UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q
(Mark One)

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

For the Quarterly Period Ended September 30, 2021

OR

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

For the transition period from _____ to _____

Commission file number 000-19125

     

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

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

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

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

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

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

     

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

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

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

Large Accelerated Filer 
Accelerated Filer
   
Non-accelerated Filer
Smaller Reporting Company
 
Emerging Growth Company

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

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

The number of shares of voting common stock outstanding as of October 27, 2021 was 141,210,015.




IONIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX

PART I
FINANCIAL INFORMATION
 
     
ITEM 1:
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited) (as revised)
3
     
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited) (as revised)
4
     
 
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020 (unaudited) (as revised)
5
     
 
Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited) (as revised)
6
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited) (as revised)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
9
     
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
     
 
Overview
31
     
 
Results of Operations
35
     
 
Liquidity and Capital Resources
41
     
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk
43
     
ITEM 4:
Controls and Procedures
43
     
PART II
OTHER INFORMATION
43
     
ITEM 1:
Legal Proceedings
43
     
ITEM 1A:
Risk Factors
44
     
ITEM 2:
Unregistered Sales of Equity Securities and Use of Proceeds
62
     
ITEM 3:
Default upon Senior Securities
62
     
ITEM 4:
Mine Safety Disclosures
62
     
ITEM 5:
Other Information
62
     
ITEM 6:
Exhibits
62
     
SIGNATURES
64

TRADEMARKS

Ionis,” the Ionis logo, and other trademarks or service marks of Ionis Pharmaceuticals, Inc. appearing in this report are the property of Ionis Pharmaceuticals, Inc. “Akcea,” the Akcea logo, and other trademarks or service marks of Akcea Therapeutics, Inc. appearing in this report are the property of Akcea Therapeutics, Inc., Ionis’ wholly owned subsidiary. This report contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or TM symbols.




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

 
September 30,
2021
   
December 31,
2020
 
         
(as revised*)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
632,953
   
$
397,664
 
Short-term investments
   
1,354,146
     
1,494,711
 
Contracts receivable
   
9,068
     
76,204
 
Inventories
   
22,930
     
21,965
 
Other current assets
   
136,643
     
140,163
 
Total current assets
   
2,155,740
     
2,130,707
 
Property, plant and equipment, net
   
180,144
     
181,077
 
Patents, net
   
30,038
     
27,937
 
Deposits and other assets
   
48,971
     
50,034
 
Total assets
 
$
2,414,893
   
$
2,389,755
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
8,357
   
$
17,199
 
Accrued compensation
   
32,320
     
65,728
 
Accrued liabilities
   
75,681
     
90,161
 
Income taxes payable
   
450
     
1,324
 
1 percent convertible senior notes, net
   
61,936
     
308,809
 
Current portion of long-term obligations
   
3,109
     
7,301
 
Current portion of deferred contract revenue
   
97,925
     
108,376
 
Total current liabilities
   
279,778
     
598,898
 
Long-term deferred contract revenue
   
362,887
     
424,046
 
0 percent convertible senior notes, net
   
618,341
     
 
0.125 percent convertible senior notes, net
   
541,768
     
540,136
 
Long-term obligations, less current portion
   
21,628
     
23,409
 
Long-term mortgage debt
   
59,955
     
59,984
 
Total liabilities
   
1,884,357
     
1,646,473
 
Stockholders’ equity:
               
Common stock, $0.001 par value; 300,000,000 shares authorized, 141,184,026 and 140,365,594 shares issued and outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively
   
141
     
140
 
Additional paid-in capital
   
1,942,348
     
1,895,519
 
Accumulated other comprehensive loss
   
(27,437
)
   
(21,071
)
Accumulated deficit
   
(1,384,516
)
   
(1,131,306
)
Total stockholders’ equity
   
530,536
     
743,282
 
Total liabilities and stockholders’ equity
 
$
2,414,893
   
$
2,389,755
 


*
We revised our 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

3


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

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
         
(as revised*)
         
(as revised*)
 
Revenue:
                       
Commercial revenue:
                       
SPINRAZA royalties
 
$
66,572
   
$
74,171
   
$
198,726
   
$
211,925
 
TEGSEDI and WAYLIVRA revenue, net
   
15,519
     
19,040
     
46,901
     
50,562
 
Licensing and other royalty revenue
   
2,729
     
2,129
     
9,502
     
6,548
 
Total commercial revenue
   
84,820
     
95,340
     
255,129
     
269,035
 
Research and development revenue under collaborative agreements
   
48,273
     
64,739
     
115,321
     
169,948
 
Total revenue
   
133,093
     
160,079
     
370,450
     
438,983
 
                                 
Expenses:
                               
Cost of sales
   
3,079
     
3,086
     
8,616
     
8,646
 
Research, development and patent
   
184,770
     
125,083
     
463,878
     
364,298
 
Selling, general and administrative
   
31,093
     
68,447
     
148,747
     
215,455
 
Total operating expenses
   
218,942
     
196,616
     
621,241
     
588,399
 
                                 
Loss from operations
   
(85,849
)
   
(36,537
)
   
(250,791
)
   
(149,416
)
                                 
Other income (expense):
                               
Investment income
   
872
     
6,454
     
8,236
     
25,913
 
Interest expense
   
(2,340
)
   
(2,428
)
   
(7,111
)
   
(7,076
)
Gain on investments
   
4,013
     
835
     
4,885
     
10,722
 
Loss on early retirement of debt
   
     
     
(8,627
)
   
 
Other income (expenses)
   
(469
)
   
126
     
(656
)
   
(122
)
                                 
Loss before income tax benefit (expense)
   
(83,773
)
   
(31,550
)
   
(254,064
)
   
(119,979
)
                                 
Income tax benefit (expense)
   
1,307
     
(5,064
)
   
854
     
(4,077
)
                                 
Net loss
   
(82,466
)
   
(36,614
)
   
(253,210
)
   
(124,056
)
                                 
Net loss attributable to noncontrolling interest in Akcea Therapeutics, Inc.
   
     
12,147
     
     
34,325
 
                                 
Net loss attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(82,466
)
 
$
(24,467
)
 
$
(253,210
)
 
$
(89,731
)
                                 
Basic and diluted net loss per share
 
$
(0.58
)
 
$
(0.18
)
 
$
(1.80
)
 
$
(0.64
)
Shares used in computing basic and diluted net loss per share
   
141,139
     
139,708
     
140,958
     
139,497
 


*
We revised our 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

 See accompanying notes.

