under this alliance. From inception through December 2018, we have received more than $162 million in payments under this alliance with GSK. We will achieve the next payment of up to $25 million if GSK licenses a medicine under this program.
Our allianceAt the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for GSK. We determined the transaction price to be the $35 million upfront payments we received and allocated it to our single performance obligation. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance, which ended in March 2015. We do not have any remaining performance obligations under our collaboration with GSK, will continue untilhowever we can still earn additional payments and royalties as GSK advances these medicines.
During the earlier of the date that all of GSK's options to obtain the exclusive licenses under the agreement expire unexercised or, if GSK exercises its option, until the expiration of all payment obligations under the agreement. In addition, the agreement, or any program under the agreement, may terminate early underyears ended December 31, 2018, 2017 and 2016, we earned the following situations:
| ● | GSK may terminate any program, other than the IONIS-TTRRx program, at any time by providing written notice to us;
|
| ● | GSK may terminate the IONIS-TTRRx program by providing written notice to us after reviewing specific data from the Phase 3 study for the program; and
|
| ● | Either we or GSK may terminate any program by providing written notice to the other party upon the other party's uncured failure to perform a material obligation under the agreement with respect to the affected program, or the entire agreement if the other party becomes insolvent. |
During 2016, 2015 and 2014, we earned revenue of $12.3 million, $33.3 million and $37.3 million respectively, from our relationship with GSK which represented four percent, 12 percent and 17 percent, respectively, of(in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised) | | R&D revenue | | $ | 1.6 | | | $ | 14.8 | | | $ | 17.5 | | Percentage of total revenue | | | 0 | % | | | 3 | % | | | 5 | % |
We did not have any deferred revenue from our total revenue for those years. Our balance sheetsrelationship with GSK at December 31, 2016 and 2015 included deferred revenue of $2.1 million and $4.9 million, respectively, related to our relationship with GSK.2018 or December 31, 2017.
Janssen Biotech, Inc., a pharmaceutical company of Johnson & Johnson
In December 2014, we entered into a collaboration agreement with Janssen Biotech, Inc. to discover and develop antisense drugsmedicines that can be locally administered, including oral delivery, to treat autoimmune disorders of the gastrointestinal tract. Janssen has the option to license drugsmedicines from us through the designation of a development candidate for up to three programs. Under our collaboration, Janssen licensed IONIS-JBI1-2.5Rx in July 2016 and IONIS-JBI2-2.5Rx in November 2017. Janssen is currently conducting a Phase 1 study of IONIS-JBI1-2.5Rx and IONIS-JBI2-2.5Rx is in preclinical development. Prior to option exercise we are responsible for the discovery activities to identify a development candidate.candidates. If Janssen exercises an option for oneany of the programs, it will be responsible for the global development, regulatory and commercial activities under that program. Under the terms of the agreement, we received $35 million in upfront payments, which we are amortizing through December 2018.payments. We are eligible to receive up to nearlymore than $800 million in license fees and substantive milestone payments for these programs, including up to $175 million for the achievement of development milestones, up to $420$440 million for the achievement of regulatory milestones and up to $180 million for the achievement of commercialization milestones. ThroughFrom inception through December 2016,2018, we have received $47over $75 million, including the $10$15 million in license fee we earned in July 2016fees when Janssen licensed IONIS-JBI1-2.5Rx and IONIS-JBI2-2.5Rxfrom us, which we recognized as revenue in the third quarter of 2016.us. We also earned areceived $5 million milestone payment in December 2016 when Janssen selectedJanuary 2018 for the initiation of a development candidate for a second program.Phase 1 study of IONIS-JBI1-2.5Rx in late 2017. In addition, we are eligible to receive tiered royalties up to the near teens on net sales from any drugsmedicines resulting from this collaboration. We will earnachieve the next milestone payment of $5 million if Janssen chooses another targetcontinues to advance a target under this collaboration.
Our agreement withAt the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Janssen. We determined the transaction price to be the $35 million upfront payments we received. We allocated the $35 million to our single performance obligation. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance, which ended in November 2017.
We identified separate performance obligations each time Janssen will continue untillicensed one of our medicines under our collaboration because the earlierlicenses we granted to Janssen were distinct from our other performance obligations. We recognized the $10 million license fee for IONIS-JBI1-2.5Rx in July 2016 and $5 million for the license of IONIS-JBI2-2.5Rx in November 2017, because Janssen had full use of the date that all of Janssen’s options to obtain the exclusive licenses under the agreement expire unexercised or, if Janssen exercises its option, until the expiration of all payment obligations under the agreement. In addition, the agreement, orwithout any program under the agreement, may terminate early under the following situations:
| ● | Janssen may terminate the agreement or any program at any time by providing written notice to us; and |
| ● | Either we or Janssen may terminate any program by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement, or the entire agreement if the other party becomes insolvent. |
During 2016 and 2015 we earned revenue of $27.3 million and $8.9 million, respectively,continuing involvement from our relationship with Janssen. During 2014us. Additionally, we did not earnhave any further performance obligations related to the licenses after we delivered them to Janssen.
During the years ended December 31, 2018, 2017 and 2016, we earned the following revenue from our relationship with Janssen. Our balance sheetJanssen (in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised) | | R&D revenue | | $ | 6.6 | | | $ | 36.0 | | | $ | 24.8 | | Percentage of total revenue | | | 1 | % | | | 7 | % | | | 7 | % |
We did not have any deferred revenue from our relationship with Janssen at December 31, 20162018 and 2015 included deferred revenue of $17.5 million and $26.3 million, respectively, related to our relationship with Janssen.2017.
Novartis
In January 2017, we and Akcea initiated a collaboration with Novartis to develop and commercialize AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Under the collaboration, option and license agreement, Novartis has an exclusive option to develop and commercialize these drugs. Akcea is responsible for completing a Phase 2 dose ranging study and conducting an end-of-Phase 2 meeting with the FDA for each drug. If Novartis exercises an option for one of these drugs, Novartis will be responsible for all further global development, regulatory and commercialization activities for each drug.
Akcea will receive a $75 million upfront payment, of which Akcea will retain $60 million and will pay us $15 million as a sublicense fee under our license agreement with Akcea. Beginning in 2017, we and Akcea will recognize revenue from this collaboration with Novartis. If Novartis exercises its option for a drug, Novartis will pay Akcea a license fee equal to $150 million for each drug it licenses. In addition, Akcea is eligible to receive up to $600 million and $530 million in milestone payments related to AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx, respectively. Akcea retains the right to co-commercialize any such drug through its specialized sales force focused on lipid specialists in selected markets. Akcea is also eligible to receive tiered royalties in the mid-teens to low 20 percent range on net sales of AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Akcea will pay 50 percent of these license fees, milestone payments and royalties to us as a sublicense fee.
The agreement with Novartis will continue until the earlier of the date that all of Novartis’ options to obtain the exclusive licenses under the agreement expire unexercised or, if Novartis exercises its options, until the expiration of all payment obligations under the agreement. In addition, the agreement as a whole or with respect to any drug under the agreement, may terminate early under the following situations:
| ● | Novartis may terminate the agreement as a whole or with respect to any drug at any time by providing written notice to us; |
| ● | Either we or Novartis may terminate the agreement with respect to any drug by providing written notice to the other party in good faith that we or Novartis has determined that the continued development or commercialization of the drug presents safety concerns that pose an unacceptable risk or threat of harm in humans or would violate any applicable law, ethical principles, or principles of scientific integrity; |
| ● | Either we or Novartis may terminate the agreement for a drug by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation related to the drug under the agreement, or the entire agreement if the other party becomes insolvent; and |
| ● | We may terminate the agreement if Novartis disputes or assists a third party to dispute the validity of any or our patents. |
Additionally, in January 2017, we and Akcea entered into a stock purchase agreement, or SPA, with Novartis. Under the SPA, Novartis purchased 1,631,435 shares of our common stock for $100 million. Additionally, the SPA requires Novartis to purchase an additional $50 million of common stock in the future. The additional purchase will be for either our stock or Akcea’s stock.
