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, 2020

OR

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

For the transition period from _____ to _____

Commission file number 000-19125

     

Ionis Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its charter)

Delaware
 
33-0336973
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

2855 Gazelle Court, Carlsbad, California
 
92010
(Address of Principal Executive Offices)
 
(Zip Code)

760-931-9200
(Registrant’s telephone number, including area code)

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

Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common Stock, $.001 Par Value
 
IONS
 
The Nasdaq Stock Market LLC

     

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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 voting common stock outstanding as of October 29, 2020 was 139,823,135.



IONIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX

PART I
FINANCIAL INFORMATION
 
     
ITEM 1:
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019
3
     
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)
4
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 (unaudited)
5
     
 
Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)
6
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
9
     
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
     
 
Overview
32
     
 
Results of Operations
35
     
 
Liquidity and Capital Resources
41
     
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk
43
     
ITEM 4:
Controls and Procedures
44
     
PART II
OTHER INFORMATION
44
     
ITEM 1:
Legal Proceedings
44
     
ITEM 1A:
Risk Factors
45
     
ITEM 2:
Unregistered Sales of Equity Securities and Use of Proceeds
61
     
ITEM 3:
Default upon Senior Securities
61
     
ITEM 4:
Mine Safety Disclosures
61
     
ITEM 5:
Other Information
61
     
ITEM 6:
Exhibits
61
     
SIGNATURES
63

TRADEMARKS

 "Ionis," the Ionis logo, and other trademarks or service marks of Ionis Pharmaceuticals, Inc. appearing in this report are the property of Ionis Pharmaceuticals, Inc. "Akcea," the Akcea logo, and other trademarks or service marks appearing in this report, including TEGSEDI (inotersen) and WAYLIVRA (volanesorsen), 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


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

   
September 30,
2020
   
December 31,
2019
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
633,059
   
$
683,287
 
Short-term investments
   
1,696,145
     
1,816,257
 
Contracts receivable
   
38,977
     
63,034
 
Inventories
   
22,172
     
18,180
 
Other current assets
   
146,628
     
139,839
 
Total current assets
   
2,536,981
     
2,720,597
 
Property, plant and equipment, net
   
181,518
     
153,651
 
Patents, net
   
28,274
     
25,674
 
Long-term deferred tax assets
   
307,737
     
305,557
 
Deposits and other assets
   
41,191
     
27,633
 
Total assets
 
$
3,095,701
   
$
3,233,112
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
16,222
   
$
16,067
 
Accrued compensation
   
28,390
     
37,357
 
Accrued liabilities
   
80,750
     
66,769
 
Income taxes payable
   
8,929
     
32,514
 
Current portion of long-term obligations and other current liabilities
   
5,849
     
2,026
 
Current portion of deferred contract revenue
   
104,431
     
118,272
 
Total current liabilities
   
244,571
     
273,005
 
Long-term deferred contract revenue
   
429,931
     
490,060
 
0.125 percent convertible senior notes
   
450,386
     
434,711
 
1 percent convertible senior notes
   
288,579
     
275,333
 
Long-term obligations, less current portion
   
15,884
     
15,543
 
Long-term mortgage debt
   
59,966
     
59,913
 
Total liabilities
   
1,489,317
     
1,548,565
 
Stockholders’ equity:
               
Common stock, $0.001 par value; 300,000,000 shares authorized, 139,793,901 and 140,339,615 shares issued and outstanding at September 30, 2020 (unaudited) and December 31, 2019, respectively
   
140
     
140
 
Additional paid-in capital
   
2,311,679
     
2,203,778
 
Accumulated other comprehensive loss
   
(19,572
)
   
(25,290
)
Accumulated deficit
   
(909,098
)
   
(707,534
)
Total Ionis stockholders’ equity
   
1,383,149
     
1,471,094
 
   Noncontrolling interest in Akcea Therapeutics, Inc.
   
223,235
     
213,453
 
Total stockholders’ equity
   
1,606,384
     
1,684,547
 
Total liabilities and stockholders’ equity
 
$
3,095,701
   
$
3,233,112
 


See accompanying notes.