4


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

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
         
(as revised*)
         
(as revised*)
 
                         
Net loss
 
$
(82,466
)
 
$
(36,614
)
 
$
(253,210
)
 
$
(124,056
)
Unrealized gains (losses) on debt securities, net of tax
   
(1,618
)
   
(3,448
)
   
(6,321
)
   
5,803
 
Currency translation adjustment
   
(23
)
   
275
     
(45
)
   
357
 
                                 
Comprehensive loss
   
(84,107
)
   
(39,787
)
   
(259,576
)
   
(117,896
)
                                 
Comprehensive loss attributable to noncontrolling interest in Akcea Therapeutics, Inc.
   
     
(12,188
)
   
     
(33,883
)
                                 
Comprehensive loss attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(84,107
)
 
$
(27,599
)
 
$
(259,576
)
 
$
(84,013
)


*
We revised our 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

5


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended September 30, 2020 and 2021
(In thousands)
(Unaudited)

 
Common Stock
   
Additional
   
Accumulated Other
   
Accumulated
   
Total Ionis
Stockholders
   
Noncontrolling
Interest in Akcea
   
Total
Stockholders
 
Description
 
Shares
   
Amount
   
Paid in Capital
   
Comprehensive Loss
   
Deficit
   
Equity
   
Therapeutics, Inc.
   
Equity
 
Balance at June 30, 2020 (as revised*)
   
139,489
   
$
139
   
$
2,053,502
   
$
(16,440
)
 
$
(752,308
)
 
$
1,284,893
   
$
217,620
   
$
1,502,513
 
Net loss
   
     
     
     
     
(24,467
)
   
(24,467
)
   
     
(24,467
)
Change in unrealized losses, net of tax
   
     
     
     
(3,448
)
   
     
(3,448
)
   
     
(3,448
)
Foreign currency translation
   
     
     
     
275
     
     
275
     
     
275
 
Issuance of common stock in connection with employee stock plans
   
321
     
1
     
12,997
     
     
     
12,998
     
     
12,998
 
Stock-based compensation expense
   
     
     
45,845
     
     
     
45,845
     
     
45,845
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(16
)
   
     
(990
)
   
     
     
(990
)
   
     
(990
)
Noncontrolling interest in Akcea Therapeutics, Inc.
   
     
     
(17,803
)
   
41
     
     
(17,762
)
   
5,615
     
(12,147
)
Balance at September 30, 2020 (as revised*)
   
139,794
   
$
140
   
$
2,093,551
   
$
(19,572
)
 
$
(776,775
)
 
$
1,297,344
   
$
223,235
   
$
1,520,579
 
                                                                 
Balance at June 30, 2021
   
141,022
   
$
141
   
$
1,910,379
   
$
(25,796
)
 
$
(1,302,050
)
 
$
582,674
   
$
   
$
582,674
 
Net loss
   
     
     
     
     
(82,466
)
   
(82,466
)
   
     
(82,466
)
Change in unrealized losses, net of tax
   
     
     
     
(1,618
)
   
     
(1,618
)
   
     
(1,618
)
Foreign currency translation
   
     
     
     
(23
)
   
     
(23
)
   
     
(23
)
Issuance of common stock in connection with employee stock plans
   
176
     
     
1,922
     
     
     
1,922
     
     
1,922
 
Stock-based compensation expense
   
     
     
30,537
     
     
     
30,537
     
     
30,537
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(14
)
   
     
(490
)
   
     
     
(490
)
   
     
(490
)
Balance at September 30, 2021
   
141,184
   
$
141
   
$
1,942,348
   
$
(27,437
)
 
$
(1,384,516
)
 
$
530,536
   
$
   
$
530,536
 


*
We revised our 2019 and 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

6


IONIS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Nine Months Ended September 30, 2020 and 2021
(In thousands)
(Unaudited)

 
Common Stock
   
Additional
   
Accumulated Other
   
Accumulated
   
Total Ionis
Stockholders
   
Noncontrolling
Interest in Akcea
   
Total
Stockholders
 
Description
 
Shares
   
Amount
   
Paid in Capital
   
Comprehensive Loss
   
Deficit
   
Equity
   
Therapeutics, Inc.
   
Equity
 
Balance at December 31, 2019 (as revised*)
   
140,340
   
$
140
   
$
1,985,650
   
$
(25,290
)
 
$
(596,495
)
 
$
1,364,005
   
$
213,453
   
$
1,577,458
 
Net loss
   
     
     
     
     
(89,731
)
   
(89,731
)
   
     
(89,731
)
Change in unrealized gains, net of tax
   
     
     
     
5,803
     
     
5,803
     
     
5,803
 
Foreign currency translation
   
     
     
     
357
     
     
357
     
     
357
 
Issuance of common stock in connection with employee stock plans
   
1,141
     
1
     
29,449
     
     
     
29,450
     
     
29,450
 
Repurchases and retirements of common stock
   
(1,478
)
   
(1
)
   
     
     
(90,549
)
   
(90,550
)
   
     
(90,550
)
Stock-based compensation expense
   
     
     
135,077
     
     
     
135,077
     
     
135,077
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(209
)
   
     
(12,960
)
   
     
     
(12,960
)
   
     
(12,960
)
Noncontrolling interest in Akcea Therapeutics, Inc.
   
     
     
(43,665
)
   
(442
)
   
     
(44,107
)
   
9,782
     
(34,325
)
Balance at September 30, 2020 (as revised*)
   
139,794
   
$
140
   
$
2,093,551
   
$
(19,572
)
 
$
(776,775
)
 
$
1,297,344
   
$
223,235
   
$
1,520,579
 
                                                                 
Balance at December 31, 2020 (as revised*)
   
140,366
   
$
140
   
$
1,895,519
   
$
(21,071
)
 
$
(1,131,306
)
 
$
743,282
   
$
   
$
743,282
 
Net loss
   
     
     
     
     
(253,210
)
   
(253,210
)
   
     
(253,210
)
Change in unrealized losses, net of tax
   
     
     
     
(6,321
)
   
     
(6,321
)
   
     
(6,321
)
Foreign currency translation
   
     
     
     
(45
)
   
     
(45
)
   
     
(45
)
Issuance of common stock in connection with employee stock plans
   
1,094
     
1
     
11,563
     
     
     
11,564
     
     
11,564
 
Issuance of warrants
   
     
     
89,752
     
     
     
89,752
     
     
89,752
 
Purchase of note hedges
   
     
     
(136,620
)
   
     
     
(136,620
)
   
     
(136,620
)
Stock-based compensation expense
   
     
     
98,419
     
     
     
98,419
     
     
98,419
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(276
)
   
     
(16,285
)
   
     
     
(16,285
)
   
     
(16,285
)
Balance at September 30, 2021
   
141,184
   
$
141
   
$
1,942,348
   
$
(27,437
)
 
$
(1,384,516
)
 
