| Significant Accounting Policies | 2. Significant Accounting Policies Revenue Recognition Our Revenue Sources We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our consolidated balance sheet. Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue future sales milestone payments and royalties we earn under our partnerships. Commercial Revenue: TEGSEDI product sales, net We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018. 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 7, Collaborative Arrangements and Licensing Agreements, in our Annual Report on Form 10-K for the year ended December 31, 2018 . 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 and our partner approved the contract and we are both committed to perform our obligations;
● We have identified our rights, our partner’s rights and the payment terms;
● We have concluded that the contract has commercial substance, meaning that the risk, timing, or amount of our future cash flows is expected to change as a result of the contract; and
● We believe collectability is probable.
2. Identify the performance obligations We next identify the distinct goods and services we are required to provide under the contract. Accounting rules refer to these as our performance obligations. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services. Often times we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights. These items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item. In some cases, 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 events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price. Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the first quarter of 2019, we earned $35 million in milestone payments from Roche when Roche dosed the first patient in the Phase 3 study of IONIS-HTT Rx
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 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 on future product sales;
● Contractual milestone payments;
● Expenses we expect to incur;
● Income taxes; and
● A discount rate. We typically estimate the selling price of R&D services by using our internal estimates of the cost to perform the specific services. The significant inputs we use to determine the selling price of our R&D services include:
● The number of internal hours we estimate we will spend performing these services;
● The estimated cost of work we will perform;
● The estimated cost of work that we will contract with third parties to perform; and
● The estimated cost of API we will use. For purposes of determining the stand-alone selling price of the R&D services we perform and the API we will deliver, accounting guidance requires us to include a markup for a reasonable profit margin. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices.
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. The following are examples of when we typically recognize revenue based on the types of payments we receive. Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue We recognize royalty revenue in the period in which the counterparty sells the related product, which in certain cases may require us to estimate our royalty revenue. Commercial Revenue: TEGSEDI product sales, net We recognize TEGSEDI product sales in the period Reserves for TEGSEDI product sales We record TEGSEDI product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as reductions of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment in our condensed consolidated balance sheet. In certain cases, our estimates include a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net TEGSEDI product sales in the respective period. The following are the components of variable consideration related to TEGSEDI product sales: Chargebacks: Government rebates : We are subject t Trade discounts: Product returns: Other incentives: 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-L Rx for the treatment of complement-mediated diseases Milestone payments We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments under our collaboration agreements. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules. We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the second quarter of 2019, we achieved a $7.5 million milestone payment from Biogen when we advanced a new target for an unidentified neurological disease under our 2018 strategic neurology 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 first quarter of 2019, we recognized $35 million in milestone payments when Roche dosed the first patient in a Phase 3 study for IONIS-HTT Rx We concluded that the milestone payments were not related to our R&D services performance obligation. Therefore, we recognized these milestone payments in full in the first quarter of 2019. License fees We generally recognize as revenue the total amount we determine to be the stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. Rx 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. Amendments to agreements From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:
1) If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and
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 at their stand-alone selling price, we then assess whether the remaining goods or services are distinct from those already provided. If the goods and/or services are distinct from what we have 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-FXI Rx for the prevention of thrombosis. As part of the agreement, Bayer paid us a $ million upfront payment. At the onset of the agreement, we were responsible for completing a Phase 2 study of IONIS-FXI Rx 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-FXI Rx and to initiate development of IONIS-FXI-L Rx , which Bayer licensed. As part of the 2017 amendment, Bayer paid us $ million. We are also eligible to receive milestone payments and tiered royalties on gross margins of IONIS-FXI Rx and IONIS-FXI-L Rx . Under the 2017 amendment, we concluded we had a new agreement with performance obligations. These performance obligations were to deliver the license of IONIS-FXI-L Rx , to provide R&D services and to deliver API. We allocated the $ million transaction price to these performance obligations. Note 7, Collaborative Arrangements and Licensing Agreements of our accounting treatment for our Bayer collaboration. 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;
● Whether the amount of consideration in one contract depends on the price or performance of the other agreement; or
● Whether the goods and/or services promised under the agreements are a single performance obligation. Our evaluation involves significant judgment to determine whether a group of agreements might be so closely related that 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 contract 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 condensed 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 condensed consolidated balance sheet. 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 TEGSEDI. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval in July 2018, we expensed a significant portion of the costs we incurred to produce the TEGSEDI supply we are using in the commercial launch as research and development expense. We previously expensed $ million and $ million of costs to produce TEGSEDI related to the TEGSEDI commercial revenue we recognized in the Noncontrolling Interest in Akcea Therapeutics, Inc. Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. From the closing of Akcea’s IPO in July 2017 through mid-April 2018, we owned approximately 68 percent Rx Rx The shares third parties own represent an interest in Akcea’s equity that is not controlled by us. However, as we continue to maintain overall control of Akcea through our voting interest, we reflect the assets, liabilities and results of operations of Akcea in our condensed consolidated financial statements. We reflect the noncontrolling interest attributable to other owners of Akcea’s common stock in a separate line on the statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, we record a noncontrolling interest adjustment to account for the stock options Akcea grants, which if exercised, will dilute our ownership in Akcea. This adjustment is a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized. Cash, Cash equivalents and Investments We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold. We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At June 30, 2019, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in four privately-held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Seventh Sense Biosystems and Suzhou Ribo Life Science Co, Ltd. Inventory Valuation We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. We capitalize the costs of raw materials that we purchase for use in producing our medicines because until we use these raw materials they have alternative future uses. We include in inventory raw material costs for medicines that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. We can use each of our raw materials in multiple products and, as a result, each raw material has future economic value independent of the development status of any single medicine. For example, if one of our medicines failed, we could use the raw materials for that medicine to manufacture our other medicines. We expense these costs as R&D expenses when we begin to manufacture API for a particular medicine if the medicine has not been approved for marketing by a regulatory agency. We obtained the first regulatory approval for TEGSEDI in July 2018 and regulatory approval for WAYLIVRA in May 2019. At June 30, 2019, our physical inventory for TEGSEDI and WAYLIVRA included API that we produced prior to when we obtained regulatory approval. As such, this API has no cost basis as we had previously expensed the costs as R&D expenses. We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of our inventory, alternative uses for our medicines in development and historical write-offs. We did t record any material inventory write-offs for the . Total inventory was $ million and $ million as of , respectively. Leases Topic 842 Adoption In February 2016, the Financial Accounting Standards Board, or FASB, issued amended accounting guidance related to lease accounting. This guidance supersedes the lease requirements we previously followed in Accounting Standards Codification, or ASC, Topic 840, Leases Leases permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification of those leases we had in place as of January 1, 2019. Leases We determine if an arrangement contains a lease at inception. We currently only have operating leases. We recognize a right-of-use operating lease asset and associated short- and long-term operating lease liability on our condensed consolidated balance sheet for operating leases greater than one year. Our right-of-use assets represent our right to use an underlying asset for the lease term and our lease liabilities represent our obligation to make lease payments arising from the lease arrangement. We recognize our right-of-use operating lease assets and lease liabilities based on the present value of the future minimum lease payments we will pay over the lease term. As our current leases do not provide an interest rate implicit in the lease, we used our or Akcea’s incremental borrowing rate, based on the information available on the date we adopted Topic 842 in determining the present value of future payments. Our right-of-use operating lease asset also includes any lease payments we made and excludes any tenant improvement allowances we received. We recognize rent expense for our minimum lease payments on a straight-line basis over the expected term of our lease. We recognize period expenses, such as common area maintenance expenses, in the period we incur the expense. 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 condensed consolidated balance sheet and we expense them as the services are provided. We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We amortize patent costs over the useful life of the patent, beginning with the date the United States Patent and Trademark Office, or foreign equivalent, issues the patent. We review our capitalized patent costs regularly to ensure that they include costs for patents and patent applications that have future value. We evaluate patents and patent applications that we are not actively pursuing and write off any associated costs. Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. We record a valuation allowance when necessary to reduce our net deferred tax assets to the amount expected to be realized. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the Tax Act. The Tax Act created a new requirement on global intangible low-taxed income, or GILTI, earned by foreign subsidiaries for tax years beginning on or after January 1, 2018. The GILTI provisions require foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s assets to be included in our U.S. income tax return. Under U.S. GAAP, we are permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into our measurement of deferred taxes. We have made the election to account for GILTI as a component of current taxes incurred rather than as a component of deferred taxes. Long-lived Assets We evaluate long-lived assets, which include property, plant and equipment, right-of-use operating lease assets and patent costs acquired from third parties, for impairment on at least a quarterly basis and whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of such assets. Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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 the three and six months ended June 30, 2019 and 2018 considered our net income for Ionis on a stand-alone basis plus our share of Akcea’s net loss for the period. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s loss per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income (loss) available to Ionis common stockholders for the calculation of net income (loss) per share is different than net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders in the condensed consolidated statements of operations. Our basic net loss per share for the three months ended June 30, 2019, was calculated as follows (in thousands, except per share amounts):
Three months ended June 30, 2019 Weighted Average Shares Owned in Akcea Akcea’s Net Loss Per Share Ionis’ Portion of Akcea’s Net Loss
Common shares 70,221 $ (0.40 ) $ (28,244 )
Akcea’s net loss attributable to our ownership $ (28,244 )
Ionis’ stand-alone net income 27,311
Net loss available to Ionis common stockholders $ (933 )
Weighted average shares outstanding 140,247
Basic net loss per share $ (0.01 ) Our basic net income per share for the six months ended
Six months ended June 30, 2019 Weighted Average Shares Owned in Akcea Akcea’s Net Loss Per Share Ionis’ Portion of Akcea’s Net Loss
Common shares 69,406 $ (0.06 ) $ (4,380 )
Akcea’s net loss attributable to our ownership $ (4,380 )
Ionis’ stand-alone net income 91,008
Net income available to Ionis common stockholders $ 86,628
Weighted average shares outstanding 139,419
Basic net income per share $ 0.62 Our basic net loss per share for the three months ended June 30, 2018, was calculated as follows (in thousands, except per share amounts):
Three months ended June 30, 2018 Weighted Average Shares Owned in Akcea Akcea’s Net Loss Per Share Ionis’ Portion of Akcea’s Net Loss
Common shares 60,832 $ (0.72 ) $ (43,814 )
Akcea’s net loss attributable to our ownership $ (43,814 )
Ionis’ stand-alone net income 5,882
Net loss available to Ionis common stockholders $ (37,932 )
Weighted average shares outstanding 128,712
Basic net loss per share $ (0.29 ) Our basic net loss per share for the six months ended
Six months ended June 30, 2018 Weighted Average Shares Owned in Akcea Akcea’s Net Loss Per Share Ionis’ Portion of Akcea’s Net Loss
Common shares 53,183 $ (1.19 ) $ (63,198 )
Akcea’s net loss attributable to our ownership $ (63,198 )
Ionis’ stand-alone net income 24,668
Net income available to Ionis common stockholders $ (38,530 )
Weighted average shares outstanding 127,030
Basic net loss per share $ (0.30 ) Dilutive net income (loss per share) For the six months ended June 30, 2019, 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 duri |