Roche
Huntington’s Disease
In April 2013, we formed an alliance with Hoffman-La Roche Inc. and F. Hoffmann-La Roche Ltd., collectively Roche, to develop treatments for Huntington'sHuntington’s disease, or HD, based on our antisense technology. Roche hashad the option to license the drugsmedicines from us through the completion of the first Phase 1 trial. Under the agreement, we are responsible for the discovery and development of an antisense drugmedicine targeting huntingtin, or HTT, protein. We are currently evaluatingevaluated a drugmedicine targeting HTT, IONIS-HTTRx, in a Phase 1/2 clinical study in patientspeople with early stage HD. If
In December 2017, upon completion of the Phase 1/2 study, Roche exercisesexercised its option it will beto license IONIS-HTTRx and is now responsible for the global development, regulatory and commercialization activities for any drug arising out of the collaboration.IONIS-HTTRx. Under the terms of the agreement, we received an upfront payment of $30 million in April 2013, which we are amortizing through April 2017.2013. In December 2016, we updated development activities for IONIS-HTTRx and as a result we arewere eligible for an additional $3 million payment.payment, which we achieved in 2017. We are eligible to receive up to $365 million in a license fee and substantive milestone payments including up to $70 million for the achievement of development milestones, up to $170 million for the achievement of regulatory milestones and up to $80 million for the achievement of commercialization milestones. In addition, we are eligible to receive up to $136.5 million in milestone payments for each additional drugmedicine successfully developed. We are also eligible to receive tiered royalties up to the mid-teens on any net sales of any product resulting from this alliance. ThroughFrom inception through December 2016,2018, we have received $53.6over $112 million in upfront fees, milestone payments and license fees for advancing IONIS-HTTRx, not including $35 million in milestone payments and upfront fees under this alliance with Roche.we earned in the first quarter of 2019 when Roche dosed the first patient in a Phase 3 study for IONIS-HTTRx. We will earnachieve the next milestone payment of $10$15 million if Roche initiatesadvances IONIS-HTTRx.
At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Roche. We determined the transaction price to be the $30 million upfront payment we received and allocated it to our single performance obligation. As we achieved milestone payments for our R&D services, we included these amounts in our transaction price for our R&D services performance obligation. We recognized revenue for our R&D services performance obligation over our period of performance, which ended in September 2017.
We identified a second performance obligation upon Roche’s license of IONIS-HTTRx in the fourth quarter of 2017 because the license we granted to Roche is distinct from our other performance obligation. We recognized the $45 million license fee for IONIS-HTTRx as revenue at that time because Roche had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after we delivered it to Roche.
We do not have any remaining performance obligations related to IONIS-HTTRx under this collaboration with Roche, however we can still earn additional payments and royalties as Roche advances IONIS-HTTRx.
IONIS-FB-LRx for Complement-Mediated Diseases
In October 2018, we entered into a collaboration agreement with Roche to develop IONIS-FB-LRx for the treatment of complement-mediated diseases. The first indication we plan to pursue is the treatment of patients with Geographic Atrophy, or GA, the advanced stage of dry age-related macular degeneration, or AMD. We are responsible for conducting a Phase 2 trialstudy in patients with dry AMD. In addition, we are exploring the medicine in a severe and rare renal indication. Roche has the option to license IONIS-FB-LRx at the completion of these studies. Upon licensing, Roche will be responsible for IONIS-HTTRx.all further global development, regulatory and commercialization activities and costs.
Our alliance with Roche will continue untilUnder the earlierterms of the date Roche's optionthis agreement, we received a $75 million upfront payment in October 2018. We are eligible to obtain the exclusivereceive up to $684 million in development, regulatory and sales milestone payments and license under the agreement expires unexercised or, if Roche exercises its option, until the expiration of all payment obligations under the agreement.fees. In addition, we are also eligible to receive tiered royalties from the agreement may terminate early underhigh teens to twenty percent on net sales. We will achieve the next payment of $20 million when we advance the Phase 2 study in patients with dry AMD.
At the commencement of this collaboration, we identified one performance obligation, which was to perform R&D services for Roche. We determined the transaction price to be the $75 million upfront payment we received and allocated it to our single performance obligation. We are recognizing revenue for our R&D services performance obligation as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to satisfy our performance obligation. We currently estimate we will satisfy our performance obligation in December 2022.
During the years ended December 31, 2018, 2017 and 2016, we earned the following situations:
| ● | Roche may terminate the agreement at any time by providing written notice to us; and |
| ● | Either we or Roche may terminate the agreement by providing written notice to the other party upon the other party's uncured failure to perform a material obligation under the agreement or if the other party becomes insolvent. |
During 2016, 2015 and 2014, we earned revenue of $7.1 million, $31.2 million and $8.7 million, respectively from our relationship with Roche which represented two percent, 11 percent and four percent, respectively, of our total revenue for those years. (in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | | | | (as revised) | | R&D revenue | | $ | 8.3 | | | $ | 55.7 | | | $ | 10.7 | | Percentage of total revenue | | | 1 | % | | | 11 | % | | | 3 | % |
Ourconsolidated balance sheet at December 31, 2016 and 20152018 included deferred revenue of $1.7$72.6 million and $8.8 million, respectively related to our relationship with Roche. We did not have any deferred revenue related to our relationship with Roche at December 31, 2017.
The following collaboration agreements relate to Akcea, our majority-owned affiliate. Our consolidated results include all the revenue earned and cash received under these collaboration agreements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and in a separate line within stockholders’ equity in our consolidated balance sheet.
Satellite Company PartnershipsNovartis
Achaogen, Inc.In January 2017, we and Akcea initiated a collaboration with Novartis to develop and commercialize AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx.Under the collaboration agreement, Novartis has an exclusive option to further develop and commercialize AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Akcea is responsible for completing a Phase 2 program, conducting an end-of-Phase 2 meeting with the FDA and providing initial quantities of API for each medicine. If Novartis exercises an option for either of these medicines, Novartis will be responsible for all further global development, regulatory and co-commercialization activities and costs for such medicine.
Akcea received a $75 million upfront payment in the first quarter of 2017, of which it retained $60 million and paid us $15 million as a sublicense fee. In 2006,February 2019, Novartis licensed AKCEA-APO(a)-LRx and we exclusively licensedearned a $150 million license fee. Akcea will pay us $75 million as a sublicense fee in 2.8 million shares of Akcea common stock. Novartis is responsible for conducting and funding all future development, regulatory and commercialization activities for AKCEA-APO(a)-LRx, including a global pivotal cardiovascular outcomes study, for which planning and initiation activities are underway. If Novartis exercises its option for AKCEA-APOCIII-LRx, Novartis will pay Akcea a license fee equal to Achaogen, Inc. specific know-how, patents and patent applications relating$150 million. In addition, for AKCEA-APO(a)-LRx, Akcea is eligible to aminoglycosides. In connection with the license, Achaogen issued to us $1.5 million of Achaogen stock. Achaogen is developing plazomicin, an aminoglycoside Achaogen discovered based on the technology we licensed to Achaogen. If Achaogen successfully develops and commercializes two drugs under our agreement, we will receive payments totaling up to $49.3$675 million in milestone payments, including $25 million for the achievement of key clinical, regulatory and sales events. In December 2016, Achaogen announced positive data for its CARE Phase 3 study for plazomicin and that its EPIC Phase 3 study met its primary endpoints. Achaogen plans to submit an NDA, which will include EPIC and CARE data, to the FDA in the second half of 2017 and also plans to submit an MAA to the EMA in 2018. Through December 2016, we have earned $7 million ina development milestone, payments from Achaogen, including a $4 million milestone payment we earned in September 2014 when Achaogen initiated a Phase 3 study of plazomicin. We will earn the next milestone payment of $7.5 million if Achaogen obtains regulatory approval for plazomicin in a major market. We are also eligible to receive low single digit royalties on sales of drugs resulting from the program. Achaogen is solely responsible for the continued development and commercialization of plazomicin.
