Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This financial review presents our operating results for each of the two years in the period ended December 31, 2020, and our financial condition at December 31, 2020. Refer to our 2019 Form 10-K for our results of operations for 2019 compared to 2018. Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under Item 1A of Part I of this report, “Risk Factors.” In addition, the following review should be read in conjunction with the information presented in our consolidated financial statements and the related notes to our consolidated financial statements as indexed on page F-1.
Overview
As noted in our Business Overview in Part I of this report, for more than 30 years, we have been a leader in RNA-targeted therapy and believe our medicines are pioneering new markets, changing standards of care and transforming the lives of people with devastating diseases. We currently have three marketed medicines and a late-stage pipeline primarily focused on two core franchises: neurology and cardiometabolic. Our scientific innovation began and continues with the knowledge that sick people depend on us, which fuels our vision of becoming one of the most successful biotechnology companies. For further details on our business refer to the Business section of Part I of this report.
Financial Highlights
The following is a summary of our financial results (in millions):
Year Ended December 31,
Income (loss) from operations $ (172.1 ) $ 365.9
Cash, cash equivalents and short-term investments $ 1,892.4 $ 2,499.5
Commercial revenue increased in 2020 compared to 2019 due to an increase in product sales from TEGSEDI and WAYLIVRA, primarily from major market launches in 2020. Our R&D revenue in 2019 was higher compared to 2020 primarily because of license fees we recognized in 2019. In 2019, we earned approximately $400 million of revenue from licensing vupanorsen to Pfizer and pelacarsen to Novartis.
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Our operating expenses for 2020 increased compared to 2019 principally due to our investments in the Phase 3 program for IONIS-TTR-LRx and our wholly owned pipeline. Additionally, we incurred approximately $90 million in costs related to the Akcea Acquisition and restructured European operations. The costs primarily consisted of severance and retention costs of $29 million and stock-based compensation expense for the acceleration of Akcea equity awards of $59 million.
Our net loss for 2020 included income tax expense of $317 million compared to $44 million in 2019. The increase was primarily due to a non-cash tax expense of $313 million related to an increase in the valuation allowance we recorded against our federal net deferred tax assets. As a result of the Akcea Acquisition, Ionis and Akcea will file their federal taxes on a consolidated basis beginning in the fourth quarter of 2020. We recorded a valuation allowance against all of Ionis’ federal net deferred tax assets in the fourth quarter of 2020, due largely to Akcea’s history of losses, and the expected impact of this on Ionis’ consolidated federal taxable income. We now maintain a valuation allowance against all our consolidated federal and state net deferred tax assets. See Note 5, Income Taxes, in the Notes to the Consolidated Financial Statements for further discussion on our valuation allowance assessment.
With $1.9 billion in cash and short-term investments at December 31, 2020, we believe we have the financial resources to execute on our strategic priorities for 2021 and beyond.
Business Segments
Through 2020, we had two operating segments, our Ionis Core segment and Akcea Therapeutics. Akcea was focused on developing and commercializing medicines to treat patients with serious and rare diseases. We have provided 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 reviewed to assess operating performance and to make operating decisions through 2020. We allocated a portion of Ionis’ development, R&D support and general and administrative expenses to Akcea for work Ionis performed on behalf of Akcea and we billed Akcea for these expenses. As a result of acquiring Akcea in the fourth quarter of 2020 we integrated Akcea operations within Ionis. Beginning in 2021, our chief decision maker began assessing operating performance and making operating decisions on a single segment basis, which we refer to as Ionis Pharmaceuticals.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial condition. Each quarter, our senior management reviews the development, selection and disclosure of such estimates with the audit committee of our board of directors. In the following paragraphs, we describe the specific risks associated with these critical accounting estimates and we caution that future events rarely develop exactly as one may expect, and that best estimates may require adjustment. Our significant accounting policies are outlined in Note 1, Organization and Significant Accounting Policies, in the Notes to the Consolidated Financial Statements.
The following are our significant accounting estimates, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results:
● Estimating our income taxes.
The following are descriptions of our critical accounting estimates.
Revenue Recognition
We earn revenue from several sources. The judgements and estimates we make vary between each source of our revenue. The following is a summary of the critical accounting estimates we make with respect to each of our significant revenue sources.
Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue
We estimate our commercial revenue from SPINRAZA royalties based on reporting we receive from Biogen each quarter. We use this reporting to calculate our royalty revenue based on our tiered contractual royalty rate for the given period based on annual cumulative net sales. We record our royalty revenue in the same period in which Biogen sells SPINRAZA. We also estimate commercial revenue from licensing and other royalty revenue.
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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. We recognize product sales in the period when our customer obtains control of our products. We record product sales at our net sales price, which includes estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer under contracts between us and our customers, wholesalers, health care providers and other indirect customers. Actual amounts may vary from our estimates. Our historical reserve estimates have not been materially different from our actual amounts. The total reserves we estimated during 2020 and 2019 were not material to our financial results.
Research and development revenue under collaborative agreements
We recognize R&D revenue from numerous collaboration agreements. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, R&D services, and manufacturing services. Upon entering into a collaboration agreement, we are required to make the following judgements:
● Identifying the performance obligations contained in the agreement
Our assessment of what constitutes a separate performance obligation requires us to apply judgement. Specifically, we have to identify which goods and services we are required to provide under the contract are distinct.
● Determining the transaction price, including any variable consideration
To determine the transaction price, we review the amount of consideration we are eligible to earn under the agreement. We do not typically include any payments we may receive in the future in our initial transaction price since the payments are typically not probable because they are contingent upon certain future events.
We are required to reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price that have become probable. For example, in the fourth quarter of 2020, we achieved a milestone payment for $7.5 million under our 2018 strategic neurology collaboration with Biogen. Prior to achieving this milestone payment, we did not consider this payment probable. Upon achieving the milestone payment, we reassessed the total transaction price of our 2018 strategic neurology collaboration. We added this milestone payment to our total transaction price under our collaboration.