$
530,536
   
$
   
$
530,536
 


*
We revised our 2019 and 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

7


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

 
Nine Months Ended
September 30,
 
   
2021
   
2020
 
         
(as revised*)
 
Operating activities:
           
Net loss
 
$
(253,210
)
 
$
(124,056
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
   
11,665
     
9,713
 
Amortization of right-of-use operating lease assets
   
1,171
     
1,356
 
Amortization of patents
   
1,740
     
1,526
 
Amortization of premium on investments, net
   
13,515
     
7,812
 
Amortization of debt issuance costs
   
3,586
     
2,388
 
Stock-based compensation expense
   
98,419
     
135,077
 
Gain on investments
   
(933
)
   
(10,722
)
Loss on early retirement of debt
   
8,627
     
 
Non-cash losses related to patents
   
1,150
     
616
 
Provision for deferred income taxes
   
     
1,649
 
Changes in operating assets and liabilities:
               
Contracts receivable
   
67,136
     
24,057
 
Inventories
   
(965
)
   
(1,468
)
Other current and long-term assets
   
10,358
     
(5,647
)
Income taxes (payable) receivable
   
134
     
(23,674
)
Accounts payable
   
(10,737
)
   
(10,970
)
Accrued compensation
   
(33,408
)
   
(8,967
)
Accrued liabilities and other current liabilities
   
(19,526
)
   
13,195
 
Deferred contract revenue
   
(71,610
)
   
(73,970
)
Net cash used in operating activities
   
(172,888
)
   
(62,085
)
                 
Investing activities:
               
Purchases of short-term investments
   
(930,963
)
   
(1,376,631
)
Proceeds from sale of short-term investments
   
1,051,857
     
1,497,433
 
Purchases of property, plant and equipment
   
(9,453
)
   
(29,971
)
Acquisition of patents, net
   
(4,459
)
   
(4,203
)
Purchase of Bicycle Therapeutics plc common stock
   
(7,185
)
   
 
Net cash provided by investing activities
   
99,797
     
86,628
 
                 
Financing activities:
               
Proceeds from equity, net
   
11,564
     
29,450
 
Payments of tax withholdings related to vesting of employee stock awards and exercise of employee stock options
   
(16,285
)
   
(12,960
)
Proceeds from issuance of 0 percent convertible senior notes
   
632,500
     
 
0 percent convertible senior notes issuance costs
   
(15,525
)
   
 
Repurchase of $247.9 million principal amount of 1 percent convertible senior notes
   
(256,963
)
   
 
Proceeds from issuance of warrants
   
89,752
     
 
Purchase of note hedges
   
(136,620
)
   
 
Repurchases and retirements of common stock
   
     
(90,548
)
Payments of transaction costs for Akcea merger
   
     
(1,071
)
Net cash provided by (used in) financing activities
   
308,423
     
(75,129
)
                 
Effects of exchange rates on cash
   
(43
)
   
358
 
                 
Net increase (decrease) in cash and cash equivalents
   
235,289
     
(50,228
)
Cash and cash equivalents at beginning of period
   
397,664
     
683,287
 
Cash and cash equivalents at end of period
 
$
632,953
   
$
633,059
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid
 
$
3,527
   
$
3,700
 
Income taxes paid
 
$
3
   
$
23,532
 
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Amounts accrued for capital and patent expenditures
 
$
1,811
   
$
6,576
 
Amounts accrued for Akcea merger transaction costs
 
$
   
$
8,103
 


*
We revised our 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

See accompanying notes.

8


IONIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

1.  Basis of Presentation


We prepared the unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 on the same basis as the audited financial statements for the year ended December 31, 2020, with the exception of our retrospective adoption of Accounting Standards Update, or ASU, 2020-06, which simplifies the accounting for convertible debt instruments. See Note 2, Significant Accounting Polices, Convertible Debt, for details of our adoption of this guidance. We included all normal recurring adjustments in the financial statements, which we considered necessary for a fair presentation of our financial position at such dates and our operating results and cash flows for those periods. Our operating results for the interim periods may not be indicative of what our operating results will be for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC.


In our condensed consolidated financial statements, we included the accounts of Ionis Pharmaceuticals, Inc. and the consolidated results of our wholly owned 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, which reduced our ownership of Akcea’s common stock below 100 percent. In October 2020, we completed a merger transaction with Akcea such that following the completion of the merger, Akcea became our wholly owned subsidiary. We will refer to this transaction as the Akcea Merger throughout the remainder of this document. We reflected changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the changes occurred.

2.  Significant Accounting Policies


Revenue Recognition


Our Revenue Sources


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


Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue


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


Commercial Revenue: TEGSEDI and WAYLIVRA revenue, net


In April 2021, we began commercializing TEGSEDI in North America through a distribution agreement with Swedish Orphan Biovitrum AB, or Sobi. In January 2021, we began commercializing TEGSEDI and WAYLIVRA in Europe through a distribution agreement with Sobi. Under our agreements, we are responsible for supplying finished goods inventory to Sobi and Sobi is responsible for selling each medicine to the end customer. As a result of these agreements, we earn a distribution fee on net sales from Sobi for each medicine.


Prior to the second quarter of 2021 in North America, we sold TEGSEDI through exclusive distribution agreements with third-party logistics companies, or 3PLs, that took title to TEGSEDI. The 3PLs then distributed TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distributed TEGSEDI to health care providers and patients. In the United States, or U.S., we had a single 3PL as our sole customer and in Canada we also had a single 3PL as our sole customer. Prior to 2021 in Europe, we sold TEGSEDI and WAYLIVRA to hospitals and pharmacies, which were our customers, using 3PLs as distributors.

9


Under our collaboration agreement with PTC Therapeutics International Limited, or PTC, PTC is responsible for commercializing TEGSEDI and WAYLIVRA in Latin America and Caribbean countries. In the third quarter of 2021, we earned a $4 million milestone payment from PTC when WAYLIVRA was approved in Brazil, which we included in TEGSEDI and WAYLIVRA revenue in our condensed consolidated statement of operations.


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.


See Note 5, Collaborative Arrangements and Licensing Agreements, for collaborations with substantive changes that occurred in 2021. Additionally, see 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, 2020 for a summary of each of our material collaborative agreements.


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 of the consideration is probable.

2.
Identify the performance obligations


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


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

10


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 third quarter of 2021, we earned a $25 million milestone payment from Novartis when Novartis achieved 50 percent enrollment in the Lp(a) HORIZON Phase 3 cardiovascular outcome study of pelacarsen. We did not consider the milestone payment probable until Novartis achieved the milestone event because it was contingent on Novartis’ enrollment of patients 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;
Estimated expenses we may incur;
Estimated 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 estimated number of internal hours we will spend performing these services;
The estimated cost of work we will perform;
The estimated cost of work that we will contract with third parties to perform; and
The estimated cost of API we will use.