During 2016 and 2015, we did not earn any revenue from our relationship with Achaogen. During 2014, we earned revenue of $4 million from our relationship with Achaogen and we sold all of the Achaogen stock we owned resulting in net proceeds of $1.3 million.
Alnylam Pharmaceuticals, Inc.
In March 2004, we entered into an alliance with Alnylam to develop and commercialize RNAi therapeutics. Under the terms of the agreement, we exclusively licensed to Alnylam our patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for double-stranded RNAi therapeutics in exchange for a $5 million technology access fee, participation in fees from Alnylam’s partnering programs, as well as future milestone and royalty payments from Alnylam. For each drug Alnylam develops under this alliance, we may receive up to $3.4 million in milestone payments, including up to $1.1 million for the achievement of development milestones and $2.3 million for regulatory milestones. We will earn the next milestone payment of $0.4 million if Alnylam initiates a Phase 1 study for a drug in Alnylam’s pipeline. We also have the potential to earn royalties on drug sales and a portion of payments that Alnylam receives from licenses of our technology it grants to its partners, plus royalties. We retained rights to a limited number of double-stranded RNAi therapeutic targets and all rights to single-stranded RNAi, or ssRNAi, therapeutics.
In turn, Alnylam nonexclusively licensed to us its patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry to research, develop and commercialize single-stranded antisense therapeutics, ssRNAi therapeutics, and to research double-stranded RNAi compounds. We also received a license to develop and commercialize double-stranded RNAi drugs targeting a limited number of therapeutic targets on a nonexclusive basis. If we develop or commercialize an RNAi-based drug using Alnylam’s technology, we will pay Alnylam up to $3.4 million in milestone payments for specified development and regulatory events, plus royalties. To date, we do not have an RNAi-based drug in development.
In 2015, we and Alnylam entered into an alliance in which we formed an intellectual property cross-license under which we and Alnylam each obtained exclusive license rights to four therapeutic programs. Alnylam granted us an exclusive, royalty-bearing license to its chemistry, RNA targeting mechanism and target-specific intellectual property for oligonucleotides against four targets, including FXI and Apo(a) and two other targets. In exchange, we granted Alnylam an exclusive, royalty-bearing license to our chemistry, RNA targeting mechanism and target-specific intellectual property for oligonucleotides against four other targets. Alnylam also granted us a royalty-bearing, non-exclusive license to new platform technology arising from May 2014 through April 2019 for single-stranded antisense therapeutics. In turn, we granted Alnylam a royalty-bearing, non-exclusive license to new platform technology arising from May 2014 through April 2019 for double-stranded RNAi therapeutics. Through December 2016, we have received over $70 million from Alnylam.
During 2016, 2015 and 2014, we earned revenue from our relationship with Alnylam totaling $1.1 million, $1.3 million and $9.9 million, respectively.
Antisense Therapeutics Limited
In 2001, we licensed ATL1102 and ATL1103 to ATL, an Australian company publicly traded on the Australian Stock Exchange. ATL completed a Phase 2a efficacy and safety trial and has also completed a chronic toxicology study in primates to support a potential Phase 2b trial of ATL1102 in patients with multiple sclerosis, or MS. In addition, ATL is currently developing ATL1103 for growth and sight disorders. We are eligible to receive royalties on sales of ATL1102 and ATL1103. We may also receive a portion of the fees ATL receives if it licenses ATL1102 or ATL1103. At December 31, 2016 and 2015, we owned less than 10 percent of ATL’s equity. During 2016, 2015 and 2014, we did not earn any revenue from our relationship with ATL.
Atlantic Pharmaceuticals Limited
In March 2007, we licensed alicaforsen to Atlantic Pharmaceuticals, a UK-based specialty pharmaceutical company founded in 2006. Atlantic Pharmaceuticals is developing alicaforsen for the treatment of ulcerative colitis, or UC, and other inflammatory diseases. Atlantic Pharmaceuticals is initially developing alicaforsen for pouchitis, a UC indication, followed by UC and other inflammatory diseases. In January 2017, Atlantic announced that it received agreement from the FDA to initiate a rolling submission of its NDA for alicaforsen. In exchange for the exclusive, worldwide license to alicaforsen, we received a $2 million upfront payment from Atlantic Pharmaceuticals in the form of equity. Under the agreement, we could receive milestone payments totaling up to $1.4 million for the achievement of regulatory milestones for multiple indications. We will earn the next milestone payment of $0.6 million if Atlantic Pharmaceuticals submits an NDA for alicaforsen with the FDA. In 2010, Atlantic Pharmaceuticals began supplying alicaforsen under international named patient supply regulations for patients with inflammatory bowel disease, or IBD, for which we receive royalties.
In 2010, 2013 and 2016, we agreed to sell Atlantic Pharmaceuticals alicaforsen drug substance in return for shares of Atlantic Pharmaceuticals’ common stock. Additionally, in 2013 we received an advance payment in the form of equity for the initial royalties that we will earn from Atlantic Pharmaceuticals. We recorded a full valuation allowance for all of the equity we received from Atlantic Pharmaceuticals, including the upfront payment, because realization of value from the equity is uncertain. At December 31, 2016 and 2015, we owned approximately 9 percent and 11 percent, respectively, of Atlantic Pharmaceuticals’ equity. Because the payments were made in equity, we did not record any revenue. During 2016 we did not earn any revenue and during 2015 and 2014, our revenue was negligible from our relationship with Atlantic Pharmaceuticals.
Dynacure, SAS
In October 2016, we entered into a collaboration with Dynacure to discover, develop and commercialize an antisense drug for the treatment of neuromuscular diseases. We and Dynacure will share research responsibilities and to identify a drug candidate. Upon exercising its option to license the drug, Dynacure will assume all responsibility for development and commercialization. Under the terms of the agreement, we obtained a 15 percent equity ownership in Dynacure. If Dynacure advances a target under this collaboration, we could receive cash or equity up to more than $210 million in a license fee and milestone payments including up to $34.5 million for the achievement of development milestones, up to $111$290 million for the achievement of regulatory milestones and up to $60$360 million for the achievement of commercialization milestones. In addition, we arefor AKCEA-APOCIII-LRx, Akcea is eligible to receive royalties on future product sales of the drug under this collaboration. We will receive an additional equity positionup to $530 million in Dynacure if Dynacure initiates a Phase 1 study for a target under this collaboration. During 2016, we did not earn any revenue from our relationship with Dynacure.
OncoGenex Technologies Inc., a subsidiary of OncoGenex Pharmaceuticals Inc.
In January 2005, we entered into an agreement with OncoGenex to allow for the development of an antisense anti-cancer drug, apatorsen. OncoGenex and collaborators are evaluating apatorsen in multiple Phase 2 studies in patients with cancer. OncoGenex is responsible for all development costs and activities. OncoGenex will pay us milestone payments, totaling up to $5.8including $25 million for the achievement of keya development and regulatory milestones, includingmilestone, up to $1.3 million for the achievement of development milestones and up to $4.5$240 million for the achievement of regulatory milestones and up to $265 million for the achievement of commercialization milestones. In addition, we areAkcea is also eligible to receive tiered royalties in the mid-teens to low 20 percent range on future productnet sales of apatorsen. WeAKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx. Akcea will earnpay 50 percent of these license fees, milestone payments and royalties to us as a sublicense fee. In connection with Novartis’ license of AKCEA-APO(a)-LRx, Akcea and Novartis established a more definitive framework under which the nextcompanies would negotiate the co-commercialization of AKCEA-APO(a)-LRx in selected markets. Included in this framework is an option by which Novartis could solely commercialize AKCEA-APO(a)-LRx in exchange for Novartis paying Akcea increased commercial milestone paymentpayments based on sales of $1.3 millionAKCEA-APO(a)-LRx. Akcea may co-commercialize IONIS-APOCIII-LRx if OncoGenex initiates a Phase 3 study for apatorsen.licensed and commercialized by Novartis in selected markets through its specialized sales force under terms and conditions to be negotiated with Novartis in the future.
