akca-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2018

OR

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

For the transition period from            to           

Commission file number 001-38137

 

 

Akcea Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

47-2608175

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

22 Boston Wharf Road, 9th Floor, Boston, MA 02210

(Address of principal executive offices, including zip code)

617-207-0202

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

The number of shares of common stock outstanding as of October 31, 2018 was 89,210,927.

 

 

 

 


AKCEA THERAPEUTICS, INC.

FORM 10-Q

INDEX

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (as revised)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (as revised)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (as revised)

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (as revised)

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

24

 

 

 

 

 

Overview

 

24

 

 

 

 

 

Results of Operations

 

30

 

 

 

 

 

Liquidity and Capital Resources

 

32

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

35

 

 

 

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

 

 

 

Item 1A

Risk Factors

 

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

64

 

 

 

 

Item 4.

Mine Safety Disclosures

 

64

 

 

 

 

Item 5.

Other Information

 

64

 

 

 

 

Item 6.

Exhibits

 

65

 

 

 

 

Signatures

 

66

 

TRADEMARKS

"Akcea," the Akcea logo, and other trademarks or service marks of Akcea Therapeutics, Inc. appearing in this Report are the property of Akcea Therapeutics, Inc. This Report contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Report may appear without the ® or TM symbols.

2


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

(as revised)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

116,206

 

 

$

58,367

 

Short-term investments

 

 

204,109

 

 

 

201,763

 

Contract receivable

 

 

636

 

 

 

5,413

 

Other current assets

 

 

8,397

 

 

 

1,302

 

Total current assets

 

 

329,348

 

 

 

266,845

 

Property, plant and equipment, net

 

 

5,757

 

 

 

77

 

Licenses, net

 

 

40,969

 

 

 

1,221

 

Deposits and other assets

 

 

3,054

 

 

 

661

 

Total assets

 

$

379,128

 

 

$

268,804

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,071

 

 

$

2,381

 

Payable to Ionis Pharmaceuticals, Inc.

 

 

23,888

 

 

 

14,365

 

Accrued compensation

 

 

8,848

 

 

 

4,083

 

Accrued liabilities

 

 

21,151

 

 

 

7,570

 

Current portion of deferred revenue

 

 

32,347

 

 

 

58,192

 

Other current liabilities

 

 

1,295

 

 

 

1,875

 

Total current liabilities

 

 

90,600

 

 

 

88,466

 

Long-term portion of deferred rent

 

 

4,653

 

 

 

12

 

Long-term portion of deferred revenue

 

 

2,464

 

 

 

12,501

 

Total liabilities

 

 

97,717

 

 

 

100,979

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 and 100,000,000 shares authorized

   at September 30, 2018 and December 31, 2017, respectively; 87,471,330 and

   66,541,629 shares issued and outstanding at September 30, 2018 and December 31,

   2017, respectively

 

 

87

 

 

 

67

 

Additional paid-in capital

 

 

733,098

 

 

 

464,430

 

Accumulated other comprehensive loss

 

 

(289

)

 

 

(451

)

Accumulated deficit

 

 

(451,485

)

 

 

(296,221

)

Total stockholders’ equity

 

 

281,411

 

 

 

167,825

 

Total liabilities and stockholders’ equity

 

$

379,128

 

 

$

268,804

 

 

See accompanying notes.