3


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Revenue:
                       
Commercial revenue:
                       
SPINRAZA royalties
 
$
74,171
   
$
81,672
   
$
211,925
   
$
211,884
 
Product sales, net
   
19,040
     
11,945
     
50,562
     
28,563
 
Licensing and other royalty revenue
   
2,129
     
2,082
     
6,548
     
11,638
 
Total commercial revenue
   
95,340
     
95,699
     
269,035
     
252,085
 
Research and development revenue under collaborative agreements
   
64,739
     
72,193
     
169,948
     
376,833
 
Total revenue
   
160,079
     
167,892
     
438,983
     
628,918
 
                                 
Expenses:
                               
Cost of products sold
   
3,086
     
967
     
8,646
     
3,373
 
Research, development and patent
   
125,083
     
104,366
     
364,298
     
316,948
 
Selling, general and administrative
   
68,447
     
60,036
     
215,455
     
203,368
 
Total operating expenses
   
196,616
     
165,369
     
588,399
     
523,689
 
                                 
Income (loss) from operations
   
(36,537
)
   
2,523
     
(149,416
)
   
105,229
 
                                 
Other income (expense):
                               
Investment income
   
6,454
     
13,136
     
25,913
     
39,015
 
Interest expense
   
(11,321
)
   
(12,002
)
   
(33,484
)
   
(35,404
)
Gain on investments
   
835
     
     
10,722
     
 
Other income (expenses)
   
126
     
(140
)
   
(122
)
   
(332
)
                                 
Income (loss) before income tax (expense) benefit
   
(40,443
)
   
3,517
     
(146,387
)
   
108,508
 
                                 
Income tax (expense) benefit
   
(2,648
)
   
14,915
     
1,047
     
(9,204
)
                                 
Net income (loss)
   
(43,091
)
   
18,432
     
(145,340
)
   
99,304
 
                                 
Net loss attributable to noncontrolling interest in Akcea Therapeutics, Inc.
   
12,147
     
7,731
     
34,325
     
10,426
 
                                 
Net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(30,944
)
 
$
26,163
   
$
(111,015
)
 
$
109,730
 
                                 
Basic net income (loss) per share
 
$
(0.22
)
 
$
0.19
   
$
(0.80
)
 
$
0.81
 
Shares used in computing basic net income (loss) per share
   
139,708
     
140,551
     
139,497
     
139,800
 
Diluted net income (loss) per share
 
$
(0.22
)
 
$
0.18
   
$
(0.80
)
 
$
0.79
 
Shares used in computing diluted net income (loss) per share
   
139,708
     
143,408
     
139,497
     
142,821
 


 See accompanying notes.

4


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
                         
Net income (loss)
 
$
(43,091
)
 
$
18,432
   
$
(145,340
)
 
$
99,304
 
Unrealized gains (losses) on debt securities, net of tax
   
(3,448
)
   
(1,110
)
   
5,803
     
6,666
 
Currency translation adjustment
   
275
     
(13
)
   
357
     
(25
)
                                 
Comprehensive income (loss)
   
(46,264
)
   
17,309
     
(139,180
)
   
105,945
 
                                 
Comprehensive loss attributable to noncontrolling interests
   
(12,188
)
   
(7,731
)
   
(33,883
)
   
(10,423
)
                                 
Comprehensive income (loss) attributable to Ionis Pharmaceuticals, Inc. stockholders
 
$
(34,076
)
 
$
25,040
   
$
(105,297
)
 
$
116,368
 


See accompanying notes.

5


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended September 30, 2019 and 2020
(In thousands)
(Unaudited)

   
Common Stock
   
Additional
   
Accumulated Other
   
Accumulated
   
Total Ionis
Stockholders
   
Noncontrolling
Interest in Akcea
   
Total
Stockholders
 
Description
 
Shares
   
Amount
   
Paid in Capital
   
Comprehensive Loss
   
Deficit
   
Equity
   
Therapeutics, Inc.
   