In early 2017, OncoGenex Pharmaceuticals, Inc.conjunction with this collaboration, we entered into a definitive merger agreement under which OncoGenex will acquire Achieve Life SciencesSPA with Novartis. As part of the SPA, Novartis purchased 1.6 million shares of our common stock for $100 million in the first quarter of 2017. As part of the SPA, Novartis was required to purchase $50 million of Akcea’s common stock at the IPO price or our common stock at a premium if an all-stock transaction. The merger isIPO did not occur by April 2018. Under the SPA, in July 2017, Novartis purchased $50 million of Akcea’s common stock in a separate private placement concurrent with the completion of its IPO at a price per share equal to the IPO price.
At the commencement of this collaboration, we identified four separate performance obligations:
| ● | R&D services for AKCEA-APO(a)-LRx; |
| ● | R&D services for AKCEA-APOCIII-LRx; |
| ● | API for AKCEA-APO(a)-LRx; and |
| ● | API for AKCEA-APOCIII-LRx. |
We determined that the R&D services for each medicine and the API for each medicine were distinct from our other performance obligations.
We determined our transaction price to be $108.4 million, comprised of the following:
| ● | $75 million from the upfront payment; |
| ● | $28.4 million for the premium paid by Novartis for its purchase of our common stock at a premium in the first quarter of 2017; and |
| ● | $5.0 million for the potential premium Novartis would have paid if they purchased our common stock in the future. |
We allocated the transaction price based on the estimated stand-alone selling price of each performance obligation as follows:
| ● | $64.0 million for the R&D services for AKCEA-APO(a)-LRx; |
| ● | $40.1 million for the R&D services for AKCEA-APOCIII-LRx; |
| ● | $1.5 million for the delivery of AKCEA-APO(a)-LRx API; and |
| ● | $2.8 million for the delivery of AKCEA-APOCIII-LRx API. |
We are recognizing revenue related to the R&D services for the AKCEA-APO(a)-LRx and AKCEA-APOCIII-LRx performance obligations as we perform services based on our effort to satisfy our performance obligation relative to our total effort expected to close mid-2017. Upon closing OncoGenex Pharmaceuticals, Inc.satisfy our performance obligation. We satisfied the significant portion of our performance obligation for AKCEA-APO(a)-LRx in December 2018 and we currently estimate we will be renamed Achieve Life Sciences, Inc.satisfy the remainder by mid-2019. We currently estimate we will satisfy the significant portion of our performance obligation for AKCEA-APOCIII-LRx by mid-2020 with the remainder by the end of 2019. We recognized the amount attributed to the API supply for AKCEA-APO(a)-LRx when we delivered it to Novartis in 2017. We recognized the amount attributed to the API supply for AKCEA-APOCIII-LRx when we delivered it to Novartis in May 2018.
Akcea is responsible for the development activities under this collaboration. As such, Akcea is recognizing the associated revenue in its statement of operations, and we reflect all of Akcea’s revenue in our consolidated results. Akcea pays us sublicense fees for payments that it receives under the collaboration and we recognize those fees as revenue in our Ionis Core operating segment results and Akcea recognizes the fees as R&D expense. In our consolidated results, we eliminate this sublicense revenue and expense. Any cash Akcea receives is included in our consolidated balance sheet.
During 2016the years ended December 31, 2018 and 2017, we earned $1.4 million inthe following revenue from our relationship with OncoGenex. During 2015Novartis (in millions, except percentage amounts):
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | | | | | (as revised) | | R&D revenue | | $ | 50.6 | | | $ | 43.4 | | Percentage of total revenue | | | 8 | % | | | 8 | % |
Our consolidated balance sheet at December 31, 2018 and 2014, we did not earn any2017 included deferred revenue fromof $28.8 million and $70.7 million, respectively, related to our relationship with OncoGenex.
Regulus Therapeutics Inc.
In September 2007, we and Alnylam established Regulus as a company focused on the discovery, development and commercialization of microRNA-targeting therapeutics. We and Alnylam retain rights to develop and commercialize, on pre-negotiated terms, microRNA therapeutic products that Regulus decides not to develop either by itself or with a partner. Regulus is addressing therapeutic opportunities that arise from alterations in microRNA expression. Since microRNAs may act as master regulators of the genome, affecting the expression of multiple genes in a disease pathway, microRNA therapeutics define a new platform for drug discovery and development. MicroRNAs may also prove to be an attractive new tool for characterizing diseases. Regulus focuses its drug discovery and development efforts in numerous therapeutic areas, including cancer, fibrosis, and viral infections. Regulus currently has three drugs in clinical development. Regulus is evaluating RG-101 in a Phase 2 study in patients with HCV and in a Phase 1 study in patients with severe renal insufficiency or end-stage renal disease. Regulus is also evaluating RG-012 in a Phase 1 study to treat patients with Alport syndrome. Regulus and AstraZeneca are also evaluating RG-125 in a Phase 1 study for the treatment of NASH in patients with type 2 diabetes or pre-diabetes. We are eligible to receive royalties on any future product sales of these drugs.
During 2016, 2015 and 2014, we did not earn any revenue from our relationship with Regulus. During 2016, we sold a portion of our Regulus stock for proceeds of $4.5 million. During 2015 and 2014, we sold a portion of our Regulus stock, resulting in a gain of $20.2 million and $19.9 million, respectively, and proceeds of $25.5 million and $22.9 million, respectively. As of December 31, 2016, we owned approximately 1.1 million shares, with a net carrying value of $2.4 million. In January 2017, we sold our remaining investment in Regulus.
The University of Texas MD Anderson Cancer Center
In May 2016, we entered into a collaboration agreement with the University of Texas MD Anderson Cancer Center to identify cancer targets and create novel antisense drugs to treat cancer together. In the collaboration, we and MD Anderson will work together to validate novel “undruggable” cancer targets selected based on human genomic data. We will lead the drug discovery efforts against mutually agreed upon novel targets and MD Anderson will lead development activities through clinical proof of concept. Following clinical proof of concept, we and MD Anderson plan to identify a partner to complete development and to commercialize each drug with us leading business development efforts. Under the five-year collaboration, we and MD Anderson will evenly share costs specific to our collaboration.
External Project Funding
CHDI Foundation, Inc.
Starting in November 2007, CHDI provided financial and scientific support to our Huntington’s disease drug discovery program through our development collaboration. In April 2013, we formed an alliance with Roche to develop treatments for Huntington’s disease. Under the terms of our agreement with CHDI, we will reimburse CHDI for a portion of its support of our Huntington’s disease program out of the payments we receive from Roche. We made payments of $5 million and $3 million to CHDI in 2015 and 2013, respectively, associated with the progression of our Huntington’s disease program. If we achieve pre-specified milestones under our collaboration with Roche, we will make additional research related payments to CHDI up to $4 million, upon completion of our Phase 1/2 study of IONIS-HTTRx. If Roche licenses IONIS-HTTRx,we will make an additional payment to CHDI.
During 2016 and 2014, we did not earn any revenue from our relationship with CHDI. During 2015, our revenue earned from our relationship with CHDI was negligible.