● Allocating the transaction price to each of our performance obligations
When we 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. The estimate of the relative stand-alone selling price requires us in some cases to make significant judgements. For example, when we deliver a license at the start of an agreement, we use valuation methodologies, such as the relief from royalty method, to value the license. Under this method we are required to make estimates including: future sales, royalties on future product sales, contractual milestones, expenses, income taxes and discount rates. Additionally, when we estimate the selling price for R&D services, we make estimates, including: the number of internal hours we will spend on the services, the cost of work we and third parties will perform and the cost of clinical trial material we will use.
The R&D revenue we recognize each period is comprised of several types of revenue, including amortization from upfront payments, milestone payments, license fees and other services. Each of these types of revenue require us to make various judgements and estimates.
Amortization from Upfront Payments
We recognize revenue from the amortization of upfront payments as we perform R&D services. We use an input method to estimate the amount of revenue to recognize each period. This method requires us to make estimates of the total costs we expect to incur to complete our R&D services performance obligation or the total length of time it will take us to complete our R&D services performance obligation. If we change our estimates, we may have to adjust our revenue. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, for further discussion of the cumulative catch up adjustment we made.
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Milestone Payments
When recognizing revenue related to milestone payments we typically make the following judgements and estimates:
License Fees
When we grant a license for a medicine in clinical development, we generally recognize as R&D 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. We discuss the estimates we make related to the relative stand-alone selling price of a license in detail above under “Allocating the transaction price to each of our performance obligations”.
Estimated Liability for Clinical Development Costs
We have numerous medicines in preclinical studies and/or clinical trials at clinical sites throughout the world. On at least a quarterly basis, we estimate our liability for preclinical and clinical development costs we have incurred and services that we have received but for which we have not yet been billed and maintain an accrual to cover these costs. These costs primarily relate to third-party clinical management costs, laboratory and analysis costs, toxicology studies and investigator grants. We estimate our liability using assumptions about study and patient activities and the related expected expenses for those activities determined based on the contracted fees with our service providers. The assumptions we use represent our best estimates of the activity and expenses at the time of our accrual and involve inherent uncertainties and the application of our judgment. Upon settlement, these costs may differ materially from the amounts accrued in our consolidated financial statements. Our historical accrual estimates have not been materially different from our actual amounts.
Income Taxes
Ionis and Akcea have filed separate U.S. federal income tax returns since Akcea’s IPO in 2017. Accordingly, we were required to assess Ionis’ stand-alone and Akcea’s valuation allowances separately even though we consolidate Akcea’s financial results in our consolidated financial statements. However, as a result of the Akcea Acquisition, Ionis and Akcea will file a consolidated U.S. federal income tax return beginning in the fourth quarter of 2020, and we therefore assessed our U.S. federal valuation allowance requirements on a consolidated basis as of that period. We continue to assess the state portion of our valuation allowance on a consolidated basis.
We assessed our valuation allowance requirements and recorded a valuation allowance of $313 million against all of Ionis’ U.S. federal net deferred tax assets in the fourth quarter of 2020, due to uncertainties related to our ability to realize the tax benefits associated with these assets. This determination is based largely on Akcea rejoining the Ionis consolidated U.S. federal tax group in the fourth quarter of 2020. Due to Akcea’s historical and projected financial statement losses, and the expected negative impact this will have on Ionis’ consolidated taxable income, there is uncertainty of generating sufficient consolidated pre-tax income in future periods to realize the Ionis deferred tax benefits. It is also expected that Ionis’ pre-tax income in future periods may be lower due to significant investments in research and development associated with our pipeline of wholly owned medicines. We now maintain a valuation allowance against all our consolidated U.S. federal and state net deferred tax assets.
We evaluate our deferred tax assets quarterly 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.
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Results of Operations
Below we have included our results of operations for 2020 compared to 2019. Refer to our 2019 Form 10-K for our results of operations for 2019 compared to 2018.
Years Ended December 31, 2020 and December 31, 2019
Revenue
Total revenue for 2020 was $729.3 million compared to $1.1 billion in 2019 and was comprised of the following (amounts in millions):
Year Ended December 31,
Revenue:
Commercial revenue:
Licensing and other royalty revenue 8.1 17.2
R&D revenue:
Amortization from upfront payments 79.6 146.2
In 2020, our commercial revenue increased compared to 2019 primarily due to increases in TEGSEDI and WAYLIVRA product sales, primarily from major market launches in 2020.
We earn our R&D revenue from multiple sources. Our R&D revenue can fluctuate depending on the timing of events. Our R&D revenue in 2020 included more than $165 million from our cardiometabolic disease franchise, including a $75 million milestone payment we earned from Pfizer in the fourth quarter of 2020. We also earned more than $125 million from our neurological disease franchise, primarily driven by several Biogen-partnered programs. Additionally, in November 2020, we completed an arbitration process with Alnylam. The arbitration panel awarded us $41 million for payments owed to us by Alnylam related to Alnylam’s agreement with Sanofi Genzyme. We recognized the $41 million payment from Alnylam as R&D revenue in the fourth quarter of 2020.
Our R&D revenue in 2019 included significant revenue from license fees, including $246 million for Pfizer’s license of vupanorsen and $150 million for Novartis’ license of pelacarsen. Additionally, our amortization from upfront payments for 2019 was higher compared to 2020 because it included amortization from collaborations for which we have completed our R&D services performance obligations in 2019.
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Operating Expenses
Operating expenses for 2020 were $901.3 million, and increased compared to $756.7 million for 2019. The increase was principally due to $89.6 million of operating expenses related to the Akcea Acquisition and restructured European operations, including non-cash stock-based compensation expense of $59.3 million related to the acceleration of all of Akcea’s equity award stock-based compensation expense and severance, retention and other expenses of $30.3 million. Excluding expenses related to the Akcea Acquisition and restructured European operations, our operating expenses increased primarily due to our investments in the Phase 3 program for IONIS-TTR-LRx and our wholly-owned pipeline.