For purposes of determining the stand-alone selling price of the R&D services we perform and the API we will deliver, accounting guidance requires us to include a markup for a reasonable profit margin.

5.
Recognize revenue


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


For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.

11


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: TEGSEDI and WAYLIVRA revenue, net


Under our distribution agreements with Sobi we concluded that our performance obligation is to provide services to Sobi over the term of the agreement, which includes supplying finished goods inventory to Sobi and because we retained the marketing authorization for TEGSEDI and WAYLIVRA we are responsible for leading the global commercial strategy for each medicine. We view this performance obligation as a series of distinct activities that are substantially the same. Therefore, we recognize as revenue the price Sobi pays us for the inventory when we deliver the finished goods inventory to Sobi. We also recognize distribution fee revenue based on Sobi’s net sales of TEGSEDI and WAYLIVRA. Under our agreements with Sobi, Sobi does not generally have a right of return.


Prior to our distribution agreements with Sobi, we recognized TEGSEDI and WAYLIVRA commercial revenue in the period when our customer obtained control of our products, which occurred at a point in time upon transfer of title to the customer. We classified payments to customers or other parties in the distribution channel for services that were distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. We classified payments to customers or other parties in the distribution channel that did not meet those criteria as a reduction of revenue, as discussed further below. We excluded from revenues taxes collected from customers relating to TEGSEDI and WAYLIVRA commercial revenue and remitted these amounts to governmental authorities.


Reserves for TEGSEDI and WAYLIVRA commercial revenue


Under our distribution agreements with Sobi, Sobi is responsible for any applicable reserves.


Prior to our distribution agreements with Sobi, we recorded TEGSEDI and WAYLIVRA commercial revenue at our net sales price, or transaction price. We included in our transaction price estimated reserves for discounts, returns, chargebacks, rebates and other allowances that we offered within contracts between us and our customers, wholesalers, distributors, health care providers and other indirect customers. We estimated our reserves using the amounts we have earned or we could claim on the associated sales. We classified our reserves as a reduction of accounts receivable when we were not required to make a payment or as a current liability when we were required to make a payment. In certain cases, our estimates included a range of possible outcomes that were 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 reflected our best estimates under the terms of our respective contracts. When calculating our reserves and related TEGSEDI and WAYLIVRA commercial revenue, we only recognized amounts to the extent that we considered it probable that we would not have to reverse a significant amount of the cumulative sales we previously recognized in a future period. Under our agreements with Sobi, we transferred all reserves to Sobi. See our revenue recognition policy in Note 1, Organization and Significant Accounting Policies, of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 for additional details regarding how we accounted for the reserves related to TEDSEDI and WAYLIVIRA product sales prior to our agreements with Sobi.


Research and development revenue under collaboration agreements:


Upfront payments


When we enter into a collaboration agreement and receive 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.

12


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.


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 $7.5 million milestone payment from Biogen when we advanced a 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 2021, we recognized a $25 million milestone payment from Novartis when Novartis achieved 50 percent enrollment in the Lp(a) HORIZON Phase 3 cardiovascular outcome study of pelacarsen. We recognized the milestone payment in full in the third quarter of 2021 because we did not have any remaining performance obligations related to the milestone payment.


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 $30 million 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.


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 sold 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 fesomersen (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 fesomersen. Under the 2017 amendment, we concluded we had a new agreement with three performance obligations. These performance obligations were to deliver the license of fesomersen, 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, 2020 for further discussion of the Bayer collaboration.

13


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 contracts receivable to be unconditional. We typically receive payment within one quarter of billing our partner or customer.


As of September 30, 2021, approximately 58.3 percent of our contracts receivables were from three significant customers. As of December 31, 2020, approximately 99.5 percent of our contracts receivables were from two significant customers.


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. During the three months ended September 30, 2021 and 2020, we recognized $21.1 million and $22.5 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. During the nine months ended September 30, 2021 and 2020, we recognized $71.9 million and $84.1 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 Sales


Our cost of sales 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 sales.


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 in our condensed consolidated statement of operations. We use the specific identification method to determine the cost of securities sold.

14


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 September 30, 2021, we held equity investments in three publicly held companies, Antisense Therapeutics Limited, or ATL, Bicycle Therapeutics plc, or Bicycle, and ProQR Therapeutics N.V., or ProQR. We also held equity investments in seven privately held companies, Aro Biotherapeutics, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Flamingo Therapeutics BV, YourBio Health, Inc. (formerly Seventh Sense Biosystems) and Suzhou-Ribo Life Science Co, Ltd.


We are required to measure and record our equity investments at fair value and to recognize the changes in fair value in our condensed consolidated statement of operations. We account for our equity investments in privately held companies at their cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. For example, 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. These observable price changes resulted in us recognizing 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 condensed consolidated statement of operations during 2020 because the sales were at higher prices compared to our recorded value.


Inventory Valuation


We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or net realizable 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, which we refer to as clinical raw materials. 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. Our raw materials- commercial inventory includes API for our commercial medicines. We capitalize material, labor and overhead costs as part of our raw materials- commercial inventory.


We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At September 30, 2021, 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. For the nine months ended September 30, 2021 and 2020, we recorded an immaterial amount of inventory write-offs.


Our inventory consisted of the following (in thousands):

 
September 30, 2021
   
December 31, 2020
 
Raw materials:
           
Raw materials- clinical
 
$
11,993
   
$
9,206
 
Raw materials- commercial
   
4,147
     
7,502
 
Total raw materials
   
16,140
     
16,708
 
Work in process
   
6,183
     
2,252
 
Finished goods
   
607
     
3,005
 
Total inventory
 
$
22,930
   
$
21,965
 


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. We determine the lease term at the inception of each lease, and in certain cases our lease term could include renewal options if we concluded we were reasonably certain that we will exercise the renewal option. When we exercise a lease option that was not previously included in the initial lease term, we reassess our right-of-use asset and lease liabilities for the new lease term.

15


As our current leases do not provide an interest rate implicit in the lease, we used our incremental borrowing rate, based on the information available on the date we adopted Topic 842 (January 2019), as of the lease inception date or at the lease option extension date in determining the present value of future payments. 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.


In September 2021, we entered into an operating lease agreement for office space located in Boston, Massachusetts. We determined that the lease commencement date is the date in which the space is ready for our occupancy, which we expect will be in the fourth quarter of 2021. We are leasing this space under a non-cancelable operating lease with an initial term ending 91 months following the lease commencement date and an option to extend the lease for an additional five-year term. Under the lease agreement, we will receive a seven-month free rent period, which will commence on the lease commencement date. Our lease payments over the initial term total $6.8 million. We will recognize a right-of-use lease asset and lease liability in the fourth quarter of 2021 upon the lease commencement date. Since we did not have the right to occupy the premises as of September 30, 2021, there was no accounting impact in the third quarter.