Cystic Fibrosis Foundation
In August 2016, we entered into a collaboration agreement with the Cystic Fibrosis Foundation to discover and advance a drug for the treatment of Cystic Fibrosis. Under this agreement, we received upfront payments of $1 million and we are eligible to receive additional milestone payments up to $2 million. Under the agreement, we and the Cystic Fibrosis Foundation will evenly share the first $3 million of costs specific to our collaboration. We will pay the Cystic Fibrosis Foundation up to $18 million in payments upon achieving specific regulatory and sales events if we advance a drug under our collaboration. We will earn the next milestone payment of $0.5 million if we further advance IONIS-ENAC-2.5Rx.
During 2016 we earned $0.6 million from our relationship with the Cystic Fibrosis Foundation.
The Ludwig Institute; Center for Neurological Studies
In October 2005, we entered into a collaboration agreement with the Ludwig Institute, the Center for Neurological Studies and researchers from these institutions to discover and develop antisense drugs for amyotrophic lateral sclerosis, or ALS, and other neurological diseases. Under this agreement, we agreed to pay the Ludwig Institute and Center for Neurological Studies modest milestone payments and royalties on any antisense drugs resulting from the collaboration.
Intellectual Property Sale and Licensing Agreements
Sales of Intellectual Property
Abbott Molecular Inc.
In January 2009, we sold our former subsidiary, Ibis Biosciences, to Abbott Molecular Inc., or AMI, pursuant to a stock purchase agreement for a total acquisition price of $215 million plus the earn out payments described below.
Under the stock purchase agreement, we are eligible to receive earn out payments from AMI equal to a percentage of Ibis’ revenue related to sales of Ibis systems, which AMI launched in 2014 as IRIDICA, including instruments, assay kits and successor products. Once cumulative net sales reach $140 million, and through December 31, 2025, we are eligible to earn out payments in any year that net sales exceed $50 million for the applicable year. The earn out payments will equal five percent of Ibis’ cumulative net sales over $140 million and up to $2.1 billion, and three percent of Ibis’ cumulative net sales over $2.1 billion. AMI may reduce these earn out payments from five percent to as low as 2.5 percent and from three percent to as low as 1.5 percent, respectively, upon the occurrence of certain events. During 2016, 2015 and 2014, we did not earn any revenue from our relationship with AMI.
KastlePTC Therapeutics
In May 2016, weAugust 2018, Akcea entered into an exclusive license agreement with Kastle under which Kastle acquired the global rightsPTC Therapeutics to developcommercialize TEGSEDI and commercialize Kynamro. Kynamro is approvedWAYLIVRA in the United States for use in patients with homozygous familial hypercholesterolemia to reduce low density lipoprotein-cholesterol, apolipoprotein B, total cholesterol and non-high density lipoprotein-cholesterol as an adjunct to lipid lowering medications and diet. We previously licensed Kynamro to Sanofi Genzyme. As a result, Sanofi Genzyme earns a three percent royalty on sales of Kynamro and three percent of non-royalty cash payments we receive from Kastle.Latin America. Under the terms of ourlicense agreement, with Kastle, we areAkcea is eligible to receive up to $95$26 million in payments, including $12 million which includes a $15 million upfront payment weit received in May 2016, a $10the third quarter of 2018, $6 million payment we are entitled to receive in May 2019upon the earlier of FDA or EMA approval of WAYLIVRA and up to $70$8 million for regulatory milestones. Akcea is eligible to receive royalties from PTC in the mid-20 percent range on net sales in Latin America for each medicine. PTC’s obligation to pay Akcea royalties begins on the earlier of 12 months after the first commercial sale of a product in Brazil or the date that PTC recognizes revenue of at least $10 million in sales milestones. In December 2016,Latin America. Consistent with the agreements between Ionis and Akcea, the companies will share all payments, including royalties.
At the commencement of this collaboration, we amendedidentified two performance obligations, which were the licenses Akcea granted to PTC to commercialize TEGSEDI and WAYLIVRA in Latin America in the third quarter of 2018. Akcea recognized $12 million in license fee revenue at that time because PTC had full use of both licenses without any continuing involvement from Akcea. Akcea does not have any remaining performance obligations under its collaboration with PTC. Akcea can still earn additional payments and royalties as PTC commercializes the medicines.
Akcea was responsible for the activities under this collaboration. As such, Akcea is recognizing the associated revenue in its statement of operations, and we reflect all of Akcea’s revenue in our agreement with Kastle. As a resultconsolidated results. Akcea pays us sublicense fees for payments that it receives under the collaboration and we recognize those fees as revenue in our Ionis Core operating segment results and Akcea recognizes the fees as SG&A expense. For example, during the third quarter of 2018, we recognized $7.2 million of sublicense revenue in our Ionis Core operating segment results related to our portion of the amendment, through 2017, Kastle will only pay us the three percent royaltyPTC license fee Akcea paid us. In our consolidated results, we owe Sanofi Genzyme on sales of Kynamro. Beginningeliminate this sublicense revenue and expense. Any cash Akcea receives is included in 2018, we will be eligible to earn tiered royalties on global sales of Kynamro that average in the mid to low teens, increasing slightly in years 2020 and 2021. In addition in May 2016, we received a 10 percent common equity position in Kastle. Because realization of our equity position is uncertain, we recorded a full valuation allowance.consolidated balance sheet.
During 2016, we earnedOur consolidated balance sheet at December 31, 2018 and 2017 did not include any deferred revenue of $15.1 million fromrelated to our relationship with Kastle.PTC.
In-Licensing Arrangements
University of Massachusetts
We are pursuing discovery and development projects that provide us with new therapeutic applications for antisense medicines. These programs represent opportunities for us and our technology. In some cases, we have a license agreement withfunded these studies through support from our partners or disease advocacy groups and foundations. Our External Project Funding partners include the University of Massachusetts under which we acquired an exclusive license to the University of Massachusetts’ patent rights related to SPINRAZA. We are obligated to pay the University of Massachusetts nominal amounts for license fees and milestone payments we receive and a low single digit royalty on sales of SPINRAZA.following:
Cold Spring Harbor Laboratory | ● | CHDI Foundation- Through our development collaboration, CHDI provided financial and scientific support to our Huntington’s disease drug discovery program. We have reimbursed CHDI for its support of our Huntington’s disease program out of the payments we receive from Roche. |
| ● | Cystic Fibrosis Foundation- We received upfront funding from the Cystic Fibrosis Foundation to discover and advance a medicine for the treatment of cystic fibrosis. In exchange for this funding, we are obligated to pay the Cystic Fibrosis Foundation up to $18 million upon achieving specific regulatory and sales events if we advance a medicine under our collaboration. |
| ● | The Ludwig Institute; Center for Neurological Studies- We have a collaboration with the Ludwig Institute, the Center for Neurological Studies and researchers to discover and develop antisense medicines for ALS and other neurodegenerative diseases. Under this agreement, we agreed to pay the Ludwig Institute and the Center for Neurological Studies modest milestone payments and royalties on any antisense medicines resulting from the collaboration. |
We have a collaboration and license agreement with the Cold Spring Harbor Laboratory under which we acquired an exclusive license to the Cold Spring Harbor Laboratory’s patent rights related to SPINRAZA. If we successfully develop and commercialize a drug incorporating the technology we licensed from the Cold Spring Harbor Laboratory, we will pay a portion of any sublicense revenue and post licensing milestone payments we receive in consideration for sublicensing the Cold Spring Harbor Laboratory’s technology up to $11.3 million and a low single digit royalty on sales of SPINRAZA. During 2016, we paid Cold Spring Harbor Laboratory $3.4 million.