Our operating expenses by segment were as follows (in millions):
Year Ended December 31,
Elimination of intercompany activity (51.9 ) (214.6 )
Non-cash compensation expense related to equity awards 230.1 146.6
In order to analyze and compare our results of operations to other similar companies, we believe it is important to exclude non-cash compensation expense related to equity awards from our operating expenses. We believe non-cash compensation expense related to equity awards is not indicative of our operating results or cash flows from our operations. Further, we internally evaluate the performance of our operations excluding it.
Cost of Products Sold
Our cost of products sold consisted of manufacturing costs, including certain fixed costs, transportation and freight, indirect overhead costs associated with the manufacturing and distribution of TEGSEDI and WAYLIVRA and certain associated period costs. Prior to the regulatory approval of TEGSEDI and WAYLIVRA, we expensed as R&D expense a significant portion of the cost of producing TEGSEDI and WAYLIVRA that we are using in the commercial launches. We expect cost of products sold to increase as we deplete these inventories.
Our cost of products sold by segment were as follows (in millions):
Year Ended December 31,
Ionis Core $ — $ —
Elimination of intercompany activity (8.9 ) (8.9 )
Non-cash compensation expense related to equity awards 1.9 0.4
Total cost of products sold $ 11.9 $ 4.3
Our cost of products sold increased in 2020 compared to 2019 because of the increase in associated product sales in the same periods. In its cost of products sold, Akcea includes the amortization for milestone payments it made to us related to the U.S. and European approvals of TEGSEDI. We eliminate this amortization in our consolidated results. All amounts exclude non-cash compensation expense related to equity awards.
We began recognizing cost of products sold for TEGSEDI in the third quarter of 2018 when TEGSEDI was approved and for WAYLIVRA in the second quarter of 2019 when WAYLIVRA was approved. Our cost of products sold increased in 2020 compared to 2019 primarily due to the increase in product sales of TEGSEDI and WAYLIVRA. All amounts exclude non-cash compensation expense related to equity awards.
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Research, Development and Patent Expenses
Our research, development and patent expenses consist of expenses for antisense drug discovery, antisense drug development, manufacturing and development chemistry and R&D support expenses.
The following table sets forth information on research, development and patent expenses (in millions):
Year Ended December 31,
Non-cash compensation expense related to equity awards 115.6 95.4
Total research, development and patent expenses $ 535.1 $ 465.7
Our research, development and patent expenses by segment were as follows (in millions):
Year Ended December 31,
Elimination of intercompany activity (43.0 ) (205.7 )
Non-cash compensation expense related to equity awards 115.6 95.4
Total research, development and patent expenses $ 535.1 $ 465.7
Antisense Drug Discovery
We use our proprietary antisense technology to generate information about the function of genes and to determine the value of genes as drug discovery targets. We use this information to direct our own antisense drug discovery research, and that of our partners. Antisense drug discovery is also the function that is responsible for advancing our antisense core technology. This function is also responsible for making investments in complementary technologies to expand the reach of antisense technology.
As we continue to advance our antisense technology, we are investing in our drug discovery programs to expand our pipeline.
Our antisense drug discovery expenses are part of our Ionis Core business segment and were as follows (in millions):
Year Ended December 31,
Non-cash compensation expense related to equity awards 24.2 20.9
Total antisense drug discovery expenses $ 113.4 $ 104.4
Antisense drug discovery expenses were slightly higher in 2020 compared to 2019 due to expenses we incurred related to advancing our research programs and investments we made in complementary technologies to expand the reach of our antisense technology. All amounts exclude non-cash compensation expense related to equity awards.
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Antisense Drug Development
The following table sets forth drug development expenses, including expenses for our marketed medicines and those in Phase 3 development for which we have incurred significant costs (in millions):
Year Ended December 31,
IONIS-APOCIII-LRx 5.6 7.6
Other antisense development projects 86.9 86.6
Development overhead expenses 85.9 74.0
Non-cash compensation expense related to equity awards 63.7 45.9
Total antisense drug development expenses $ 296.4 $ 252.4
Our development expenses increased in 2020 compared to 2019 primarily due to our broad Phase 3 program for IONIS-TTR-LRx, which we initiated in late 2019 and other medicines in our wholly-owned pipeline. These increases were slightly offset by decreases in expenses for TEGSEDI, WAYLIVRA, IONIS-FXI-LRx, IONIS-APOCIII-LRx and vupanorsen. We completed a Phase 2 study for IONIS-FXI-LRx in 2019 and we completed Phase 2 studies for IONIS-APOCIII-LRx and vupanorsen in early 2020. All amounts exclude non-cash compensation expense related to equity awards.
Our antisense drug development expenses by segment were as follows (in millions):
Year Ended December 31,
Elimination of intercompany activity (37.5 ) (200.0 )
Non-cash compensation expense related to equity awards 63.7 45.9
Total antisense drug development expenses $ 296.4 $ 252.4
We may conduct multiple clinical trials on a drug candidate, including multiple clinical trials for the various indications we may be studying. Furthermore, as we obtain results from trials, we may elect to discontinue clinical trials for certain drug candidates in certain indications in order to focus our resources on more promising drug candidates or indications. Our Phase 1 and Phase 2 programs are clinical research programs that fuel our Phase 3 pipeline. When our medicines are in Phase 1 or Phase 2 clinical trials, they are in a dynamic state in which we may adjust the development strategy for each medicine. Although we may characterize a medicine as “in Phase 1” or “in Phase 2,” it does not mean that we are conducting a single, well-defined study with dedicated resources. Instead, we allocate our internal resources on a shared basis across numerous medicines based on each medicine’s particular needs at that time. This means we are constantly shifting resources among medicines. Therefore, what we spend on each medicine during a particular period is usually a function of what is required to keep the medicines progressing in clinical development, not what medicines we think are most important. For example, the number of people required to start a new study is large, the number of people required to keep a study going is modest and the number of people required to finish a study is large. However, such fluctuations are not indicative of a shift in our emphasis from one medicine to another and cannot be used to accurately predict future costs for each medicine. And, because we always have numerous medicines in preclinical and early stage clinical research, the fluctuations in expenses from medicine to medicine, in large part, offset one another. If we partner a medicine, it may affect the size of a trial, its timing, its total cost and the timing of the related costs.
