equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. We
determine the carrying amount of the liability component by measuring the fair value of similar debt instruments
that do not have the conversion feature. If a similar debt instrument does not exist, we estimate the fair value by
using assumptions that market participants would use in pricing a debt instrument, including market interest
rates, credit standing, yield curves and volatilities. Determining the fair value of the debt component requires the
use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and
could have a significant impact on the determination of the debt component and the associated non-cash interest
expense.
We assign a value to the debt component of our convertible notes equal to the estimated fair value of
similar debt instruments without the conversion feature, which resulted in us recording the debt at a discount. We
are amortizing the debt discount over the life of the convertible notes as additional non-cash interest expense
utilizing the effective interest method. For additional information, see Note 4,
Long-TermObligations and
Commitments,
in the Notes to the Consolidated Financial Statements.
Results of Operations
Years Ended December 31, 2014 and December 31, 2013
Revenue
Total revenue for the year ended December 31, 2014 was $214.2 million compared to $147.3 million for
2013. Our revenue fluctuates based on the nature and timing of payments under agreements with our partners
and consists primarily of revenue from the amortization of upfront fees, milestone payments and license fees. For
example, nearly two-thirds of our revenue in 2014 was frommilestone payments we earned due to the success of
our drugs and partnerships.
Research and Development Revenue Under Collaborative Agreements
Research and development revenue under collaborative agreements for the year ended December 31, 2014
was $202.5 million compared to $144.2 million for 2013. Our revenue fluctuates based on the nature and timing
of payments under agreements with our partners, including license fees, milestone-related payments and other
payments. For example, nearly two-thirds of our revenue in 2014 was frommilestone payments we earned from
the success of our drugs and partnerships. We earned $135.0 million in milestone payments during 2014
compared to $82.8 million in 2013. The revenue frommilestone payments in 2014 was primarily comprised of:
•
$80 million fromBiogen Idec, for advancing ISIS-SMN
Rx
, including initiating two Phase 3 studies,
initiating a Phase 1 study of ISIS-DMPK-2.5
Rx
, validating two undisclosed targets to treat neurological
disorders under our neurology collaborations, and advancing a third drug into development;
•
$28.5 million fromGSK related to advancing the Phase 2/3 study of ISIS-TTR
Rx
, and further
advancing ISIS-HBV
Rx
, ISIS-GSK4-L
Rx
, and ISIS-RHO-2.5
Rx
;
•
$22.1 million fromAstraZeneca related to the initiation of a Phase 1 clinical study of ISIS-AR-2.5
Rx
and advancing ISIS-STAT3-2.5
Rx
; and
•
$4 million fromAchaogen whenAchaogen initiated a Phase 3 study of plazomicin.
Licensing and Royalty Revenue
Our revenue from licensing activities and royalties for the year ended December 31, 2014 was $11.6 million
and increased compared to $3.1 million for 2013. The increase in 2014 was primarily a result of the $9.5 million
in revenue we earned fromAlnylam related to its license of our technology to one of its partners.
Operating Expenses
Operating expenses for the year ended December 31, 2014 were $261.9 million compared to $199.0 million
for 2013. The expected increase in operating expenses was primarily due to higher costs associated with our
Phase 3 programs for ISIS-TTR
Rx
, ISIS-SMN
Rx
and ISIS-APOCIII
Rx
and an increase in stock compensation
expense due to the increase in our stock price. As drugs move forward to more advanced stages of development,
including into longer and larger clinical studies, the costs of development increase. In addition to the Phase 3
programs we are conducting, we initiated Phase 2 studies for several drugs in our pipeline in the second half of
2013, which are ongoing in 2014, and advanced numerous drugs into clinical development in 2014.
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