3


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for share and per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(as revised)

 

 

 

 

 

 

(as revised)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licensing revenue

 

$

12,000

 

 

$

 

 

$

12,000

 

 

$

 

Research and development revenue under collaborative

   agreement

 

 

7,241

 

 

 

9,906

 

 

 

42,670

 

 

 

21,712

 

Total revenue

 

 

19,241

 

 

 

9,906

 

 

 

54,670

 

 

 

21,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - product

 

 

1,043

 

 

 

 

 

 

1,043

 

 

 

 

Cost of sales - intangible asset amortization

 

 

701

 

 

 

 

 

 

701

 

 

 

 

Cost of license

 

 

7,200

 

 

 

 

 

 

7,200

 

 

 

 

Research and development

 

 

29,381

 

 

 

17,640

 

 

 

96,808

 

 

 

100,921

 

Selling, general and administrative

 

 

45,924

 

 

 

8,373

 

 

 

107,676

 

 

 

19,963

 

Total expenses

 

 

84,249

 

 

 

26,013

 

 

 

213,428

 

 

 

120,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(65,008

)

 

 

(16,107

)

 

 

(158,758

)

 

 

(99,172

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

1,675

 

 

 

687

 

 

 

4,089

 

 

 

994

 

Interest expense

 

 

 

 

 

(224

)

 

 

 

 

 

(1,731

)

Other income (expense)

 

 

(25

)

 

 

73

 

 

 

(148

)

 

 

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

 

(63,358

)

 

 

(15,571

)

 

 

(154,817

)

 

 

(99,785

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(233

)

 

 

(2,066

)

 

 

(447

)

 

 

(2,066

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(63,591

)

 

$

(17,637

)

 

$

(155,264

)

 

$

(101,851

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of preferred stock, basic and diluted

 

$

 

 

$

(0.01

)

 

$

 

 

$

(2.16

)

Weighted-average shares of preferred stock outstanding, basic and

   diluted

 

 

 

 

 

5,651,323

 

 

 

 

 

 

21,055,031

 

Net loss per share of common stock owned by Ionis, basic and

   diluted

 

$

(0.73

)

 

$

(0.33

)

 

$

(1.93

)

 

$

(3.12

)

Weighted-average shares of common stock outstanding owned by

   Ionis, basic and diluted

 

 

65,538,467

 

 

 

36,555,903

 

 

 

57,346,539

 

 

 

12,319,205

 

Net loss per share of common stock owned by others, basic and

   diluted

 

$

(0.73

)

 

$

(0.33

)

 

$

(2.07

)

 

$

(3.12

)

Weighted-average shares of common stock outstanding owned by

   others, basic and diluted

 

 

21,671,415

 

 

 

16,966,712

 

 

 

21,446,813

 

 

 

5,717,720

 

 

See accompanying notes.

4


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(as revised)

 

 

 

 

 

 

(as revised)

 

Net loss

 

$

(63,591

)

 

$

(17,637

)

 

$

(155,264

)

 

$

(101,851

)

Unrealized gains (losses) on investments, net of tax

 

 

37

 

 

 

(86

)

 

 

143

 

 

 

(113

)

Currency translation adjustment

 

 

(29

)

 

 

(52

)

 

 

19

 

 

 

(88

)

Comprehensive loss

 

$

(63,583

)

 

$

(17,775

)

 

$

(155,102

)

 

$

(102,052

)

 

See accompanying notes.

5


AKCEA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(as revised)

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(155,264

)

 

$

(101,851

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

109

 

 

 

82

 

Amortization of licenses

 

 

815

 

 

 

89

 

Amortization of premium on investments, net

 

 

197

 

 

 

312

 

Non-cash sublicensing expense

 

 

 

 

 

33,394

 

Non-cash interest expense for line of credit with Ionis Pharmaceuticals, Inc.

 

 

 

 

 

1,731

 

Stock-based compensation expense

 

 

31,239

 

 

 

11,814

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Contracts receivable

 

 

4,777

 

 

 

(500

)

Other current and long-term assets

 

 

(7,104

)

 

 

(1,160

)

Accounts payable

 

 

300

 

 

 

897

 

Payable to Ionis Pharmaceuticals, Inc.