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 U.S. 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. When we identify patents and patent applications that we are not actively pursuing, we 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 we expect to realize.


We evaluate our deferred tax assets regularly 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.


We assessed our valuation allowance requirements and recorded a valuation allowance 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. We based our determination largely on Akcea rejoining the Ionis U.S. consolidated federal tax group in the fourth quarter of 2020. Due to Akcea’s historical and projected financial statement losses, and the negative impact we expect this to 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. We also expect that Ionis’ pre-tax income in future periods may be lower due to increased research and development expenses associated with our pipeline of wholly owned medicines. We continue to maintain a valuation allowance against all our consolidated U.S. federal and state net deferred tax assets.


Long-lived Assets


We evaluate long-lived assets, which include property, plant and equipment and patent costs, 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.

16


Use of Estimates


We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. that require 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 our estimates.


Basic and Diluted Net Loss Per Share


Basic net loss per share


We calculated our basic net loss per share for the three and nine months ended September 30, 2021 by dividing our net loss by our weighted-average number of common shares outstanding during the period. For the first nine months of 2021, we did not have to consider Akcea results separately in our calculation because we owned 100 percent of Akcea for the entire period. Our basic net loss per share for the three and nine months ended September 30, 2021 was $0.58 and $1.80, respectively.


In the third quarter of 2020, prior to the Akcea Merger, we calculated our basic net loss per share for the three and nine months ended September 30, 2020 by calculating our net loss for Ionis on a stand-alone basis plus our share of Akcea’s net loss for the period to determine our total net loss attributable to our common stockholders. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s net loss per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net loss available to Ionis common stockholders for the calculation of net loss per share is different than our net loss attributable to Ionis Pharmaceuticals, Inc. common stockholders in the condensed consolidated statements of operations.


We calculated our basic net loss per share for the three months ended September 30, 2020 as follows (in thousands, except per share amounts):

Three months ended September 30, 2020
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Loss
Per Share
   
Basic
Net Loss Per
Share Calculation
(as revised*)
 
Ionis’ portion of Akcea’s net loss
   
77,095
   
$
(0.49
)
 
$
(37,822
)
Akcea’s net loss attributable to our ownership
                 
$
(37,822
)
Ionis’ stand-alone net income
                   
13,251
 
Net loss available to Ionis common stockholders
                 
$
(24,571
)
Weighted average shares outstanding
                   
139,708
 
Basic net loss per share
                 
$
(0.18
)


We calculated our basic net loss per share for the nine months ended September 30, 2020 as follows (in thousands, except per share amounts):

Nine months ended September 30, 2020
 
Weighted
Average Shares
Owned in Akcea
   
Akcea’s
Net Loss
Per Share
   
Basic
Net Loss Per
Share Calculation
(as revised*)
 
Ionis’ portion of Akcea’s net loss
   
77,095
   
$
(1.40
)
 
$
(108,176
)
Akcea’s net loss attributable to our ownership
                 
$
(108,176
)
Ionis’ stand-alone net income
                   
18,235
 
Net loss available to Ionis common stockholders
                 
$
(89,941
)
Weighted average shares outstanding
                   
139,497
 
Basic net loss per share
                 
$
(0.64
)

*
We revised our 2020 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 2, Significant Accounting Policies, for further information.

17


Diluted net loss per share


For the three and nine months ended September 30, 2021 and 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, or 0.125% Notes;
Note hedges related to the 0.125% Notes;
1 percent convertible senior notes, or 1% Notes;
Dilutive stock options;
Unvested restricted stock units, or RSUs;
Unvested performance restricted stock units, or PRSUs; and
Employee Stock Purchase Plan, or ESPP.


For the three and nine months ended September 30, 2021, common stock from the following would also have had an anti-dilutive effect on net loss per share:

0 percent convertible senior notes, or 0% Notes; and
Note hedges related to the 0% Notes.


Additionally as of September 30, 2021, we had warrants related to our 0% and 0.125% Notes outstanding. We will include the shares issuable under these 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.


Convertible Debt


Adoption of ASU 2020-06


In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible debt instruments, amends the guidance on derivative scope exceptions for contracts in an entity’s own equity, and modifies the guidance on diluted earnings per share calculations. We adopted ASU 2020-06 on January 1, 2021 under the full retrospective approach, which required us to revise our prior period financial statements. This guidance impacted our accounting for outstanding convertible debt. At January 1, 2021, we had two outstanding convertible notes, our 0.125% Notes, which mature in December 2024, and our 1% Notes, which mature in November 2021. In April 2021, we completed a $632.5 million offering of 0% Notes primarily to repurchase a majority of our 1% Notes. We accounted for our 0% Notes under ASU 2020-06 at issuance. Refer to Note 6, Convertible Debt, for further information.


The updated guidance eliminates the cash conversion accounting model we previously followed in Accounting Standard Codification, or ASC, 470-20, which required us to separate each of our convertible debt instruments at issuance into two units of accounting, a liability component, based on our nonconvertible debt borrowing rate at issuance, and an equity component. Under ASU 2020-06, we now account for each of our convertible debt instruments as a single unit of accounting, a liability, because we concluded that the conversion features do not require bifurcation as a derivative under ASC 815-15 and our convertible debt instruments were not issued at a substantial premium. Since we adopted ASU 2020-06 using the full retrospective approach, we were required to apply the guidance to all convertible debt instruments we had outstanding as of January 1, 2019. We recomputed the basis of each convertible debt instrument as if we accounted for each as a single unit of accounting at issuance. This update included recalculating the amortization of debt issuance costs using an updated effective interest rate. As a result of adopting ASU 2020-06, we recorded a cumulative adjustment to decrease our additional paid in capital and our accumulated deficit at January 1, 2019. We have updated these financial statements to reflect the cumulative adjustment for the periods presented. We have labeled our prior period financial statements “as revised” to indicate the change required under the new accounting guidance. Below is a summary of the change in our balance sheet at December 31, 2020 and statement of operations from the three and nine months ended September 30, 2020 under the ASC 470-20 legacy guidance compared to the new ASU 2020-06 guidance we adopted:

18


The following table summarizes the adjustments we made to the condensed consolidated balance sheet we originally reported at December 31, 2020 to adopt ASU 2020-06 (in thousands):

 
December 31, 2020
 
   
As Previously
Reported
   
ASU 2020-06
Adjustment
   
As Revised
 
1 percent convertible senior notes
 
$
293,161
   
$
15,648
   
$
308,809
 
0.125 percent convertible senior notes
 
$
455,719
   
$
84,417
   
$
540,136
 
Additional paid-in-capital
 
$
2,113,646
   
$
(218,127
)
 
$
1,895,519
 
Accumulated deficit
 
$
(1,249,368
)
 
$
118,062
   
$
(1,131,306
)


Under ASU 2020-06, our revised ending balances for our 1% Notes and 0.125% Notes as of December 31, 2020 represent the principal balance of each convertible debt instrument less debt issuance costs. Additionally, because we have deferred tax assets related to our convertible debt instruments, we also adjusted these amounts as part of our adoption of ASU 2020-06. However, because we have a full valuation allowance on our deferred tax assets, there was no impact to our condensed consolidated balance sheet related to our deferred tax assets.