Equity
 
Balance at June 30, 2019
   
140,393
   
$
140
   
$
2,177,222
   
$
(24,252
)
 
$
(883,726
)
 
$
1,269,384
   
$
187,818
   
$
1,457,202
 
Net income
   
     
     
     
     
26,163
     
26,163
     
     
26,163
 
Change in unrealized losses, net of tax
   
     
     
     
(1,110
)
   
     
(1,110
)
   
     
(1,110
)
Foreign currency translation
   
     
     
     
(13
)
   
     
(13
)
   
     
(13
)
Issuance of common stock in connection with employee stock plans
   
255
     
1
     
10,130
     
     
     
10,131
     
     
10,131
 
Stock-based compensation expense
   
     
     
24,126
     
     
     
24,126
     
     
24,126
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(11
)
   
     
(10,804
)
   
     
     
(10,804
)
   
     
(10,804
)
Noncontrolling interest in Akcea Therapeutics, Inc
   
     
     
18,416
     
     
     
18,416
     
(26,145
)
   
(7,729
)
Balance at September 30, 2019
   
140,637
   
$
141
   
$
2,219,090
   
$
(25,375
)
 
$
(857,563
)
 
$
1,336,293
   
$
161,673
   
$
1,497,966
 
                                                                 
Balance at June 30, 2020
   
139,489
   
$
139
   
$
2,271,630
   
$
(16,440
)
 
$
(878,154
)
 
$
1,377,175
   
$
217,620
   
$
1,594,795
 
Net loss
   
     
     
     
     
(30,944
)
   
(30,944
)
   
     
(30,944
)
Change in unrealized gains, net of tax
   
     
     
     
(3,448
)
   
     
(3,448
)
   
     
(3,448
)
Foreign currency translation
   
     
     
     
275
     
     
275
     
     
275
 
Issuance of common stock in connection with employee stock plans
   
321
     
1
     
12,997
     
     
     
12,998
     
     
12,998
 
Stock-based compensation expense
   
     
     
45,845
     
     
     
45,845
     
     
45,845
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(16
)
   
     
(990
)
   
     
     
(990
)
   
     
(990
)
Noncontrolling interest in Akcea Therapeutics, Inc.
   
     
     
(17,803
)
   
41
     
     
(17,762
)
   
5,615
     
(12,147
)
Balance at September 30, 2020
   
139,794
   
$
140
   
$
2,311,679
   
$
(19,572
)
 
$
(909,098
)
 
$
1,383,149
   
$
223,235
   
$
1,606,384
 


See accompanying notes.

6


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Nine Months Ended September 30, 2019 and 2020
(In thousands)
(Unaudited)

   
Common Stock
   
Additional
   
Accumulated Other
   
Accumulated
   
Total Ionis
Stockholders
   
Noncontrolling
Interest in Akcea
   
Total
Stockholders
 
Description
 
Shares
   
Amount
   
Paid in Capital
   
Comprehensive Loss
   
Deficit
   
Equity
   
Therapeutics, Inc.
   
Equity
 
Balance at December 31, 2018
   
137,929
   
$
138
   
$
2,047,250
   
$
(32,016
)
 
$
(967,293
)
 
$
1,048,079
   
$
139,081
   
$
1,187,160
 
Net income
   
     
     
     
     
109,730
     
109,730
     
     
109,730
 
Change in unrealized gains, net of tax
   
     
     
     
6,666
     
     
6,666
     
     
6,666
 
Foreign currency translation
   
     
     
     
(25
)
   
     
(25
)
   
     
(25
)
Issuance of common stock in connection with employee stock plans
   
2,855
     
3
     
112,132
     
     
     
112,135
     
     
112,135
 
Stock-based compensation expense
   
     
     
111,564
     
     
     
111,564
     
     
111,564
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(147
)
   
     
(18,841
)
   
     
     
(18,841
)
   
     
(18,841
)
Noncontrolling interest in Akcea Therapeutics, Inc.
   
