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Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2020
Significant Accounting Policies [Abstract] |
Significant Accounting Policies | 2. Significant Accounting Policies Revenue Recognition Our Revenue Sources We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue. In the instances in which we have received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our condensed consolidated balance sheet. Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue We earn commercial revenue primarily in the form of royalty payments on net sales of SPINRAZA. We will also recognize as commercial revenue sales milestone payments and royalties we earn in the future under our partnerships. Commercial Revenue: Product sales, net We added product sales from TEGSEDI to our commercial revenue in the fourth quarter of 2018 and we added product sales from WAYLIVRA to our commercial revenue in the third quarter of 2019. In the U.S., we distribute TEGSEDI through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to TEGSEDI. The 3PL is our sole customer in the U.S. The 3PL then distributes TEGSEDI to a specialty pharmacy and a specialty distributor, which we collectively refer to as wholesalers, who then distribute TEGSEDI to health care providers and patients. In Europe, we sell TEGSEDI and WAYLIVRA to hospitals and pharmacies using 3PLs as distributors. Research and development revenue under collaborative agreements We often enter into collaboration agreements to license and sell our technology on an exclusive or non-exclusive basis. Our collaboration agreements typically contain multiple elements, or performance obligations, including technology licenses or options to obtain technology licenses, research and development, or R&D, services, and manufacturing services. In Note 6, Collaborative Arrangements and Licensing Agreements, we have included our collaborations with substantive changes during the first nine months of 2020 from those included in Note 6 of our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. Steps to Recognize Revenue We use a five-step process to determine the amount of revenue we should recognize and when we should recognize it. The five-step process is as follows:
| 1. | Identify the contract
First, we determine if we have a contract with our partner, including confirming that we have met each of the following criteria:
| ● | We and our partner approved the contract and we are both committed to perform our obligations;
| ● | We have identified our rights, our partner’s rights and the payment terms;
| ● | We have concluded that the contract has commercial substance, meaning that the risk, timing, or amount of our future cash flows is expected to change as a result of the contract; and
| ● | We believe collectability of the consideration is probable.
| 2. | Identify the performance obligations
We next identify our performance obligations, which represent the distinct goods and services we are required to provide under the contract. We typically have only one performance obligation at the inception of a contract, which is to perform R&D services. Often we enter into a collaboration agreement in which we provide our partner with an option to license a medicine in the future. We may also provide our partner with an option to request that we provide additional goods or services in the future, such as active pharmaceutical ingredient, or API. We evaluate whether these options are material rights at the inception of the agreement. If we determine an option is a material right, we will consider the option a separate performance obligation. Historically, we have concluded that the options we grant to license a medicine in the future or to provide additional goods and services as requested by our partner are not material rights because these items are contingent upon future events that may not occur. When a partner exercises its option to license a medicine or requests additional goods or services, then we identify a new performance obligation for that item. In some cases, we deliver a license at the start of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation.
| 3. | Determine the transaction price
We then determine the transaction price by reviewing the amount of consideration we are eligible to earn under the collaboration agreement, including any variable consideration. Under our collaboration agreements, consideration typically includes fixed consideration in the form of an upfront payment and variable consideration in the form of potential milestone payments, license fees and royalties. At the start of an agreement, our transaction price usually consists of only the upfront payment. We do not typically include any payments we may receive in the future in our initial transaction price because the payments are not probable and are contingent on certain future events. We reassess the total transaction price at each reporting period to determine if we should include additional payments in the transaction price. Milestone payments are our most common type of variable consideration. We recognize milestone payments using the most likely amount method because we will either receive the milestone payment or we will not, which makes the potential milestone payment a binary event. The most likely amount method requires us to determine the likelihood of earning the milestone payment. We include a milestone payment in the transaction price once it is probable we will achieve the milestone event. Most often, we do not consider our milestone payments probable until we or our partner achieve the milestone event because the majority of our milestone payments are contingent upon events that are not within our control and are usually based on scientific progress. For example, in the third quarter of 2020, we earned $18 million in milestone payments from Biogen when Biogen initiated a Phase 1/2 trial for ION464, our medicine in development targeting alpha-synuclein to treat patients with multiple system atrophy. We did not consider the milestone payments probable until Biogen achieved the milestone events because advancing ION464 was contingent and was not within our control. We recognized the milestone payments in full in the period the milestone events were achieved because we did not have any remaining performance obligations related to the milestone payments.