 

 

9,198

 

 

 

(48,248

)

Accrued compensation

 

 

4,765

 

 

 

(198

)

Deferred rent

 

 

1,018

 

 

 

(5

)

Accrued liabilities

 

 

12,219

 

 

 

2,382

 

Income taxes payable

 

 

(553

)

 

 

2,049

 

Deferred revenue

 

 

(35,882

)

 

 

87,540

 

Net cash used in operating activities

 

 

(134,166

)

 

 

(11,672

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(105,091

)

 

 

(219,179

)

Proceeds from sale of short-term investments

 

 

138,580

 

 

 

42,988

 

Purchase of property, plant and equipment

 

 

(116

)

 

 

(9

)

Net cash provided by (used in) investing activities

 

 

33,373

 

 

 

(176,200

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options and employee stock purchase

   plan issuances

 

 

5,141

 

 

 

 

Proceeds from issuance of common stock, net of underwriters' discount

 

 

 

 

 

135,438

 

Proceeds from sale of common stock to Novartis in private placement

 

 

 

 

 

50,000

 

Proceeds from line of credit from Ionis Pharmaceuticals, Inc.

 

 

 

 

 

106,000

 

Net proceeds from issuance of common stock to Ionis in connection with TTR

   License Agreement

 

 

155,856

 

 

 

 

Offering costs paid

 

 

 

 

 

(1,057

)

Net cash provided by financing activities

 

 

160,997

 

 

 

290,381

 

Effect of exchange rates on cash

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

60,223

 

 

 

102,509

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

58,367

 

 

 

7,857

 

Cash, cash equivalents and restricted cash at end of period

 

$

118,590

 

 

$

110,366

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid deferred offering costs

 

$

 

 

$

638

 

Conversion of line of credit from Ionis Pharmaceuticals, Inc. into common stock

 

$

 

 

$

107,731

 

Purchase of property, plant and equipment included in accounts payable

   and accrued liability

 

$

1,752

 

 

$

 

Purchase of property, plant and equipment included in long-term

   deferred rent liability

 

$

3,596

 

 

$

 

Purchase of property, plant and equipment included in payable to Ionis Pharmaceuticals

 

$

325

 

 

$

 

Acquisition of research and development licenses and milestone payments

 

$

40,563

 

 

$

 

6


 

The following table presents the line items and amounts of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets:

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

116,206

 

 

$

110,366

 

Restricted cash included in deposits and other assets

 

 

2,384

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

118,590

 

 

$

110,366

 

 

See accompanying notes.

7


AKCEA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

1.

Basis of Presentation and Organization

The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP. Certain amounts in the prior period financial statements have been revised to conform to the presentation of the current period financial statements. See Note 2, Summary of Significant Accounting Policies, for a discussion of these revisions to prior period financial statements made in connection with our adoption of the new revenue recognition guidance retroactive to January 1, 2017.

The condensed consolidated financial statements include the accounts of Akcea Therapeutics, Inc. ("we," "our," and "us") and our wholly owned subsidiaries. All intercompany transactions and balances were eliminated in consolidation. We included all normal recurring adjustments in the financial statements, which we considered necessary for a fair presentation of our financial position and our operating results and cash flows for the interim periods ended September 30, 2018 and 2017. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

We were incorporated in Delaware in December 2014. We were organized by Ionis Pharmaceuticals, Inc., or Ionis, to focus on developing and commercializing drugs to treat patients with rare and serious diseases. On July 19, 2017, we completed our initial public offering, or IPO. As of September 30, 2018, Ionis owned approximately 75% of our common stock and is our majority shareholder. Prior to our IPO, we were wholly owned by Ionis.

In accordance with Accounting Standard Codification, or ASC, 205-40, Going Concern, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. As of September 30, 2018, we had an accumulated deficit of $451.5 million. During the three and nine months ended September 30, 2018, we incurred a loss of $63.6 million and $155.3 million, respectively, and during the nine months ended September 30, 2018, we used $134.2 million of cash in operations. We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future. The transition to profitability is dependent upon the successful development, approval, and commercialization of our products and product candidates and the achievement of a level of revenues adequate to support our cost structure.  We believe that our currently available funds of $320.3 million as of September 30, 2018, in addition to cash expected to be generated from sales of our products, one of which has been approved in the U.S., the EU and Canada, will be sufficient to fund our operations through at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q.  Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties.   If actual results are different from management’s estimates, we may need to seek additional funding or delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and commercialize our drugs even if we would otherwise prefer to develop and commercialize the drugs ourselves.