     
     
(33,015
)
   
     
     
(33,015
)
   
22,592
     
(10,423
)
Balance at September 30, 2019
   
140,637
   
$
141
   
$
2,219,090
   
$
(25,375
)
 
$
(857,563
)
 
$
1,336,293
   
$
161,673
   
$
1,497,966
 
                                                                 
Balance at December 31, 2019
   
140,340
   
$
140
   
$
2,203,778
   
$
(25,290
)
 
$
(707,534
)
 
$
1,471,094
   
$
213,453
   
$
1,684,547
 
Net loss
   
     
     
     
     
(111,015
)
   
(111,015
)
   
     
(111,015
)
Change in unrealized gains, net of tax
   
     
     
     
5,803
     
     
5,803
     
     
5,803
 
Foreign currency translation
   
     
     
     
357
     
     
357
     
     
357
 
Issuance of common stock in connection with employee stock plans
   
1,141
     
1
     
29,449
     
     
     
29,450
     
     
29,450
 
Repurchases and retirements of common stock
   
(1,478
)
   
(1
)
   
     
     
(90,549
)
   
(90,550
)
   
     
(90,550
)
Stock-based compensation expense
   
     
     
135,077
     
     
     
135,077
     
     
135,077
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(209
)
   
     
(12,960
)
   
     
     
(12,960
)
   
     
(12,960
)
Noncontrolling interest in Akcea Therapeutics, Inc.
   
     
     
(43,665
)
   
(442
)
   
     
(44,107
)
   
9,782
     
(34,325
)
Balance at September 30, 2020
   
139,794
   
$
140
   
$
2,311,679
   
$
(19,572
)
 
$
(909,098
)
 
$
1,383,149
   
$
223,235
   
$
1,606,384
 


See accompanying notes.

7


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2020
   
2019
 
Operating activities:
           
Net income (loss)
 
$
(145,340
)
 
$
99,304
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation
   
9,713
     
9,345
 
Amortization of right-of-use operating lease assets
   
1,356
     
1,433
 
Amortization of patents
   
1,526
     
1,139
 
Amortization of premium (discount) on investments, net
   
7,812
     
(7,064
)
Amortization of debt issuance costs
   
1,884
     
1,448
 
Amortization of convertible senior notes discount
   
26,912
     
26,747
 
Stock-based compensation expense
   
135,077
     
111,564
 
Gain on investments
   
(10,722
)
   
 
Non-cash losses related to patents, licensing and property, plant and equipment and investments
   
616
     
216
 
Provision for deferred income taxes
   
(3,475
)
   
4,103
 
Changes in operating assets and liabilities:
               
Contracts receivable
   
24,057
     
(33,716
)
Inventories
   
(1,468
)
   
(6,606
)
Other current and long-term assets
   
(5,647
)
   
(23,377
)
Income taxes
   
(23,674
)
   
 
Accounts payable
   
(10,970
)
   
(18,764
)
Accrued compensation
   
(8,967
)
   
(4,864
)
Other current liabilities
   
13,195
     
3,909
 
Deferred contract revenue
   
(73,970
)
   
(97,029
)
Net cash provided by (used in) operating activities
   
(62,085
)
   
67,788
 
                 
Investing activities:
               
Purchases of short-term investments
   
(1,376,631
)
   
(1,617,726
)
Proceeds from sale of short-term investments
   
1,497,433
     
1,465,600
 
Purchases of property, plant and equipment
   
(29,971
)
   
(23,143
)
Acquisition of licenses and other assets, net
   
(4,203
)
   
(4,196
)
Net cash used in investing activities
   
86,628
     
(179,465
)
                 
Financing activities:
               
Proceeds from issuance of equity, net
   
29,450
     
112,137
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(12,960
)
   
(18,841
)
Repurchases and retirements of common stock
   
(90,548
)
   
 
Payments of transaction costs for Akcea acquisition
   
(1,071
)
   
 
Principal payments on debt obligations
   
     
(12,500
)
Net cash provided by (used in) financing activities
   
(75,129
)
   
80,796
 
                 
Effects of exchange rates on cash
   
358
     
 
                 
Net decrease in cash and cash equivalents
   
(50,228
)
   
(30,881
)
Cash and cash equivalents at beginning of period
   
683,287
     
278,820
 
Cash and cash equivalents at end of period
 
$
633,059
   
$
247,939
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid
 
$
3,700
   
$
5,474
 
Income taxes paid
 
$
23,532
   
$
9,037
 
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Right-of-use assets obtained in exchange for lease liabilities
 
$
   
$
14,178
 
Amounts accrued for capital and patent expenditures
 
$
6,576
   
$
3,251
 
Amounts accrued for Akcea acquisition transaction costs
 
$
8,103
   
$
 

See accompanying notes.