Our in-licensing arrangements include:
| ● | University of Massachusetts- We have a license agreement with the University of Massachusetts under which we acquired an exclusive license to the University of Massachusetts’ patent rights related to SPINRAZA. We paid the University of Massachusetts nominal amounts for license fees and milestone payments we received. We also pay a low single digit royalty on net sales of SPINRAZA. |
| ● | Cold Spring Harbor Laboratory- We have a collaboration and license agreement with the Cold Spring Harbor Laboratory under which we acquired an exclusive license to the Cold Spring Harbor Laboratory’s patent rights related to SPINRAZA. We paid Cold Spring Harbor Laboratory nominal amounts for license fees and milestone payments we received in 2017 and a low single digit royalty on net sales of SPINRAZA. Additionally, we owe a low single digit royalty on future sales of SPINRAZA. |
7. Segment Information and Concentration of Business Risk
In 2015, we began reporting our financial results inWe have two reportable segments Ionis Core and Akcea Therapeutics, our whollyTherapeutics. At December 31, 2018, we owned subsidiary.approximately 75 percent of Akcea. Segment lossincome (loss) from operations includes revenue less operating expenses attributable to each segment.
In our Ionis Core segment we are exploiting a novel drug discovery platform we createdour antisense technology to generate a broad pipeline of first-in-class and/or best-in-class drugsmedicines for us and our partners. Our Ionis Core segment generates revenue from a multifaceted partnering strategy.
We formed Akcea to developis a biopharmaceutical company focused on developing and commercialize drugscommercializing medicines to treat patients with rare and serious cardiometabolic diseases caused by lipid disorders. Moving our lipid drugs into a company that we own ensures that our core focus at Ionis remains on innovation while allowing us to maintain control over and retain more value from our lipid drugs. Through 2016, Akcea had not earned any revenue, however in 2017, Akcea will begin recognizing revenue related to its collaboration with Novartis..
The following is our segment information for 2016, 2015 and 2014 (in thousands).
2016 | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | Revenue: | | | | | | | | | | | | | Research and development | | $ | 338,546 | | | $ | — | | | $ | (12,648 | ) | | $ | 325,898 | | Licensing and royalty | | | 20,722 | | | | — | | | | — | | | | 20,722 | | Total segment revenue | | $ | 359,268 | | | $ | — | | | $ | (12,648 | ) | | $ | 346,620 | | Income (loss) from operations | | $ | 37,196 | | | $ | (83,512 | ) | | $ | — | | | $ | (46,316 | ) |
2015 | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | Revenue: | | | | | | | | | | | | | Research and development | | $ | 284,135 | | | $ | — | | | $ | (2,775 | ) | | $ | 281,360 | | Licensing and royalty | | | 2,343 | | | | — | | | | — | | | | 2,343 | | Total segment revenue | | $ | 286,478 | | | $ | — | | | $ | (2,775 | ) | | $ | 283,703 | | Loss from operations | | $ | (23,014 | ) | | $ | (52,748 | ) | | $ | — | | | $ | (75,762 | ) |
The following tables show our segment revenue and income (loss) from operations for 2018, 2017 and 2016 (in thousands), respectively.
2014 | | Ionis Core | | | Akcea Therapeutics | | | Total | | Revenue: | | | | | | | | | | Research and development | | $ | 202,514 | | | $ | — | | | $ | 202,514 | | Licensing and royalty | | | 11,647 | | | | — | | | | 11,647 | | Total segment revenue | | $ | 214,161 | | | $ | — | | | $ | 214,161 | | Loss from operations | | $ | (26,033 | ) | | $ | (21,697 | ) | | $ | (47,730 | ) |
2018 | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | Revenue: | | | | | | | | | | | | | Commercial revenue: | | | | | | | | | | | | | SPINRAZA royalties | | $ | 237,930 | | | $ | — | | | $ | — | | | $ | 237,930 | | TEGSEDI product sales, net | | | — | | | | 2,237 | | | | — | | | | 2,237 | | Licensing and other royalty revenue | | | 2,755 | | | | 12,000 | | | | — | | | | 14,755 | | Total commercial revenue | | | 240,685 | | | | 14,237 | | | | — | | | | 254,922 | | R&D revenue under collaborative agreements | | | 401,259 | | | | 50,630 | | | | (107,137 | ) | | | 344,752 | | Total segment revenue | | $ | 641,944 | | | $ | 64,867 | | | $ | (107,137 | ) | | $ | 599,674 | | Total operating expenses | | $ | 380,212 | | | $ | 295,683 | | | $ | (14,849 | ) | | $ | 661,046 | | Income (loss) from operations | | $ | 261,732 | | | $ | (230,816 | ) | | $ | (92,288 | ) | | $ | (61,372 | ) |
2017 (as revised) | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | Revenue: | | | | | | | | | | | | | Commercial revenue: | | | | | | | | | | | | | SPINRAZA royalties | | $ | 112,540 | | | $ | — | | | $ | — | | | $ | 112,540 | | Licensing and other royalty revenue | | | 7,474 | | | | — | | | | — | | | | 7,474 | | Total commercial revenue | | | 120,014 | | | | — | | | | — | | | | 120,014 | | R&D revenue under collaborative agreements | | | 405,171 | | | | 43,401 | | | | (54,407 | ) | | | 394,165 | | Total segment revenue | | $ | 525,185 | | | $ | 43,401 | | | $ | (54,407 | ) | | $ | 514,179 | | Total operating expenses | | $ | 373,788 | | | $ | 163,871 | | | $ | (54,527 | ) | | $ | 483,132 | | Income (loss) from operations | | $ | 151,397 | | | $ | (120,470 | ) | | $ | 120 | | | $ | 31,047 | |
2016 (as revised) | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | Revenue: | | | | | | | | | | | | | Commercial revenue: | | | | | | | | | | | | | SPINRAZA royalties | | $ | 883 | | | $ | — | | | $ | — | | | $ | 883 | | Licensing and other royalty revenue | | | 21,884 | | | | — | | | | — | | | | 21,884 | | Total commercial revenue | | | 22,767 | | | | — | | | | — | | | | 22,767 | | R&D revenue under collaborative agreements | | | 362,657 | | | | — | | | | (12,648 | ) | | | 350,009 | | Total segment revenue | | $ | 385,424 | | | $ | — | | | $ | (12,648 | ) | | $ | 372,776 | | Total operating expenses | | $ | 322,192 | | | $ | 83,512 | | | $ | (12,768 | ) | | $ | 392,936 | | Income (loss) from operations | | $ | 63,232 | | | $ | (83,512 | ) | | $ | 120 | | | $ | (20,160 | ) |
The following table shows our total assets by segment at December 31, 20162018 and 20152017 (in thousands), respectively.
Total Assets | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | December 31, 2016 | | $ | 1,067,770 | | | $ | 10,684 | | | $ | (165,987 | ) | | $ | 912,467 | | December 31, 2015 | | $ | 994,191 | | | $ | 66,068 | | | $ | (112,359 | ) | | $ | 947,900 | |
Total Assets | | Ionis Core | | | Akcea Therapeutics | | | Elimination of Intercompany Activity | | | Total | | December 31, 2018 | | $ | 2,975,491 | | | $ | 365,261 | | | $ | (672,968 | ) | | $ | 2,667,784 | | December 31, 2017 (as revised) | | $ | 1,342,578 | | | $ | 268,804 | | | $ | (288,608 | ) | | $ | 1,322,774 | |
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. Revenue from significant partners, which is defined as 10 percent or more of our total revenue, was as follows:
| 2016 | | 2015 | | 2014 | Partner A | | 60 % | | | 37 % | | | 58 % | Partner B | | 19 % | | | 2 % | | | 13 % | Partner C | | 4 % | | | 12 % | | | 17 % | Partner D | | 2 % | | | 33 % | | | 0 % | Partner E | | 2 % | | | 11 % | | | 4 % |
Contracts receivables at December 31, 20162018 and December 31, 20152017 were comprised of approximately 9299 percent and 9984 percent for each year from four and two significant partners, respectively.