2.

Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, except as noted below with respect to our revenue recognition accounting policy.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires our 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.

8


Translation of Foreign Currency

For our foreign subsidiaries that report in a functional currency other than U.S. dollars, we translate their assets and liabilities into U.S. dollars using the exchange rate at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates for the period. We translate transactions in our capital accounts at the historic exchange rate in effect at the date of the transaction. We include foreign currency translation adjustments as a component of accumulated other comprehensive loss within the condensed consolidated statements of comprehensive loss.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, which amended the guidance for accounting for revenue from contracts with customers. This ASU superseded the revenue recognition requirements in 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 recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, then assess whether each promised good or service is distinct. When we offer options for additional goods or services, such as an option to license a drug in the future or for additional goods or services to be provided in the future, we evaluate whether such options are material rights that should be treated as additional performance obligations. We typically have not concluded that the option to license a drug or the options for additional goods or services that may be requested in the future under our collaboration agreement are material rights as the amounts attributable to such options represent standalone selling price, and therefore no consideration is allocated to these items at the inception of an agreement. When a partner exercises its option to license a drug or requests the additional goods or services, a new performance obligation is created for that item. Once performance obligations are identified, we then recognize as revenue the amount of the transaction price that we allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of an output or input method. As of September 30, 2018, we have two revenue streams: our strategic collaboration, option and license agreement, or collaboration agreement, with Novartis Pharma AG, or Novartis, which we entered into in January 2017, and our collaboration and license agreement with PTC Therapeutics International Limited, or PTC Therapeutics, which we entered into in August 2018. For a complete discussion of the accounting for our revenue streams, see Note 4, Strategic Collaboration with Novartis and Note 6, PTC License Agreement with PTC Therapeutics.

Effective January 1, 2018, we adopted Topic 606 using the full retrospective transition method. Under this method, we revised our consolidated financial statements for prior period amounts including the interim periods included in this Report on Form 10-Q, as if Topic 606 had been effective for such periods. The references “as revised” used herein refer to revisions of amounts originally reported for the three and nine months ended September 30, 2017 and as of December 31, 2017 as a result of our adoption of Topic 606.

Impact of Adoption

As a result of adopting Topic 606 on January 1, 2018, we revised our comparative financial statements for the prior years as if Topic 606 had been effective for that period. On September 18, 2018, we filed a Current Report on Form 8-K to present recast consolidated financial statements for each of the three years ended December 31, 2015, 2016 and 2017, to reflect our adoption of the new accounting standard for revenue recognition set forth in Topic 606. The financial information recast in the Form 8-K was originally filed with the SEC in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the SEC on February 28, 2018. Under Topic 605, we recognized revenue over time on a straight-line basis. Under Topic 606, we recognize revenue using the input method based on the total cost of performing services over time. As a result, the following financial statement line items for fiscal year 2017 were affected.

9


Condensed Consolidated Balance Sheets

 

 

 

December 31, 2017

(in thousands)

 

 

 

As Revised

Under Topic 606

 

 

As Originally

Reported

Under Topic 605

 

 

Effect

of Change

 

Current portion of deferred revenue

 

$

58,192

 

 

$

50,579

 

 

$

7,613

 

Long-term portion of deferred revenue

 

 

12,501

 

 

 

8,306

 

 

 

4,195

 

Accumulated deficit

 

$

(296,221

)

 

$

(284,413

)

 

$

(11,808

)

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

 

 

Three Months Ended September 30, 2017

(in thousands, except per share data)

 

 

 