8


IONIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

1.  Basis of Presentation


We prepared the unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 on the same basis as the audited financial statements for the year ended December 31, 2019. We included all normal recurring adjustments in the financial statements, which we considered necessary for a fair presentation of our financial position at such dates and our operating results and cash flows for those periods. Our operating results for the interim periods may not be indicative of what our operating results will be for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC.


In the condensed consolidated financial statements, we included the accounts of Ionis Pharmaceuticals, Inc. and the consolidated results of our subsidiary, Akcea Therapeutics, Inc. and its wholly owned subsidiaries. We formed Akcea in December 2014. In July 2017, Akcea completed an initial public offering, or IPO. Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. At September 30, 2020, our ownership of Akcea was approximately 76 percent. We reflect changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurs. In October 2020, we acquired the shares of Akcea’s common stock we did not own. We will refer to this transaction as the Akcea Acquisition throughout the remainder of this document. We will reflect the impact of the Akcea Acquisition in our financial statements in the fourth quarter of 2020.


Unless the context requires otherwise, “Ionis”, “Company,” “we,” “our,” and “us” refers to Ionis Pharmaceuticals, Inc. and its subsidiary Akcea Therapeutics, Inc. and its wholly owned subsidiaries.

2.  Significant Accounting Policies


Revenue Recognition


Our Revenue Sources


We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our condensed consolidated balance sheet.


Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue


We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue sales milestone payments and royalties we earn in the future under our partnerships.


Commercial Revenue: Product sales, net


We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 and we added product sales from WAYLIVRA to our commercial revenue in the third quarter of 2019. In the U.S., we distribute TEGSEDI through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Europe, we sell TEGSEDI and WAYLIVRA to hospitals and pharmacies using 3PLs as distributors.


Research and development revenue under collaborative agreements


We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services.
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In Note 6, Collaborative Arrangements and Licensing Agreements, we have included our collaborations with substantive changes during the first nine months of 2020 from those included in Note 6 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.


Steps to Recognize Revenue


We use a five-step process to determine the amount of revenue we should recognize and when we should recognize it. The five-step process is as follows:

1.
Identify the contract


First, we 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 of the consideration is probable.

2.
Identify the performance obligations


We next identify our performance obligations, which represent the distinct goods and services we are required to provide under the contract. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services.


Often we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights because these items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item.


In some cases, we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.

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 and are contingent on certain future events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price.


Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the third quarter of 2020, we earned $18 million in milestone payments from Biogen when Biogen initiated a Phase 1/2 trial for ION464, our medicine in development targeting alpha-synuclein to treat patients with multiple system atrophy. We did not consider the milestone payments probable until Biogen achieved the milestone events because advancing ION464 was contingent and was not within our control. We recognized the milestone payments in full in the period the milestone events were achieved because we did not have any remaining performance obligations related to the milestone payments.

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4.
Allocate the transaction price


Next, we allocate the transaction price to each of our performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.


We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:

Estimated future product sales;
Estimated royalties we may receive from future product sales;
Estimated contractual milestone payments we may receive;
Expenses we expect to incur;
Income taxes; and
A discount rate.


We typically estimate the selling price of R&D services by using our internal estimates of the cost to perform the specific services. The significant inputs we use to determine the selling price of our R&D services include:

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.

5.
Recognize revenue


We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner.