The following tables summarize the adjustments we made to the condensed consolidated statement of operations we originally reported for the three and nine months ended September 30, 2020 to adopt ASU 2020-06 (in thousands):

 
Three Months Ended September 30, 2020
 
   
As Previously
Reported
   
ASU 2020-06
Adjustment
   
As Revised
 
Interest expense
 
$
(11,321
)
 
$
8,893
   
$
(2,428
)
Loss before income tax expense
 
$
(40,443
)
 
$
8,893
   
$
(31,550
)
Income tax expense
 
$
(2,648
)
 
$
(2,416
)
 
$
(5,064
)
Net loss
 
$
(43,091
)
 
$
6,477
   
$
(36,614
)
Net loss attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(30,944
)
 
$
6,477
   
$
(24,467
)
Basic and diluted net loss per share
 
$
(0.22
)
 
$
0.04
   
$
(0.18
)

 
Nine Months Ended September 30, 2020
 
   
As Previously
Reported
   
ASU 2020-06
Adjustment
   
As Revised
 
Interest expense
 
$
(33,484
)
 
$
26,408
   
$
(7,076
)
Loss before income tax benefit (expense)
 
$
(146,387
)
 
$
26,408
   
$
(119,979
)
Income tax benefit (expense)
 
$
1,047
   
$
(5,124
)
 
$
(4,077
)
Net loss
 
$
(145,340
)
 
$
21,284
   
$
(124,056
)
Net loss attributable to Ionis Pharmaceuticals, Inc. common stockholders
 
$
(111,015
)
 
$
21,284
   
$
(89,731
)
Basic and diluted net loss per share
 
$
(0.80
)
 
$
0.16
   
$
(0.64
)


Under ASU 2020-06, our revised interest expense is lower because we are no longer recording non-cash interest expense related to a debt discount. This decrease was partially offset by the increase in interest expense related to the amortization of debt issuance costs because we no longer allocate a portion of our debt issuance costs to stockholders’ equity at issuance. Instead, the entire debt issuance costs were recorded as a contra-liability on our condensed consolidated balance sheet at issuance and we are amortizing them over the contractual term using an updated effective interest rate. Our updated effective interest rates for our 1% Notes and 0.125% Notes were 1.4 percent and 0.5 percent, respectively.

19


The following tables summarize the adjustments we made to our condensed consolidated statements of stockholders’ equity we originally reported at December 31, 2020 and 2019 to adopt ASU 2020-06 (in thousands):

 
December 31, 2020
 
   
As Previously
Reported
   
ASU 2020-06
Adjustment
   
As Revised
 
Additional paid-in-capital
 
$
2,113,646
   
$
(218,127
)
 
$
1,895,519
 
Accumulated deficit
 
$
(1,249,368
)
 
$
118,062
   
$
(1,131,306
)
Total stockholders’ equity
 
$
843,347
   
$
(100,065
)
 
$
743,282
 

 
December 31, 2019
 
   
As Previously
Reported
   
ASU 2020-06
Adjustment
   
As Revised
 
Additional paid-in-capital
 
$
2,203,778
   
$
(218,128
)
 
$
1,985,650
 
Accumulated deficit
 
$
(707,534
)
 
$
111,039
   
$
(596,495
)
Total stockholders’ equity
 
$
1,684,547
   
$
(107,089
)
 
$
1,577,458
 



Call Spread


In conjunction with the issuance of our 0% Notes and 0.125% Notes in April 2021 and December 2019, respectively, we entered into call spread transactions, which were comprised of purchasing note hedges and selling warrants. We account for the note hedges and warrants as separate freestanding financial instruments and treat each instrument as a separate unit of accounting. We determined that the note hedges and warrants do not meet the definition of a liability using the guidance contained in ASC Topic 480, therefore we account for the note hedges and warrants using the Derivatives and Hedging – Contracts in Entity’s Own Equity accounting guidance contained in ASC Topic 815. We determined that the note hedges and warrants meet the definition of a derivative, are indexed to our stock and meet the criteria to be classified in shareholders’ equity. We recorded the aggregate amount paid for the note hedges and the aggregate amount received for the warrants as additional paid-in capital in our condensed consolidated balance sheet. We reassess our ability to continue to classify the note hedges and warrants in shareholders’ equity at each reporting period.


Segment Information


In 2021, we began operating as a single segment, Ionis operations, because our chief decision maker reviews operating results on an aggregate basis and manages our operations as a single operating segment. Previously, we had operated as two operating segments, Ionis Core and Akcea Therapeutics. We completed the Akcea Merger in October 2020 and fully integrated Akcea’s operations into ours as of January 1, 2021.


Stock-based Compensation Expense


We measure stock-based compensation expense for equity-classified awards, principally related to stock options, RSUs, PRSUs and stock purchase rights under our ESPP based on the estimated fair value of the award on the date of grant. We recognize the value of the portion of the award that we ultimately expect to vest as stock-based compensation expense over the requisite service period in our condensed consolidated statements of operations. We reduce stock-based compensation expense for estimated forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates. We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under our ESPP.


On the grant date, we use our stock price and assumptions regarding a number of variables to determine the estimated fair value of stock-based payment awards. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.


We recognize compensation expense for stock options granted, RSUs, PRSUs and stock purchase rights under the ESPP using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), we recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.


In December 2020, we amended and restated the Akcea 2015 equity plan, including renaming the plan as the Ionis Pharmaceuticals, Inc. 2020 Equity Incentive Plan, or 2020 Plan. As a result, all employees are now under an Ionis stock plan and subject to the same Black-Scholes assumptions.