8. Employment Benefits
We have an employee 401(k) salary deferral plan, covering all employees. Employees maycould make contributions by withholding a percentage of their salary up to the IRS annual limit $18,000$18,500 and $24,000$24,500 in 20162018 for employees under 50 years old and employees 50 years old or over, respectively. We made approximately $1.7$5.7 million, $1.5$3.0 million and $1.0$1.7 million in matching contributions for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
9. Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of our business. Periodically, we evaluate the status of each legal matter and assess our potential financial exposure. If the potential loss from any legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimable. The outcome of any proceeding is not determinable in advance. As a result, the assessment of a potential liability and the amount of accruals recorded are based only on the information available to us at the time. As additional information becomes available, we reassess the potential liability related to the legal proceeding, and may revise our estimates.
Gilead Litigation
In August 2013, Gilead Sciences Inc. filed a suit in the United StatesU.S. District Court of Northern District of California related to United StatesU.S. Patent Nos. 7,105,499 and 8,481,712, which are jointly owned by Merck Sharp & Dohme Corp. and Ionis Pharmaceuticals, Inc. In the suit Gilead asked the court to determine that Gilead'sGilead’s activities do not infringe any valid claim of the named patents and that the patents are not valid. We and Merck Sharp & Dohme Corp. filed our answer denying Gilead'sGilead’s noninfringement and invalidity contentions, contending that Gilead'sGilead’s commercial sale and offer for sale of sofosbuvir prior to the expiration of the '499‘499 and '712‘712 patents infringes those patents, and requesting monetary damages to compensate for such infringement. In the trial for this case held in March 2016, the jury upheld all ten of the asserted claims of the patents-in-suit. The jury then decided that we and Merck are entitled to four percent of $5 billion in past sales of sofosbuvir. Gilead has stated it would appeal the jury’s finding of validity. In the meantime, Gilead asserted two additional non-jury defenses: waiver and unclean hands. Although the judge rejected the waiver defense, she granted Gilead’s motion claiming that the patents are unenforceable against it under the doctrine of unclean hands. We believe this ruling is contrary to the relevant law and the facts of the case. Accordingly, in July 2016, together with Merck we appealed the decision.decision to the Court of Appeals for the Federal Circuit. Gilead cross-appealed on the issue of validity. The appeal is pending beforeIn April 2018, the Court of Appeals issued its ruling affirming the District Court’s finding of unenforceability based on unclean hands. Having upheld the ruling that the patents are unenforceable against Gilead, the court did not reach the question of validity. In September 2018, we filed a petition requesting a hearing before the Supreme Court, asserting that it was improper for the Federal Circuit.trial court to overturn the jury verdict on the basis of the equitable defense of unclean hands. In January 2019, the Supreme Court denied our petition. Under our agreement with Merck, Merck is responsible for the costs of this suit.
10. Quarterly Financial Data (Unaudited)
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years ended December 31, 20162018 and 20152017 are as follows (in thousands, except per share data).
2016 Quarters | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | 2018 Quarters | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | Revenue | | $ | 36,874 | | | $ | 38,470 | | | $ | 110,927 | | | $ | 160,349 | | | $ | 144,419 | | | $ | 117,747 | | | $ | 145,395 | | | $ | 192,113 | | Operating expenses | | $ | 91,526 | | | $ | 87,397 | | | $ | 94,819 | | | $ | 119,194 | | | $ | 147,720 | | | $ | 168,028 | | | $ | 163,967 | | | $ | 181,331 | | Income (loss) from operations | | $ | (54,652 | ) | | $ | (48,927 | ) | | $ | 16,108 | | | $ | 41,155 | | | $ | (3,301 | ) | | $ | (50,281 | ) | | $ | (18,572 | ) | | $ | 10,782 | | Net income (loss) | | $ | (62,917 | ) | | $ | (56,855 | ) | | $ | 7,351 | | | $ | 25,865 | | | $ | (10,812 | ) | | $ | (56,573 | ) | | $ | (20,365 | ) | | $ | 302,735 | | Basic net income (loss) per share (1) | | $ | (0.52 | ) | | $ | (0.47 | ) | | $ | 0.06 | | | $ | 0.21 | | | Diluted net income (loss) per share (1) (2) (3) | | $ | (0.52 | ) | | $ | (0.47 | ) | | $ | 0.06 | | | $ | 0.21 | | | Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders | | | $ | (1,420 | ) | | $ | (40,358 | ) | | $ | (4,559 | ) | | $ | 320,078 | | Basic net income (loss) per share (1) (2) | | | $ | (0.01 | ) | | $ | (0.29 | ) | | $ | (0.03 | ) | | $ | 2.32 | | Diluted net income (loss) per share (1) (3) | | | $ | (0.01 | ) | | $ | (0.29 | ) | | $ | (0.03 | ) | | $ | 2.21 | |
2015 Quarters | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | 2017 Quarters (as revised) | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | Revenue | | $ | 62,583 | | | $ | 120,428 | | | $ | 49,121 | | | $ | 51,571 | | | $ | 115,800 | | | $ | 112,273 | | | $ | 118,314 | | | $ | 167,792 | | Operating expenses | | $ | 71,913 | | | $ | 75,782 | | | $ | 97,259 | | | $ | 114,511 | | | $ | 96,315 | | | $ | 105,823 | | | $ | 107,002 | | | $ | 173,992 | | Income (loss) from operations | | $ | (9,330 | ) | | $ | 44,646 | | | $ | (48,138 | ) | | $ | (62,940 | ) | | $ | 19,485 | | | $ | 6,450 | | | $ | 11,312 | | | $ | (6,200 | ) | Net income (loss) | | $ | (16,717 | ) | | $ | 35,648 | | | $ | (35,776 | ) | | $ | (71,433 | ) | | $ | 8,964 | | | $ | (3,085 | ) | | $ | (7,493 | ) | | $ | (9,169 | ) | Basic net income (loss) per share (1) | | $ | (0.14 | ) | | $ | 0.30 | | | $ | (0.30 | ) | | $ | (0.59 | ) | | Diluted net income (loss) per share (1) (4) | | $ | (0.14 | ) | | $ | 0.29 | | | $ | (0.30 | ) | | $ | (0.59 | ) | | Net income (loss) attributable to Ionis Pharmaceutical, Inc. common stockholders | | | | 8,964 | | | | (3,085 | ) | | | (2,611 | ) | | | (2,922 | ) | Basic net income (loss) per share (1) (2) | | | $ | 0.07 | | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) | Diluted net income (loss) per share (1) (3) | | | $ | 0.07 | | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) |
(1) | We computed net income (loss) per share independently for each of the quarters presented. Therefore, the sum of the quarterly net income (loss) per share will not necessarily equal the total for the year. |
(2) | As discussed in Note 1, Organization and Significant Accounting Policies, we compute basic net income (loss) per share by dividing the total net income (loss) attributable to our common stockholders by our weighted-average number of common shares outstanding during the period. Our basic net income (loss) per share calculation for each of the quarters in 2018 and for the third and fourth quarters of 2017 considered our net income for Ionis on a stand-alone basis plus our share of Akcea’s net loss for the period. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s loss per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income (loss) available to Ionis common stockholders for the calculation of net income (loss) per share is different than net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders in the consolidated statements of operations. |
Our basic net income (loss) per share for each quarter in 2018 was calculated as follows (in thousands, except per share amounts):
Three Months Ended March 31, 2018 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Income (Loss) Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | Common shares | | | 45,448 | | | $ | (0.44 | ) | | $ | (19,997 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (19,997 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 18,785 | | Net loss available to Ionis common stockholders | | | | | | | | | | $ | (1,212 | ) | Weighted average shares outstanding | | | | | | | | | | | 125,330 | | Basic net loss per share | | | | | | | | | | $ | (0.01 | ) |