As Revised

Under Topic 606

 

 

As Originally

Reported

Under Topic 605

 

 

Effect

of Change

 

Research and development revenue under collaborative

   agreement

 

$

9,906

 

 

$

13,449

 

 

$

(3,543

)

Loss from operations

 

 

(16,107

)

 

 

(12,564

)

 

 

(3,543

)

Net loss

 

 

(17,637

)

 

 

(14,094

)

 

 

(3,543

)

Net loss per share of preferred stock, basic and diluted

 

 

(0.01

)

 

 

0.05

 

 

 

(0.06

)

Net loss per share of common stock owned by Ionis, basic

   and diluted

 

 

(0.33

)

 

 

(0.27

)

 

 

(0.06

)

Net loss per share of common stock owned by others, basic

   and diluted

 

$

(0.33

)

 

 

(0.27

)

 

$

(0.06

)

 

 

 

Nine Months Ended September 30, 2017

(in thousands, except per share data)

 

 

 

As Revised

Under Topic 606

 

 

As Originally

Reported

Under Topic 605

 

 

Effect

of Change

 

Research and development revenue under collaborative

   agreement

 

$

21,712

 

 

$

37,173

 

 

$

(15,461

)

Loss from operations

 

 

(99,172

)

 

 

(83,711

)

 

 

(15,461

)

Net loss

 

 

(101,851

)

 

 

(86,390

)

 

 

(15,461

)

Net loss per share of preferred stock, basic and diluted

 

 

(2.16

)

 

 

(1.77

)

 

 

(0.39

)

Net loss per share of common stock owned by Ionis, basic

   and diluted

 

 

(3.12

)

 

 

(2.72

)

 

 

(0.40

)

Net loss per share of common stock owned by others, basic

   and diluted

 

$

(3.12

)

 

 

(2.72

)

 

$

(0.40

)

 

Condensed Consolidated Statement of Cash Flows

 

 

 

Nine Months Ended September 30, 2017

(in thousands)

 

 

 

As Revised

Under Topic 606

 

 

As Originally

Reported

Under Topic 605

 

 

Effect

of Change

 

Net loss

 

$

(101,851

)

 

$

(86,390

)

 

$

(15,461

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenues

 

 

87,540

 

 

 

72,079

 

 

 

15,461

 

Cash, cash equivalents and restricted cash at beginning

   of period

 

 

7,857

 

 

 

7,857

 

 

 

 

Cash, cash equivalents and restricted at end of period

 

$

110,366

 

 

$

110,366

 

 

$

 

 

10


Inventory

Prior to the regulatory approval of our product candidates, we incur expenses for the manufacturing of drug product that could potentially be available to support the commercial launch of our products. Until the first reporting period when regulatory approval has been received or is otherwise considered probable, we record all such costs as research and development expense.

For inventory related costs incurred subsequent to July 1, 2018, we will reflect these amounts as inventory on our condensed consolidated balance sheets at the lower of cost or market value under the first-in, first-out, or FIFO, basis. We will periodically analyze our inventory levels, and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory in excess of expected sales requirements as cost of product sales. The determination of whether inventory costs will be realizable requires estimates by our management and if actual market conditions are less favorable than projected by our management, additional write-downs of inventory may be required which would be recorded as a cost of product sales in the condensed consolidated statements of operations.

At September 30, 2018 our physical inventory for TEGSEDI was produced prior to when we obtained regulatory approval and accordingly had no cost basis as we recorded the related costs as research and development expense in prior periods.

Intangible Assets

We obtained exclusive licenses from Ionis for specific patents that Ionis owns and maintains related to our drug pipeline. We recorded our licenses from Ionis as a capital contribution using the carryover basis of Ionis' historical cost for the related patents. We are amortizing our capitalized licenses over their estimated useful life, which is the term of the underlying individual patents owned by Ionis.