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Manufacturing and Development Chemistry
Expenditures in our manufacturing and development chemistry function consist primarily of personnel costs, specialized chemicals for oligonucleotide manufacturing, laboratory supplies and outside services. Our manufacturing and development chemistry function is responsible for providing drug supplies to antisense drug development and our collaboration partners. Our manufacturing procedures include testing to satisfy good laboratory and good manufacturing practice requirements.
Our manufacturing and development chemistry expenses were as follows (in millions):
Year Ended December 31,
Non-cash compensation expense related to equity awards 10.9 9.6
Total manufacturing and development chemistry expenses $ 66.8 $ 52.1
Manufacturing and development chemistry expenses increased in 2020 compared to 2019. The increase in manufacturing and development chemistry expenses was primarily related to manufacturing API for IONIS-TTR-LRx and IONIS-APOCIII-LRx for our Phase 3 studies. All amounts exclude non-cash compensation expense related to equity awards.
Our manufacturing and development chemistry expenses by segment were as follows (in millions):
Year Ended December 31,
Elimination of intercompany activity (5.3 ) (5.5 )
Non-cash compensation expense related to equity awards 10.9 9.6
Total manufacturing and development chemistry expenses $ 66.8 $ 52.1
R&D Support
In our research, development and patent expenses, we include support costs such as rent, repair and maintenance for buildings and equipment, utilities, depreciation of laboratory equipment and facilities, amortization of our intellectual property, informatics costs, procurement costs and waste disposal costs. We call these costs R&D support expenses.
The following table sets forth information on R&D support expenses (in millions):
Year Ended December 31,
Patent expenses 4.1 4.2
Computer software and licenses 2.9 1.1
Non-cash compensation expense related to equity awards 16.8 19.0
Total R&D support expenses $ 58.5 $ 56.8
R&D support expenses for 2020 increased compared to 2019 primarily due to costs from growth in our operations. All amounts exclude non-cash compensation expense related to equity awards.
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Our R&D support expenses by segment were as follows (in millions):
Year Ended December 31,
Akcea Therapeutics 22.7 8.3
Elimination of intercompany activity (0.2 ) (0.2 )
Non-cash compensation expense related to equity awards 16.8 19.0
Total R&D support expenses $ 58.5 $ 56.8
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses include personnel and outside costs associated with the pre-commercialization and commercialization activities for our medicines and costs to support our company, our employees and our stockholders including, legal, human resources, investor relations, and finance. Additionally, we include in selling, general and administrative expenses such costs as rent, repair and maintenance of buildings and equipment, depreciation and utilities costs that we need to support the corporate functions listed above. We also include fees we owe under our in-licensing agreements related to SPINRAZA.
The following table sets forth information on SG&A expenses (in millions):
Year Ended December 31,
Non-cash compensation expense related to equity awards 112.5 50.8
Total selling, general and administrative expenses $ 354.3 $ 286.6
SG&A expenses were slightly higher for 2020 compared to 2019 principally due to costs related to the Akcea Acquisition, including severance and retention costs and legal costs related to the Alnylam arbitration. These increases were mostly offset by reductions in travel and marketing events as a result of the COVID-19 pandemic. All amounts exclude non-cash compensation expense related to equity awards.
Our SG&A expenses by segment were as follows (in millions):
Year Ended December 31,
Non-cash compensation expense related to equity awards 112.5 50.8
Total selling general and administrative expenses $ 354.3 $ 286.6
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Akcea Therapeutics, Inc.
The following table sets forth information on operating expenses (in millions) for our Akcea Therapeutics business segment:
Year Ended December 31,
Cost of products sold $ 18.9 $ 12.8
Development and patent expenses 99.6 81.0
Selling, general and administrative expenses 155.0 156.9
Profit (loss) share for TEGSEDI commercialization activities (16.2 ) (37.3 )
Non-cash compensation expense related to equity awards 94.8 37.1
Total Akcea Therapeutics operating expenses $ 389.6 $ 450.5
See discussion of fluctuations of Akcea operating expenses in the operating expense sections above. All amounts exclude non-cash compensation expense related to equity awards.
Investment Income
Investment income for 2020 was $30.6 million compared to $52.0 million for 2019. The decrease in investment income was primarily due to a decrease in interest rates during 2020 compared to 2019.
Interest Expense
The following table sets forth information on interest expense (in millions):
Year Ended December 31,
Convertible senior notes:
Interest expense payable in cash 3.8 6.7
Interest on mortgage for primary R&D and manufacturing facilities 2.4 2.4
Total interest expense $ 45.0 $ 48.8
Our interest expense payable in cash decreased in 2020 compared 2019 because we exchanged a significant portion of our 1% Notes for 0.125% Notes in December 2019.
Gain on Investments
Gain on investments for 2020 was $16.5 million compared to $0.2 million for 2019. During the second and fourth quarters of 2020, we revalued our investments in three privately held companies, Dynacure, Suzhou-Ribo and Aro Biotherapeutics because the companies sold additional equity securities that were similar to the equity we own. Because of these observable price changes we recognized a $6.3 million gain on our investment in Dynacure, a $3.0 million gain on our investment in Suzhou-Ribo and a $5.5 million gain on our investment in Aro Biotherapeutics in our consolidated statement of operations during 2020 because the sales were at higher prices compared to our recorded value.
Early Retirement of Debt
As a result of the debt exchange we completed in December 2019, we recorded a $21.9 million non-cash loss on early retirement of debt, reflecting the early retirement of a portion of our 1% Notes. The non-cash loss on the early retirement of our debt is the difference between the amount paid to exchange our 1% Notes that we attributed to the liability component and the net carrying balance of the liability component at the time that we completed the debt exchange.