20


For the nine months ended September 30, 2021 and 2020, we used the following weighted-average assumptions in our Black-Scholes calculations:


Employee Stock Options:
 
Nine Months Ended
September 30,
 
   
2021
   
2020
 
Risk-free interest rate
   
0.5
%
   
1.5
%
Dividend yield
   
0.0
%
   
0.0
%
Volatility
   
54.3
%
   
58.8
%
Expected life
 
4.9 years
   
4.7 years
 


Ionis Board of Director Stock Options:
 
Nine Months Ended
September 30,
 
   
2021
   
2020
 
Risk-free interest rate
   
1.2
%
   
0.5
%
Dividend yield
   
0.0
%
   
0.0
%
Volatility
   
55.9
%
   
57.6
%
Expected life
 
7.3 years
   
6.7 years
 


ESPP:
 
Nine Months Ended
September 30,
 
   
2021
   
2020
 
Risk-free interest rate
   
0.1
%
   
0.8
%
Dividend yield
   
0.0
%
   
0.0
%
Volatility
   
42.4
%
   
47.9
%
Expected life
 
6 months
   
6 months
 


RSU’s:


The fair value of RSUs is based on the market price of our common stock on the date of grant. The RSUs we have granted to employees vest annually over a four-year period. The RSUs we granted to our board of directors prior to June 2020 vest annually over a four-year period. RSUs granted after June 2020 to our board of directors fully vest after one year. The weighted-average grant date fair value of RSUs granted to employees and our board of directors for the nine months ended September 30, 2021 was $59.15 and $39.42 per share, respectively.


PRSU’s:


Beginning in 2020, we added PRSU awards to the compensation for our Chief Executive Officer, Dr. Brett Monia. Under the terms of the grants, one third of the PRSUs may vest at the end of three separate performance periods spread over the three years following the date of grant (i.e., the one-year period commencing on the date of grant and ending on the first anniversary of the date of grant; the two-year period commencing on the date of grant and ending on the second anniversary of the date of grant; and the three-year period commencing on the date of grant and ending on the third anniversary of the date of grant) based on our relative total shareholder return, or TSR, as compared to a peer group of companies, and as measured, in each case, at the end of the applicable performance period. Under the terms of the grants no number of PRSUs is guaranteed to vest and the actual number of PRSUs that will vest at the end of each performance period may be anywhere from zero percentto 150 percent of the target number depending on our relative TSR.


We determined the fair value of Dr. Monia’s PRSUs using a Monte Carlo model because the performance target is based on our relative TSR, which represents a market condition. We are recognizing the grant date fair value of these awards as stock-based compensation expense using the accelerated multiple-option approach over the vesting period. The weighted-average grant date fair value of PRSUs granted to Dr. Monia for the nine months ended September 30, 2021 was $77.17 per share.

21


The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2021 and 2020 (in thousands).

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2021
   
2020
   
2021
   
2020
 
Cost of sales
 
$
111
   
$
315
   
$
293
   
$
902
 
Research, development and patent expense
   
23,332
     
25,359
     
71,979
     
76,931
 
Selling, general and administrative expense
   
7,094
     
20,171
     
26,147
     
57,244
 
Total non-cash stock-based compensation expense
 
$
30,537
   
$
45,845
   
$
98,419
   
$
135,077
 


As of September 30, 2021, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options, RSUs and PRSUs was $65.3 million, $72.2 million and $2.5 million, respectively. Our actual expenses may differ from these estimates because we will adjust our unrecognized non-cash stock-based compensation expense for future forfeitures. We expect to recognize the cost of non-cash stock-based compensation expense related to our non-vested stock options, RSUs and PRSUs over a weighted average amortization period of 1.2 years, 1.4 years and 1.2 years, respectively.


Amendments to Equity Plans


2020 Equity Incentive Plan


In the second quarter of 2021, our Compensation Committee approved an amendment to the 2020 Plan. The amendment decreased the total number of shares of common stock authorized for issuance under the 2020 Plan from approximately 2.6 million to 1.6 million. We assumed the 2020 Plan in connection with Ionis’ reacquisition of all of the outstanding shares of Akcea Therapeutics, Inc. as part of the Akcea Merger.


2011 Equity Incentive Plan


In the second quarter of 2021, after receiving approval from our stockholders, we amended our 2011 Equity Incentive Plan, or 2011 Plan. The amendment increased the total number of shares of common stock authorized for issuance under the 2011 Plan from 23.0 million to 29.7 million and added a fungible share counting ratio whereby the share reserve will be reduced by 1.7 shares for each share of common stock issued pursuant to a full value award (i.e., RSU or PRSU) and increased by 1.7 shares for each share of common stock returning from a full value award.


Impact of Recently Issued Accounting Standards


As disclosed in the “Convertible Debt” policy above within this footnote, we adopted the simplified accounting for convertible debt instrument guidance (ASU 2020-06) on January 1, 2021. Refer to the section above for the impact of adoption. We do not expect any other recently issued accounting standards to have a material impact to our financial results.

3.  Investments


The following table summarizes the contract maturity of the available-for-sale securities we held as of September 30, 2021:

One year or less
   
58
%
After one year but within two years
   
26
%
After two years but within three and a half years
   
16
%
Total
   
100
%


As illustrated above, at September 30, 2021, 84 percent of our available-for-sale securities had a maturity of less than two years.


All of our available-for-sale securities are available to us for use in our current operations. As a result, we categorize all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.


We invest in available-for-sale securities with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Standard & Poor’s, or S&P, Moody’s or Fitch, respectively.


At September 30, 2021, we had an ownership interest of less than 20 percent in seven private companies and three public companies with which we conduct business. The privately held companies are Aro Biotherapeutics, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., Flamingo Therapeutics BV, YourBio Health, Inc. and Suzhou-Ribo Life Science Co, Ltd. The publicly traded companies are Antisense Therapeutics Ltd., Bicycle and ProQR.

22


The following is a summary of our investments (in thousands):

       
Gross Unrealized
   
Estimated
 
September 30, 2021
 
Cost (1)
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities (2)
 
$
447,173
   
$
1,338
   
$
(50
)
 
$
448,461
 
Debt securities issued by U.S. government agencies
   
83,630
     
96
     
(7
)
   
83,719
 
Debt securities issued by the U.S. Treasury (2)
   
89,267
     
10
     
(2
)
   
89,275
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
141,161
     
103
     
(30
)
   
141,234
 
Other municipal debt securities
   
5,028
     
     
(2
)
   
5,026
 
Total securities with a maturity of one year or less
   
766,259
     
1,547
     
(91
)
   
767,715
 
Corporate debt securities
   
366,907
     
1,181
     
(475
)
   
367,613
 
Debt securities issued by U.S. government agencies
   
73,028
     
1
     
(120
)
   
72,909
 
Debt securities issued by the U.S. Treasury
   
98,499
     
245
     
(88
)
   
98,656
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
41,167
     
8
     
(65
)
   
41,110
 
Other municipal debt
   
6,169
     
     
(26
)
   