For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods. For example, in the third quarter of 2019, we updated our estimate of the total effort we expected to expend to satisfy our performance obligation under our 2013 Strategic Neurology collaboration with Biogen. As of September 30, 2019, we had completed a significant portion of the research and development services. In this example, we expected to complete the remainder of our services in 2020. As a result of our change in estimate, in the third quarter of 2019, we recorded a cumulative catch up adjustment of $16.5 million to decrease revenue. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the cumulative catch up adjustment we made in 2019.


The following are examples of when we typically recognize revenue based on the types of payments we receive.


Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue


We recognize royalty revenue, including royalties from SPINRAZA sales, in the period in which the counterparty sells the related product and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue.

11


Commercial Revenue: Product sales, net


We recognize product sales in the period when our customer obtains control of our products, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. Otherwise, payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues taxes collected from customers relating to product sales and remitted to governmental authorities.


Reserves for Product sales


We record product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as a reduction of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment. In certain cases, our estimates include a range of possible outcomes that are probability weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net product sales in the respective period.


The following are the components of variable consideration related to product sales:

Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We also estimate the amount of chargebacks related to our estimated product remaining in the distribution channel at the end of the reporting period that we expect our customer to sell to healthcare providers in future periods. We record these reserves as a reduction to contracts receivables on our condensed consolidated balance sheet.

Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S. and we record reserves for government rebates based on statutory discount rates and estimated utilization. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability weighted for the estimated payer mix. We record these reserves as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.

Managed care rebates: We are subject to rebates in connection with agreements with certain contracted commercial payers. We record these rebates as an accrual on our condensed consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate.

Trade discounts: We provide customary invoice discounts on product sales to our U.S. customer for prompt payment. We record this discount as a reduction of product sales in the period in which we recognize the related product revenue.

Distribution services: We receive and pay for various distribution services from our U.S. and European customers and wholesalers in the U.S-. We classify the costs for services we receive that are either not distinct from the sale of the product or for which we cannot reasonably estimate the fair value as a reduction of product sales. To the extent that the services we receive are distinct from the sale of the product, we classify the costs for such services as SG&A expenses.

Product returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that our customer may return. We record our return estimate as an accrued refund liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Based on our distribution model for product sales, contractual inventory limits with our customer and wholesalers and the price of the product, we have had minimal returns to date and we believe we will continue to have minimal returns in the U.S. Our European customers generally only take title to the product after they receive an order and therefore they do not maintain excess inventory levels of our products. Accordingly, we have limited return risk in Europe and we do not estimate returns in Europe.

12

Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale.


Research and development revenue under collaboration agreements:


Upfront payments


When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our collaboration agreement with Roche to develop IONIS-FB-LRx for the treatment of complement-mediated diseases, we received a $75 million upfront payment in the fourth quarter of 2018. We allocated the upfront payment to our single performance obligation, R&D services. We are amortizing the $75 million upfront payment using an input method over the estimated period of time we are providing R&D services.


Milestone payments


We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules.


We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the third quarter of 2020, we achieved a $12 million milestone payment from Biogen when we advanced IONIS-MAPTRx under our 2012 neurology collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation for IONIS-MAPTRx. We are recognizing revenue related to this milestone payment over our estimated period of performance.


Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the third quarter of 2020, we recognized  $18 million in milestone payments when Biogen initiated a Phase 1/2 trial for ION464, our medicine in development targeting alpha-synuclein to treat patients with multiple system atrophy. We concluded that the milestone payments were not related to our R&D services performance obligation. Therefore, we recognized the milestone payments in full in the third quarter of 2020.


License fees


We generally recognize as revenue the total amount we determine to be the relative stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the second quarter of 2020, we earned a $13 million license fee from AstraZeneca when AstraZeneca licensed ION736, a medicine in development targeting FOXP3 to treat cancer.


Sublicense fees


We recognize sublicense fee revenue in the period in which a party, who has already licensed our technology, further licenses the technology to another party because we do not have any performance obligations related to the sublicense. For example, in the second quarter of 2019, we earned a $20 million sublicense fee when Alnylam Pharmaceuticals sublicensed our technology to Regeneron Pharmaceuticals.

Amendments to Agreements


From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:

1)
If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and