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Income Tax Expense (Benefit)
We had income tax expense of $316.7 million for 2020 compared to an income tax expense of $43.5 million for 2019. Our 2020 income tax expense primarily relates to a non-cash tax expense of $313 million related to an increasein the valuation allowance recorded against Ionis’ U.S. federal net deferred tax assets in the fourth quarter of 2020. We now maintain a valuation allowance against all our consolidated U.S. federal and state net deferred tax assets. See discussion of our valuation allowance under the section titled, Income Taxes, above in our discussion of our critical accounting estimates.
Net Income (Loss)
We generated a net loss of $486.8 million for 2020 compared to net income of $303.3 million for 2019. Our net loss for 2020 was primarily due to the valuation allowance we recorded as a result of the Akcea Acquisition, as discussed above in the income tax expense section. Also contributing to our net loss in 2020 was decreased revenue year-over-year, as discussed above in the revenue section and an increase in operating expenses year-over-year, as discussed above in the operating expense section.
Net Income (Loss) Attributable to Noncontrolling Interest in Akcea Therapeutics, Inc.
Our noncontrolling interest in Akcea on our statement of operations for 2020 was a net loss of $35.5 million compared to net income of $9.1 million for 2019.The net loss attributable to noncontrolling interest in Akcea for the year ended December 31, 2020, represents the portion of Akcea’s net loss that third parties owned for the period from January 1, 2020 until we acquired 100 percent of Akcea in October 2020. After our acquisition of Akcea in October 2020, we no longer recorded any adjustment related to noncontrolling interest for Akcea’s net loss. Akcea generated net income in 2019 primarily because it earned significant license fee revenue from Novartis and Pfizer.
Net Income (Loss) Attributable to Ionis Pharmaceuticals, Inc. Common Stockholders and Net Income (Loss) per Share
We had a net loss attributable to our common stockholders of $451.3 million for 2020 compared to net income of $294.1 million in 2019. Basic and diluted net loss per share for 2020 were each $3.23. Basic and diluted net income per share for 2019 was $2.12 and $2.08, respectively.
Liquidity and Capital Resources
We have financed our operations primarily from research and development collaborative agreements. We also finance our operations from commercial revenue from SPINRAZA royalties and product sales. From our inception through December 31, 2020, we have earned approximately $5.0 billion in revenue. We have also financed our operations through the sale of our equity securities and the issuance of long-term debt. From the time we were founded through December 31, 2020, we have raised net proceeds of approximately $2.0 billion from the sale of our equity securities. Additionally, we borrowed approximately $1.5 billion under long-term debt arrangements to finance a portion of our operations over the same time period.
Our key liquidity metrics and capital resources include our cash, cash equivalents and short-term investments, working capital and debt obligations. During 2020 we used a portion of our cash to complete the Akcea Acquisition. At December 31, 2020, we had $1.9 billion of cash and short-term investments on hand. We believe our cash and short-term investment balance is sufficient to fund our operations both in the short-term (i.e., the next 12 months) and in the long-term (i.e., beyond the next 12 months). In 2020 our working capital decreased because our cash and investments decreased and our 1% Notes became a current liability.
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The following table summarizes our contractual obligations as of December 31, 2020. The table provides a breakdown of when obligations become due. We provide a more detailed description of the major components of our debt in the paragraphs following the table:
Contractual Obligations Payments Due by Period(in millions)
(selected balances described below) Total Less than 1 year More than 1 year
1% Notes (principal and interest payable) $ 313.0 $ 313.0 $ —
Other obligations (principal and interest payable) 0.9 0.1 0.8
Our contractual obligations consist primarily of our convertible debt. In addition, we also have facility mortgages, facility leases, equipment financing arrangements and other obligations. Due to the uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, we have excluded our gross unrecognized tax benefits from our contractual obligations table above. We have not entered into, nor do we currently have, any off-balance sheet arrangements (as defined under SEC rules).
0.125 Percent Convertible Senior Notes and Call Spread
In December 2019, we entered into privately negotiated exchange and/or subscription agreements with certain new investors and certain holders of our existing 1% Notes to exchange $375.6 million of our 1% Notes for $439.3 million of our 0.125% Notes, and to issue $109.5 million of our 0.125% Notes. We completed this exchange to reduce our cash interest payments, increase our conversion price and extend our maturity for a large portion of our debt. Additionally, in conjunction with the December 2019 exchange, we entered into a call spread transaction, which was comprised of purchasing note hedges and selling warrants, to minimize the impact of potential economic dilution upon conversion of our 0.125% Notes by increasing the conversion price on our 0.125% Notes even further. We accounted for our call spread transactions using the Derivatives and Hedging – Contracts in Entity’s Own Equity accounting guidance contained in Topic 815. We determined that the call spread transactions meet the definition of a derivative, are indexed to our stock and meet the criteria to be classified in shareholders’ equity.
The call spread cost us $52.6 million of which $108.7 million was for the note hedge purchase offset by $56.1 million we received for selling the warrants. We increased our effective conversion price to $123.38 with the same number of underlying shares as our 0.125% Notes.
Similar to our 0.125% Notes, our note hedges are subject to adjustment. Additionally, our note hedges are exercisable upon conversion of the 0.125% Notes. The note hedges will expire upon maturity of the 0.125% Notes, or December 2024. The note hedges and warrants are separate transactions and are not part of the terms of our 0.125% Notes. The holders of the 0.125% Notes do not have any rights with respect to the note hedges and warrants.
We recorded the aggregate amount paid for the note hedges and the aggregate amount received for the warrants in additional paid-in capital in our consolidated balance sheet. See our Call Spread accounting policy in Note 1, Organization and Significant Accounting Policies, in the Notes to the Consolidated Financial Statements. We reassess our ability to continue to classify the note hedges and warrants in shareholders’ equity at each reporting period. We excluded shares under the note hedges from our calculation of diluted earnings per share as they were antidilutive. We will include the shares issuable under the warrants in our calculation of diluted earnings per share when the average market price per share of our common stock for the reporting period exceeds the strike price of the warrants.