In addition, we maintain definite-lived intangible assets related to regulatory milestone payments made to Ionis that are recoverable through future cash flows from approved products, which are capitalized as license intangible assets. These assets are amortized over their remaining useful lives, which are generally estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used. Intangible assets are amortized using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when future revenues cannot be reasonably estimated. Amortization expense is recorded as a component of cost of sales to the extent the underlying license is commercialized or research and development prior to its commercialization in the condensed consolidated statements of operations.

Cost of Product Sales

As a result of receiving marketing authorization, or MA, approval for TEGSEDI from the European Commission, or EC, in July 2018, we began recording all TEGSEDI related expenses as cost of product sales starting in July 2018. Cost of product sales consists of manufacturing costs, transportation and freight, and indirect overhead costs associated with the manufacturing and distribution of TEGSEDI. Cost of product sales may also include period costs related to certain manufacturing services and inventory adjustment charges. Additionally, we expensed a significant portion of the cost of producing TEGSEDI that we will use in the commercial launch as research and development expense prior to the regulatory approval of TEGSEDI.

New Accounting Pronouncements - Recently Issued

In February 2016, the FASB issued amended accounting guidance related to lease accounting, which requires 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 and an asset representing the underlying leased asset. The new accounting guidance requires us to determine if any lease we have is an operating or financing lease. We will record expense for an operating type lease on a straight-line basis as an operating expense and we will record expense for a financing type lease as interest expense. The new lease standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. This standard allows for a modified retrospective application and is effective for the first quarter of 2019. Entities may apply the modified retrospective approach (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption (January 1, 2019) through a cumulative-effect adjustment. We are currently assessing the impact that adoption of this guidance will have on our consolidated financial statements and disclosures.

11


In June 2016, the FASB issued guidance that changes the measurement of credit losses for most financial assets and certain other instruments. If we have credit losses, this updated guidance requires us to record allowances for these instruments under a new expected credit loss model. This model requires us to estimate the expected credit loss of an instrument over its lifetime, which represents the portion of the amortized cost basis that we do not expect to collect. This change will result in us remeasuring 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 are currently assessing the timing of adoption as well as the impact it will have on our consolidated financial statements and disclosures.

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 the stranded tax effects resulting from changes due to the Tax Act from accumulated other comprehensive income (loss) 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. Early adoption is permitted and adoption is optional. We are currently assessing the impact this updated guidance could have on our consolidated financial statements and the timing of potential adoption.

In June 2018, the FASB issued updated guidance to simplify the accounting for stock-based compensation expense for non-employees. We adopted this guidance in the second quarter of 2018. We have not granted stock options to non-employees as of September 30, 2018 and therefore this new guidance has no impact on our consolidated financial statements.

 

In August 2018, the FASB updated its disclosure requirements related to Level 1, 2 and 3 fair value measurements. The update included deletion and modification of certain disclosure requirements and additional disclosure related to Level 3 measurements.  The guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We anticipate we will adopt this updated guidance on January 1, 2019 and we do not expect it to have a significant impact on our disclosures.

 

In August 2018, the FASB issued clarifying guidance on how to account for implementation costs related to hosted cloud-servicing arrangements. The primary change is to include any arrangement in which the customer accesses or uses software but does not take possession of the software when assessing for the capitalization of implementation costs of internal use software. Qualified costs are to be capitalized and amortized over the service period and they need to be expensed in the same line item as the service expense and recognized on the balance sheet in the same category as amounts prepaid for the hosted cloud-servicing arrangements generally as an other asset. Cash flows related to the capitalized implementation costs should be presented consistent with the presentation of cash flows for the fees related to hosted cloud-servicing arrangements. The update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The updated guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently assessing the effects this updated guidance could have on our consolidated financial statements and timing of potential adoption.

 

 

 

3.