6,143
 
Total securities with a maturity of more than one year
   
585,770
     
1,435
     
(774
)
   
586,431
 
Total available-for-sale securities
 
$
1,352,029
   
$
2,982
   
$
(865
)
 
$
1,354,146
 
Equity securities:
                               
Total equity securities included in other current assets (3)
 
$
11,897
   
$
1,935
   
$
(663
)
 
$
13,169
 
Total equity securities included in deposits and other assets (4)
   
15,615
     
16,707
     
     
32,322
 
Total equity securities
   
27,512
     
18,642
     
(663
)
   
45,491
 
Total available-for-sale and equity securities
 
$
1,379,541
   
$
21,624
   
$
(1,528
)
 
$
1,399,637
 

       
Gross Unrealized
   
Estimated
 
December 31, 2020
 
Cost (1)
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale securities:
                       
Corporate debt securities (2)
 
$
514,182
   
$
2,194
   
$
(41
)
 
$
516,335
 
Debt securities issued by U.S. government agencies
   
94,234
     
354
     
(2
)
   
94,586
 
Debt securities issued by the U.S. Treasury (2)
   
307,576
     
233
     
(9
)
   
307,800
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
104,271
     
196
     
(12
)
   
104,455
 
Other municipal debt securities
   
5,191
     
     
(7
)
   
5,184
 
Total securities with a maturity of one year or less
   
1,025,454
     
2,977
     
(71
)
   
1,028,360
 
Corporate debt securities
   
325,079
     
4,941
     
(40
)
   
329,980
 
Debt securities issued by U.S. government agencies
   
80,099
     
185
     
(9
)
   
80,275
 
Debt securities issued by the U.S. Treasury
   
50,318
     
383
     
(4
)
   
50,697
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
31,779
     
91
     
(16
)
   
31,854
 
Other municipal debt securities
   
1,041
     
     
     
1,041
 
Total securities with a maturity of more than one year
   
488,316
     
5,600
     
(69
)
   
493,847
 
Total available-for-sale securities
 
$
1,513,770
   
$
8,577
   
$
(140
)
 
$
1,522,207
 
Equity securities:
                               
Total equity securities included in other current assets (3)
 
$
4,712
   
$
   
$
(2,681
)
 
$
2,031
 
Total equity securities included in deposits and other assets (4)
   
15,062
     
15,938
     
     
31,000
 
Total equity securities
   
19,774
     
15,938
     
(2,681
)
   
33,031
 
Total available-for-sale and equity securities
 
$
1,533,544
   
$
24,515
   
$
(2,821
)
 
$
1,555,238
 

(1)
We hold our available-for-sale securities at amortized cost.

(2)
Includes investments classified as cash equivalents on our condensed consolidated balance sheet.

(3)
Our equity securities included in other current assets consisted of our investments in two publicly traded companies, ProQR and Bicycle, which we classify as Level 1 and Level 3 investments, respectively. We recognize publicly traded equity securities at fair value. In the nine months ended September 30, 2021, we recognized a $1.9 million unrealized gain and a $0.7 million unrealized loss on our condensed consolidated statement of operations related to our investments in Bicycle and ProQR, respectively. In the nine months ended September 30, 2020, our equity securities included in other current assets only consisted of ProQR.

(4)
Our equity securities included in deposits and other assets consisted of our investments in privately held companies. We recognize our private company equity securities at cost minus impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

23


The following is a summary of our investments we consider to be temporarily impaired at September 30, 2021 (in thousands, except for number of investments). All of these investments have less than 12 months of temporary impairment. We believe that the decline in value of these securities is temporary and is primarily related to the change in market interest rates since purchase. We believe it is more likely than not that we will be able to hold our debt securities to maturity. Therefore, we anticipate full recovery of our debt securities’ amortized cost basis at maturity.

 
Number of
Investments
   
Estimated
Fair Value
   
Unrealized
Losses
 
Corporate debt securities
   
158
   
$
334,828
   
$
(525
)
Debt securities issued by U.S. government agencies
   
13
     
103,460
     
(127
)
Debt securities issued by the U.S. Treasury
   
10
     
75,009
     
(90
)
Debt securities issued by states of the U.S. and political subdivisions of the states
   
432
     
123,489
     
(95
)
Other municipal debt securities
   
3
     
11,168
     
(28
)
Total temporarily impaired securities
   
616
   
$
647,954
   
$
(865
)

4.  Fair Value Measurements


We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities and our investment in equity securities in publicly held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. We classify most of our securities as Level 2. We obtain the fair value of our Level 2 investments from our custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by understanding the pricing model used by the custodian banks or professional pricing service provider and comparing that fair value to the fair value based on observable market prices.


The following tables present the major security types we held at September 30, 2021 and December 31, 2020 that we regularly measure and carry at fair value. As of September 30, 2021, our Bicycle investment was subject to trading restrictions that extend to the third quarter of 2022; as a result, we included a lack of marketability discount in valuing this investment, which is a Level 3 input. As of December 31, 2020, we did not have any investments that we valued using Level 3 inputs. The following tables segregate each security type by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities’ fair value (in thousands):

 
At
September 30, 2021
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable Inputs
(Level 3)
 
Cash equivalents (1)
 
$
545,339
   
$
545,339
   
$
   
$
 
Corporate debt securities (2)
   
816,074
     
     
816,074
     
 
Debt securities issued by U.S. government agencies (2)
   
156,628
     
     
156,628
     
 
Debt securities issued by the U.S. Treasury (2)
   
187,931
     
187,931
     
     
 
Debt securities issued by states of the U.S. and political subdivisions of the states
   
182,344
     
     
182,344
     
 
Other municipal debt securities (2)
   
11,169
     
     
11,169
     
 
Investment in Bicycle Therapeutics plc (3)
   
9,120
     
     
     
9,120
 
Investment in ProQR Therapeutics N.V. (3)
   
4,049
     
4,049
     
     
 
Total
 
$
1,912,654
   
$
737,319
   
$
1,166,215
   
$
9,120
 
24


 
At
December 31, 2020
   
Quoted Prices in
Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
 
Cash equivalents (1)
 
$
221,125
   
$
221,125
   
$
 
Corporate debt securities (4)
   
846,315
     
     
846,315
 
Debt securities issued by U.S. government agencies (2)
   
174,861
     
     
174,861
 
Debt securities issued by the U.S. Treasury (5)
   
358,497
     
358,497
     
 
Debt securities issued by states of the U.S. and political subdivisions of the states (2)
   
136,309
     
     
136,309
 
Other municipal debt securities (2)
   
6,225
     
     
6,225
 
Investment in ProQR Therapeutics N.V. (3)
   
2,031