At December 31, 2020, we had the following 0.125% Notes outstanding (amounts in millions except price per share data):
Outstanding principal balance $ 548.8
Maturity date December 2024
Interest rate 0.125 percent
Conversion price per share $ 83.28
Total shares of common stock subject to conversion 6.6
76
Interest is payable semi-annually for the 0.125% Notes. The 0.125% Notes are convertible under certain conditions, at the option of the note holders. We can settle conversions of the 0.125% Notes, at our election, in cash, shares of our common stock or a combination of both. We may not redeem the 0.125% Notes prior to maturity, and no sinking fund is provided for them. Holders of the 0.125% Notes may require us to purchase some or all of their notes upon the occurrence of certain fundamental changes, as set forth in the indenture governing the 0.125% Notes, at a purchase price equal to 100 percent of the principal amount of the notes to be purchased, plus accrued and unpaid interest.
1 Percent Convertible Senior Notes
In November 2014, we completed a $500 million offering of convertible senior notes, which mature in 2021 and bear interest at 1 percent. In December 2016, we issued an additional $185.5 million of 1% Notes in exchange for the redemption of a portion of our previously outstanding 23⁄4% Notes. In December 2019, we exchanged a portion of our 1% Notes for new 0.125% Notes.
At December 31, 2020, we had the following 1% Notes outstanding (amounts in millions except price per share data):
1% Notes
Outstanding principal balance $ 309.9
Maturity date November 2021
Interest rate 1 percent
Conversion price per share $ 66.81
Total shares of common stock subject to conversion 4.6
Interest is payable semi-annually for the 1% Notes. The 1% Notes are convertible under certain conditions, at the option of the note holders. We settle conversions of the 1% Notes, at our election, in cash, shares of our common stock or a combination of both. We may not redeem the 1% Notes prior to maturity, and no sinking fund is provided for them. Holders of the 1% Notes may require us to purchase some or all of their notes upon the occurrence of certain fundamental changes, as set forth in the indenture governing the 1% Notes, at a purchase price equal to 100 percent of the principal amount of the notes to be purchased, plus accrued and unpaid interest.
Research and Development and Manufacturing Facilities
In July 2017, we purchased the building that houses our primary R&D facility for $79.4 million and our manufacturing facility for $14.0 million. We financed the purchase of these two facilities with mortgage debt of $60.4 million in total. 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.
Other Obligations
In addition to contractual obligations, we had outstanding purchase orders as of December 31, 2020 for the purchase of services, capital equipment and materials as part of our normal course of business.
We may enter into additional collaborations with partners which could provide for additional revenue to us and we may incur additional cash expenditures related to our obligations under any of the new agreements we may enter into. We currently intend to use our cash, cash equivalents and short-term investments to finance our activities. However, we may also pursue other financing alternatives, like issuing additional shares of our common stock, issuing debt instruments, refinancing our existing debt, or securing lines of credit. Whether we use our existing capital resources or choose to obtain financing will depend on various factors, including the future success of our business, the prevailing interest rate environment and the condition of financial markets generally.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily from our investments in certain short-term investments. We primarily invest our excess cash in highly liquid short-term investments of the U.S. Treasury and reputable financial institutions, corporations, and U.S. government agencies with strong credit ratings. We typically hold our investments for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.
77
Item 8. Financial Statements and Supplementary Data
We filed our consolidated financial statements and supplementary data required by this item as exhibits hereto, and listed them under Item 15(a)(1) and (2), and incorporate them herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act) that are designed to ensure that information we are required to disclose in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We designed and evaluate our disclosure controls and procedures recognizing that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance and not absolute assurance of achieving the desired control objectives.
As of the end of the period covered by this report on Form 10-K, we carried out an evaluation of our disclosure controls and procedures under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2020, we assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting under the 2013 “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission, under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that assessment, our management concluded that we maintained effective internal control over financial reporting as of December 31, 2020.
Ernst & Young LLP, an independent registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of December 31, 2020, as stated in their attestation report, which is included elsewhere herein.
Changes in Internal Control over Financial Reporting
The above assessment did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Ionis Pharmaceuticals, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Ionis Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2020, 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, 2020, 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 the Company as of December 31, 2020 and 2019, 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, 2020, and the related notes and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis 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 & Young LLP
San Diego, California
February 24, 2021
79
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, which we will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2020, or 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.
________________
Delinquent Section 16(a) Reports
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 Exchange Act from the information under the caption “Delinquent Section 16(a) Reports” contained in the Proxy Statement.
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, 2020.
________________
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.
80
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
81
INDEX TO EXHIBITS
Exhibit Number Description of Document
82
83
84
85
86
87
88
21.1 List of Subsidiaries for the Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
89
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 24th day of February, 2021.
IONIS PHARMACEUTICALS, INC.
By: /s/ BRETT P. MONIA
Brett P. Monia., Ph.D.
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 Brett P. Monia 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/ BRETT P. MONIA Director and Chief Executive Officer February 24, 2021
Brett P. MONIA, Ph.D. (Principal executive officer)
Elizabeth L. Hougen (Principal financial and accounting officer)
/s/ STANLEY T. CROOKE Executive Chairman of the Board February 24, 2021
Stanley T. Crooke, M.D., Ph.D.
/s/ B. LYNNE PARSHALL Director and Senior Strategic Advisor February 24, 2021
B. Lynne Parshall, J.D.
/s/ SPENCER R. BERTHELSEN Director February 24, 2021
Spencer R. Berthelsen, M.D.
/s/ BREAUX CASTLEMAN Director February 24, 2021
Breaux Castleman
/s/ MICHAEL HAYDEN Director February 24, 2021
Michael Hayden, CM OBC MB ChB PhD FRCP(C) FRSC
/s/ JOAN E. HERMAN Director February 24, 2021
Joan E. Herman
/s/ JOSEPH KLEIN Director February 24, 2021
Joseph Klein, III
/s/ JOSEPH LOSCALZO Director February 24, 2021
Joseph Loscalzo, M.D., Ph.D.