Investments and Fair Value Measurements

Investments

The following is a summary of our investments at September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

Gross Unrealized

 

 

Estimated

 

September 30, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

90,527

 

 

$

 

 

$

(104

)

 

$

90,423

 

Debt securities issued by U.S. government agencies

 

 

97,545

 

 

 

 

 

 

(74

)

 

 

97,471

 

Total securities with a maturity of one year or less

 

 

188,072

 

 

 

 

 

 

(178

)

 

 

187,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

2,910

 

 

 

 

 

 

(5

)

 

 

2,905

 

Debt securities issued by U.S. government agencies

 

 

13,322

 

 

 

 

 

 

(12

)

 

 

13,310

 

Total securities with a maturity of one to two years

 

 

16,232

 

 

 

 

 

 

(17

)

 

 

16,215

 

Total available-for-sale securities

 

$

204,304

 

 

$

 

 

$

(195

)

 

$

204,109

 

12


 

 

 

 

 

 

 

Gross Unrealized

 

 

Estimated

 

December 31, 2017

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

132,434

 

 

$

 

 

$

(206

)

 

$

132,228

 

Debt securities issued by U.S. government agencies

 

 

38,135

 

 

 

 

 

 

(59

)

 

 

38,076

 

Total securities with a maturity of one year or less

 

 

170,569

 

 

 

 

 

 

(265

)

 

 

170,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

8,267

 

 

 

 

 

 

(35

)

 

 

8,232

 

Debt securities issued by U.S. government agencies

 

 

23,264

 

 

 

 

 

 

(37

)

 

 

23,227

 

Total securities with a maturity of one to two years

 

 

31,531

 

 

 

 

 

 

(72

)

 

 

31,459

 

Total available-for-sale securities

 

$

202,100

 

 

$

 

 

$

(337

)

 

$

201,763

 

 

We recorded unrealized losses related to the securities listed above as of September 30, 2018 and December 31, 2017. We believe that the decline in value of these securities is temporary and primarily related to the change in market interest rates since purchase. We believe it is more likely than not that we will be able to hold our debt securities to maturity. Therefore, we anticipate a full recovery of the amortized cost basis of our debt securities at maturity.

All of our available-for-sale securities are available to us for use in our current operations. As a result, we categorized 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.

Fair Value Measurements

We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. We have not historically held any investments or other instruments as Level 3. We recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer.

The following tables present the investments we held at September 30, 2018 and December 31, 2017 that are regularly measured and carried at fair value. The table segregates each security by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities' fair value (in thousands):

 

 

 

At

September 30, 2018

 

 

Quoted Prices

in Active Markets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

Money market funds (1)

 

$

104,931

 

 

$

104,931

 

 

$

 

Corporate debt securities (2)

 

 

95,329

 

 

 

 

 

 

95,329

 

Debt securities issued by U.S. government agencies (3)

 

 

110,780

 

 

 

 

 

 

110,780

 

Total

 

$

311,040

 

 

$

104,931

 

 

$

206,109

 

 

 

 

At

December 31,

2017

 

 

Quoted Prices

in Active Markets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

Money market funds (1)

 

$

48,430

 

 

$

48,430

 

 

$

 

Corporate debt securities (3)

 

 

140,460

 

 

 

 

 

 

140,460

 

Debt securities issued by U.S. government agencies (3)

 

 

61,303

 

 

 

 

 

 

61,303

 

Total

 

$

250,193

 

 

$

48,430

 

 

$

201,763

 

 

(1)

Included in cash and cash equivalents on our condensed consolidated balance sheets.

(2)

At September 30, 2018, $2.0 million was included in cash and cash equivalents on our condensed consolidated balance sheet, with the difference included in short-term investments on our condensed consolidated balance sheet.

(3)

Included in short-term investments on our condensed consolidated balance sheets.

13


We did not have any Level 3 investments or other instruments at September 30, 2018 and December 31, 2017. During the nine months ended September 30, 2018 and the year ended December 31, 2017, there were no transfers between Level 1 and Level 2 investments.