Three Months Ended June 30, 2018 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Income (Loss) Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | Common shares | | | 60,832 | | | $ | (0.72 | ) | | $ | (43,814 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (43,814 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 5,882 | | Net loss available to Ionis common stockholders | | | | | | | | | | $ | (37,932 | ) | Weighted average shares outstanding | | | | | | | | | | | 128,712 | | Basic net loss per share | | | | | | | | | | $ | (0.29 | ) | Three Months Ended September 30, 2018 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Income (Loss) Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | | | | Common shares | | | 65,538 | | | $ | (0.73 | ) | | $ | (47,789 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (47,789 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 43,226 | | Net loss available to Ionis common stockholders | | | | | | | | | | $ | (4,563 | ) | Weighted average shares outstanding | | | | | | | | | | | 137,346 | | Basic net loss per share | | | | | | | | | | $ | (0.03 | ) |
Three Months Ended December 31, 2018 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Income (Loss) Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | Common shares | | | 67,130 | | | $ | (0.79 | ) | | $ | (53,219 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (53,219 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 372,913 | | Net income available to Ionis common stockholders | | | | | | | | | | $ | 319,694 | | Weighted average shares outstanding | | | | | | | | | | | 137,699 | | Basic net income per share | | | | | | | | | | $ | 2.32 | |
Prior to Akcea’s IPO in July 2017, we owned Akcea series A convertible preferred stock, which included a six percent cumulative dividend. Upon completion of Akcea’s IPO in July 2017, our preferred stock was converted into common stock on a 1:1 basis. The preferred stock dividend was not paid at the IPO because the IPO was not a liquidation event or a change in control. During the three months ended September 30, 2017, Akcea used a two-class method to compute its net income (loss) per share because it had both common and preferred shares outstanding during the periods. The two-class method required Akcea to calculate its net income (loss) per share for each class of stock by dividing total distributable losses applicable to preferred and common stock, including the six percent cumulative dividend contractually due to series A convertible preferred shareholders, by the weighted-average of preferred and common shares outstanding during the requisite period. Since Akcea used the two-class method, accounting rules required us to include our portion of Akcea’s net income (loss) per share for both Akcea’s common and preferred shares that we owned in our calculation of basic and diluted net income (loss) per share for the three months ended September 30, 2017.
Our basic net income (loss) per share for the three months ended September 30, 2017 was calculated as follows (in thousands, except per share amounts):
Three Months Ended September 30, 2017 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Loss Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | Common shares | | | 36,556 | | | $ | (0.33 | ) | | $ | (12,063 | ) | Preferred shares | | | 5,651 | | | | (0.01 | ) | | | (57 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (12,120 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 10,144 | | Net loss available to Ionis common stockholders | | | | | | | | | | $ | (1,976 | ) | Weighted average shares outstanding | | | | | | | | | | | 124,370 | | Basic net loss per share | | | | | | | | | | $ | (0.02 | ) |
Our basic net income (loss) per share for the three months ended December 30, 2017 was calculated as follows (in thousands, except per share amounts):
Three Months Ended December 31, 2017 | | Weighted Average Shares Owned in Akcea | | | Akcea’s Net Loss Per Share | | | Ionis’ Portion of Akcea’s Net Loss | | | | | | | | | | | | Common shares | | | 45,448 | | | $ | (0.30 | ) | | $ | (13,634 | ) | Akcea’s net loss attributable to our ownership | | | | | | | | | | $ | (13,634 | ) | Ionis’ stand-alone net income | | | | | | | | | | | 10,510 | | Net loss available to Ionis common stockholders | | | | | | | | | | $ | (3,124 | ) | Weighted average shares outstanding | | | | | | | | | | | 124,818 | | Basic net loss per share | | | | | | | | | | $ | (0.03 | ) |
(3) | For the three months ended December 31, 2016,2018, we had net income.income available to Ionis common stockholders. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period.those periods. Diluted common equivalent shares for the three months ended December 31, 20162018 consisted of the following (in thousands)thousands except per share amounts): |
Three Months Ended December 31, 2016 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | | | | | | | | | | | Income available to common shareholders | | $ | 25,865 | | | | 121,340 | | | $ | 0.21 | | Effect of diluted securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 2,189 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 403 | | | | | | Shares issuable related to our ESPP | | | — | | | | 21 | | | | | | Income available to common shareholders, plus assumed conversions | | $ | 25,865 | | | | 123,953 | | | $ | 0.21 | |
Three Months Ended December 31, 2018 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | | | | | | | | | | | Net income available to Ionis common stockholders | | $ | 319,694 | | | | 137,699 | | | | 2.32 | | Effect of dilutive securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 1,254 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 636 | | | | | | Shares issuable related to our ESPP | | | — | | | | 7 | | | | | | Shares issuable related to our 1 percent convertible notes | | | 10,745 | | | | 10,260 | | | | | | Income available to Ionis common stockholders, plus assumed conversions | | $ | 330,439 | | | | 149,856 | | | | 2.21 | |
For the three months ended DecemberMarch 31, 2016,2017, we owned 100 percent of Akcea. As a result, we did not have to adjust our earnings per share calculation. For the three months ended March 31, 2017, we had net income. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during those periods. Diluted common equivalent shares for the three months ended March 31, 2017 consisted of the following (in thousands except per share amounts):
Three Months Ended March 31, 2017 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | | | | | | | | | | | Net income available to Ionis common stockholders | | $ | 8,964 | | | | 122,861 | | | $ | 0.07 | | Effect of dilutive securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 1,674 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 377 | | | | | | Shares issuable related to our ESPP | | | — | | | | 60 | | | | | | Income available to Ionis common stockholders | | $ | 8,964 | | | | 124,972 | | | $ | 0.07 | |
For the three months ended March 31, 2017, the calculation excludesexcluded the 1 percent and 2¾ percent notes because the effect on diluted earnings per share would be anti-dilutive.
(3) | For the three months ended September 30, 2016, we had net income. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period. Diluted common equivalent shares for the three months ended September 30, 2016 consisted of the following (in thousands): |
Three Months Ended September 30, 2016 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | | | | | | | | | | | Income available to common shareholders | | $ | 7,351 | | | | 120,989 | | | $ | 0.06 | | Effect of diluted securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 2,129 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 202 | | | | | | Shares issuable related to our ESPP | | | — | | | | 58 | | | | | | Income available to common shareholders, plus assumed conversions | | $ | 7,351 | | | | 123,378 | | | $ | 0.06 | |
For the three months ended September 30, 2016, the calculation excludes the 1 percent and 2¾ percent notes because the effect on diluted earnings per share would be anti-dilutive.
(4) | For the three months ended June 30, 2015, we had net income. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period. Diluted common equivalent shares for the three months ended June 30, 2015 consisted of the following (in thousands): |
Three Months Ended June 30, 2015 | | Income (Numerator) | | | Shares (Denominator) | | | Per-Share Amount | | | | | | | | | | | | Income available to common shareholders | | $ | 35,648 | | | | 119,742 | | | $ | 0.30 | | Effect of diluted securities: | | | | | | | | | | | | | Shares issuable upon exercise of stock options | | | — | | | | 3,974 | | | | | | Shares issuable upon restricted stock award issuance | | | — | | | | 376 | | | | | | Shares issuable related to our ESPP | | | — | | | | 4 | | | | | | Shares issuable related to our 2¾ percent notes | | | 1,047 | | | | 3,683 | | | | | | Income available to common shareholders, plus assumed conversions | | $ | 36,695 | | | | 127,779 | | | $ | 0.29 | |
For the three months ended June 30, 2015, the calculation excludes the 1 percent notes because the effect on diluted earnings per share was anti-dilutive.
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