/s/ FREDERICK T. MUTO Director February 24, 2021
Frederick T. Muto, Esq.
/s/ PETER N. REIKES Director February 24, 2021
Peter N. Reikes
/s/ JOSEPH H. WENDER Director February 24, 2021
Joseph H. Wender
90
IONIS PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at December 31, 2020 and 2019 F-3
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors 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, 2020 and 2019, 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, 2020 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also 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, 2020, 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 February 24, 2021 expressed an unqualified opinion thereon.
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, 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 include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Realizability of Deferred Tax Assets
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1989
San Diego, California
February 24, 2021
F-2
IONIS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
ASSETS
Current assets:
Long-term deferred tax assets — 305,557
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
1 percent convertible senior notes 293,161 —
Current portion of long-term obligations 7,301 2,026
1 percent convertible senior notes — 275,333
Long-term obligations, less current portion 23,409 15,543
Stockholders’ equity:
Accumulated other comprehensive loss (21,071 ) (25,290 )
Noncontrolling interest in Akcea Therapeutics, Inc. — 213,453
See accompanying notes.
F-3
IONIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
Year Ended December 31,
Revenue:
Commercial revenue:
Expenses:
Other income (expense):
Loss on early retirement of debt — (21,865 ) —
Basic net income (loss) per share $ (3.23 ) $ 2.12 $ 2.09
Diluted net income (loss) per share $ (3.23 ) $ 2.08 $ 2.07
See accompanying notes.
F-4
IONIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
Unrealized gains (losses) on investments, net of tax 3,729 6,633 (280 )
Currency translation adjustment 617 93 23
See accompanying notes.
F-5
IONIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Change in unrealized losses, net of tax — — — (280 ) — (280 ) — (280 )
Foreign currency translation — — — 23 — 23 — 23
Change in unrealized gain, net of tax — — — 6,633 — 6,633 — 6,633
Foreign currency translation — — — 93 — 93 — 93
Change in unrealized gains, net of tax — — — 3,729 — 3,729 — 3,729
Foreign currency translation — — — 617 — 617 — 617
See accompanying notes.
F-6
IONIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Operating activities:
Amortization of right-of-use operating lease assets 1,731 1,542 —
Amortization of premium (discount) on investments, net 11,521 (7,485 ) (1,013 )
Loss on early retirement of debt — 21,865 —
Changes in operating assets and liabilities:
Long-term income tax receivable — 8,418 (223 )
Investing activities:
Acquisition of licenses and other assets, net (5,928 ) (5,377 ) (4,044 )
Purchase of strategic investments — (10,000 ) —
Financing activities:
Proceeds from the issuance of 0.125 percent convertible senior notes — 109,500 —
0.125 percent convertible senior notes issuance costs — (10,428 ) —
Proceeds from issuance of warrants — 56,110 —
Purchase of note hedges — (108,684 ) —
Repurchases and retirements of common stock (90,548 ) (34,392 ) —
Principal payments on line of credit — (12,500 ) —
Proceeds from the issuance of common stock to Biogen — — 447,965
Effects of exchange rates on cash 617 93 (18 )
F-7
IONIS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Supplemental disclosures of cash flow information:
Supplemental disclosures of non-cash investing and financing activities:
Amounts accrued for capital and patent expenditures $ 4,059 $ 3,126 $ 4,428
See accompanying notes.
F-8
IONIS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Basis of Presentation
In our 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”, “us” or “our”). 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. 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. See Note 7, Akcea Acquisition, in the Notes to the Consolidated Financial Statements for further details. We reflected changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurred.
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.
Basic and Diluted Net Income (Loss) per Share
Basic net income (loss) per share
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.
The calculation of total net income (loss) attributable to our common stockholders for each year considered our net income (loss) for Ionis on a stand-alone basis plus our share of Akcea’s net income (loss) for the period. To calculate the portion of Akcea’s net income (loss) attributable to our ownership for each year, we multiplied Akcea’s income (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 each year.
Our basic net income (loss) per share was calculated as follows (in thousands, except per share amounts):
Akcea’s total net loss attributable to our ownership $ (197,762 )
Ionis’ stand-alone net loss (253,725 )
Net loss available to Ionis common stockholders $ (451,487 )
Weighted average shares outstanding 139,612
Basic net loss per share $ (3.23 )
Akcea’s net income attributable to our ownership $ 34,073
Ionis’ stand-alone net income 262,490
Net income available to Ionis common stockholders $ 296,563
Weighted average shares outstanding 139,998
Basic net income per share $ 2.12
F-9
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
Diluted net income per share
For the year ended December 31, 2020, we incurred a net 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:
● 0.125 percent convertible senior notes;
● 1 percent convertible senior notes;
● Dilutive stock options;
● Unvested restricted stock units, or RSUs; and
● Employee Stock Purchase Plan, or ESPP.
For the years ended December 31, 2019 and 2018, 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 each period. We calculated our diluted net income per share as follows (in thousands except per share amounts):
Effect of dilutive securities:
Shares issuable upon exercise of stock options — 2,090
Shares issuable upon restricted stock award issuance — 766
Shares issuable related to our ESPP — 18
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
For each year presented, the calculation excluded our convertible senior notes because the effect on diluted earnings per share was anti-dilutive.
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 consolidated balance sheet.
F-10
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 under our other 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, through 2020 we sold TEGSEDI and WAYLIVRA to hospitals and pharmacies using 3PLs as distributors. Beginning in 2021, we are commercializing TEGSEDI and WAYLIVRA in Europe through a distribution agreement with Swedish Orphan Biovitrum AB, or Sobi, an international biopharmaceutical company that focuses on rare diseases. Under the terms of this agreement, we retained the marketing authorization for both medicines in Europe.
In Latin America beginning in 2020, we sold TEGSEDI and WAYLIVRA to our partner, PTC Therapeutics. Under our collaboration agreement with PTC, PTC is commercializing TEGSEDI and WAYLIVRA in Latin America and Caribbean countries.
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.
We provide details about our collaboration agreements in Note 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:
1. Identify the contract
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 have identified our rights, our partner’s rights and the payment terms;
● 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.
F-11
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 and are not priced at a significant discount. 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/ or are usually based on scientific progress which is inherently uncertain. For example, in the fourth quarter of 2020, we earned a $20 million milestone payment from AstraZeneca when AstraZeneca initiated a Phase 2b study for ION449, our medicine in development targeting PCSK9 to lower LDL-cholesterol. We did not consider the milestone payment probable until AstraZeneca achieved the milestone event because advancing ION449 was contingent on AstraZeneca initiating a Phase 2b study and was not within our control. We recognized the milestone payment in full in the period the milestone event was achieved because we did not have any remaining performance obligations related to the milestone payment.
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;
● Estimated income taxes; and
● A discount rate.
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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 estimated cost of work we will perform;
● 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. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, for further discussion of the cumulative catch up adjustment we made.
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.
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 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 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.
F-13
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 receivable on our 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 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 a liability on our 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 (prior to our agreement with Sobi) 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 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.
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 typically 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.
F-14
We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the fourth quarter of 2020, we achieved a $7.5million milestone payment from Biogen when we advanceda target under our 2018 strategic collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation. 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 fourth quarter of 2020, we earned a $30million license fee from AstraZeneca when AstraZeneca licensed ION455, an investigational medicine in development to treat nonalcoholic steatohepatitis, or NASH.
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 fourth quarter of 2020, we earned a $41.2 million sublicense fee from Alnylam Pharmaceuticals for its sublicense of our technology to Sanofi Genzyme.
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:
2) If the goods and/or services are at a stand-alone selling price.
If we conclude the goods and/or services in the amendment are distinct from the performance obligations in the original agreement and at a stand-alone selling price, we account for the amendment as a separate agreement. If we conclude the goods and/or services are not distinct and are sold at a 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 already 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 not distinct from what we have already provided, we update the transaction price for our single performance obligation and recognize any change in our estimated revenue as a 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 payment. 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 2017 amendment, Bayer paid us $75 million. We are also eligible to receive milestone payments and tiered royalties on gross margins of IONIS-FXIRx 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 to deliver API. We allocated the $75 million transaction price to these performance obligations. 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 Bayer collaboration.
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Multiple agreements
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 we should account for them individually as distinct arrangements or whether the separate agreements should be combined and accounted for together. We evaluate the following to determine the accounting for the agreements:
● Whether the agreements were negotiated together with a single objective;
Our evaluation involves significant judgment to determine whether a group of agreements might be so closely related that accounting guidance requires us to account for them as a combined arrangement.
For example, in the second quarter of 2018, we entered into two separate agreements with Biogen at the same time: a new strategic neurology collaboration agreement and a stock purchase agreement, or SPA. We evaluated the Biogen agreements to determine whether we should treat the agreements separately or combine them. We considered that the agreements were negotiated concurrently and in contemplation of one another. Based on these facts and circumstances, we concluded that we should evaluate the provisions of the agreements on a combined basis.
Contracts Receivable
Our contracts receivable balance represents the amounts we have billed our partners or customers and that are due to us unconditionally for goods we have delivered or services we have performed. When we bill our partners or customers with payment terms based on the passage of time, we consider the contracts receivable to be unconditional. We typically receive payment within one quarter of billing our partner or customer.
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.
Deferred Revenue
We are often entitled to bill our customers and receive payment from our customers in advance of our obligation to provide services or transfer goods to our partners. In these instances, we include the amounts in deferred revenue on our consolidated balance sheet. During the years ended December 31, 2020 and 2019, we recognized $100.4 million and $159.5 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above.
Cost of Products Sold
Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of our products. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval of TEGSEDI in July 2018 and WAYLIVRA in May 2019, we expensed as research and development expenses a significant portion of the costs we incurred to produce the initial commercial launch supply for each medicine.
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, 2020, 2019 and 2018, research and development expenses were $531.0 million, $461.5 million and $411.9 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, 2020, 2019 and 2018, research and development costs of approximately $49.8 million, $83.2 million and $58.7 million, respectively, were related to our partner agreements.
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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 U.S. Patent and Trademark Office, or foreign equivalent, issues the patent. The weighted average remaining amortizable life of our issued patents was 10.3 years at December 31, 2020.
The cost of our patents capitalized on our consolidated balance sheet at December 31, 2020 and 2019 was $37.0 million and $34.0 million, respectively. Accumulated amortization related to patents was $9.1 million and $8.3 million at December 31, 2020 and 2019, respectively.
Based on our existing patents, we estimate amortization expense related to patents in each of the next five years to be the following:
Year Ending December 31, Amortization(in millions)
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 2020, 2019 and 2018, patent expenses were $4.1 million, $4.2 million and $2.6 million, respectively, and included non-cash charges related to the write-down of our patent costs to their estimated net realizable values of $1.9 million, $2.2 million and $0.8 million, respectively.
Accrued Liabilities
Our accrued liabilities consisted of the following (in thousands):
December 31,
Noncontrolling Interest in Akcea Therapeutics, Inc.
Since Akcea’s IPO in July 2017 and prior to the Akcea Acquisition in October 2020, the shares of Akcea’s common stock third parties owned represented an interest in Akcea’s equity that we did not control. During this period our ownership ranged from 68 percent to 77 percent. However, as we maintained overall control of Akcea through our voting interest, we reflected the assets, liabilities and results of operations of Akcea in our consolidated financial statements. Since Akcea’s IPO in July 2017 and through the closing of the Akcea Acquisition, we reflected the noncontrolling interest attributable to other owners of Akcea’s common stock on a separate line on our statement of operations and a separate line within stockholders’ equity in our consolidated balance sheet. In addition, through the closing of the Akcea Acquisition, we recorded a noncontrolling interest adjustment to account for the stock options Akcea granted, which if exercised, would have diluted our ownership in Akcea. This adjustment was 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. Additionally, we reflected changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurred.
F-17
Concentration of Credit Risk