| 4. | Allocate the transaction price
Next, we allocate the transaction price to each of our performance obligations. When we have to allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or services on a stand-alone basis. We then allocate the transaction price to each performance obligation based on the relative stand-alone selling price. We do not reallocate the transaction price after the start of an agreement to reflect subsequent changes in stand-alone selling prices. We may engage a third party, independent valuation specialist to assist us with determining a stand-alone selling price for collaborations in which we deliver a license at the start of an agreement. We estimate the stand-alone selling price of these licenses using valuation methodologies, such as the relief from royalty method. Under this method, we estimate the amount of income, net of taxes, for the license. We then discount the projected income to present value. The significant inputs we use to determine the projected income of a license could include:
| ● | Estimated future product sales;
| ● | Estimated royalties we may receive from future product sales;
| ● | Estimated contractual milestone payments we may receive;
| ● | Expenses we expect to incur;
| ● | Income taxes; and
| ● | A discount rate.
We typically estimate the selling price of R&D services by using our internal estimates of the cost to perform the specific services. The significant inputs we use to determine the selling price of our R&D services include:
| ● | The number of internal hours we estimate we will spend performing these services;
| ● | The estimated cost of work we will perform;
| ● | The estimated cost of work that we will contract with third parties to perform; and
| ● | The estimated cost of API we will use.
For purposes of determining the stand-alone selling price of the R&D services we perform and the API we will deliver, accounting guidance requires us to include a markup for a reasonable profit margin.
| 5. | Recognize revenue
We recognize revenue in one of two ways, over time or at a point in time. We recognize revenue over time when we are executing on our performance obligation over time and our partner receives benefit over time. For example, we recognize revenue over time when we provide R&D services. We recognize revenue at a point in time when our partner receives full use of an item at a specific point in time. For example, we recognize revenue at a point in time when we deliver a license or API to a partner. For R&D services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time we estimate it will take us to complete the activities, or costs we incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods. For example, in the third quarter of 2019, we updated our estimate of the total effort we expected to expend to satisfy our performance obligation under our 2013 Strategic Neurology collaboration with Biogen. As of September 30, 2019, we had completed a significant portion of the research and development services. In this example, we expected to complete the remainder of our services in 2020. As a result of our change in estimate, in the third quarter of 2019, we recorded a cumulative catch up adjustment of $16.5 million to decrease revenue. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the cumulative catch up adjustment we made in 2019. The following are examples of when we typically recognize revenue based on the types of payments we receive. Commercial Revenue: SPINRAZA royalties and Licensing and other royalty revenue We recognize royalty revenue, including royalties from SPINRAZA sales, in the period in which the counterparty sells the related product and recognizes the related revenue, which in certain cases may require us to estimate our royalty revenue. Commercial Revenue: Product sales, net We recognize product sales in the period when our customer obtains control of our products, which occurs at a point in time upon transfer of title to the customer. We classify payments to customers or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative, or SG&A, expenses in our condensed consolidated statements of operations. Otherwise, payments to customers or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below. We exclude from revenues taxes collected from customers relating to product sales and remitted to governmental authorities. Reserves for Product sales We record product sales at our net sales price, or transaction price. We include in our transaction price estimated reserves for discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that we offer within contracts between us and our customers, wholesalers, health care providers and other indirect customers. We estimate our reserves using the amounts we have earned or what we can claim on the associated sales. We classify our reserves as a reduction of accounts receivable when we are not required to make a payment or as a current liability when we are required to make a payment. In certain cases, our estimates include a range of possible outcomes that are probability weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, our reserves reflect our best estimates under the terms of our respective contracts. When calculating our reserves and related product sales, we only recognize amounts to the extent that we consider it probable that we would not have to reverse in a future period a significant amount of the cumulative sales we previously recognized. The actual amounts we receive may ultimately differ from our reserve estimates. If actual amounts in the future vary from our estimates, we will adjust these estimates, which would affect our net product sales in the respective period. The following are the components of variable consideration related to product sales: Chargebacks: In the U.S., we estimate obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to our U.S. customer. Our U.S. customer charges us for the difference between what it pays for the product and the selling price to the qualified healthcare providers. We also estimate the amount of chargebacks related to our estimated product remaining in the distribution channel at the end of the reporting period that we expect our customer to sell to healthcare providers in future periods. We record these reserves as a reduction to contracts receivables on our condensed consolidated balance sheet. Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S. and we record reserves for government rebates based on statutory discount rates and estimated utilization. We estimate Medicaid and Medicare rebates based on a range of possible outcomes that are probability weighted for the estimated payer mix. We record these reserves as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments. Managed care rebates: We are subject to rebates in connection with agreements with certain contracted commercial payers. We record these rebates as an accrual on our condensed consolidated balance sheet in the same period we recognize the related revenue. We estimate our managed care rebates based on our estimated payer mix and the applicable contractual rebate rate. Trade discounts: We provide customary invoice discounts on product sales to our U.S. customer for prompt payment. We record this discount as a reduction of product sales in the period in which we recognize the related product revenue. Distribution services: We receive and pay for various distribution services from our U.S. and European customers and wholesalers in the U.S-. We classify the costs for services we receive that are either not distinct from the sale of the product or for which we cannot reasonably estimate the fair value as a reduction of product sales. To the extent that the services we receive are distinct from the sale of the product, we classify the costs for such services as SG&A expenses. Product returns: Our U.S. customer has return rights and the wholesalers have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that our customer may return. We record our return estimate as an accrued refund liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Based on our distribution model for product sales, contractual inventory limits with our customer and wholesalers and the price of the product, we have had minimal returns to date and we believe we will continue to have minimal returns in the U.S. Our European customers generally only take title to the product after they receive an order and therefore they do not maintain excess inventory levels of our products. Accordingly, we have limited return risk in Europe and we do not estimate returns in Europe. Other incentives: In the U.S., we estimate reserves for other incentives including co-payment assistance we provide to patients with commercial insurance who have coverage and reside in states that allow co-payment assistance. We record a reserve for the amount we estimate we will pay for co-payment assistance. We base our reserve on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. We record our other incentive reserve estimates as an accrued liability on our condensed consolidated balance sheet with a corresponding offset reducing our product sales in the same period we recognize the related sale. Research and development revenue under collaboration agreements: Upfront payments When we enter into a collaboration agreement with an upfront payment, we typically record the entire upfront payment as deferred revenue if our only performance obligation is for R&D services we will provide in the future. We amortize the upfront payment into revenue as we perform the R&D services. For example, under our collaboration agreement with Roche to develop IONIS-FB-LRx for the treatment of complement-mediated diseases, we received a $75 million upfront payment in the fourth quarter of 2018. We allocated the upfront payment to our single performance obligation, R&D services. We are amortizing the $75 million upfront payment using an input method over the estimated period of time we are providing R&D services. Milestone payments We are required to include additional consideration in the transaction price when it is probable. We typically include milestone payments for R&D services in the transaction price when they are achieved. We include these milestone payments when they are achieved because there is considerable uncertainty in the research and development processes that trigger these payments. Similarly, we include approval milestone payments in the transaction price once the medicine is approved by the applicable regulatory agency. We will recognize sales-based milestone payments in the period in which we achieve the milestone under the sales-based royalty exception allowed under accounting rules. We recognize milestone payments that relate to an ongoing performance obligation over our period of performance. For example, in the third quarter of 2020, we achieved a $12 million milestone payment from Biogen when we advanced IONIS-MAPTRx under our 2012 neurology collaboration. We added this payment to the transaction price and allocated it to our R&D services performance obligation for IONIS-MAPTRx. We are recognizing revenue related to this milestone payment over our estimated period of performance. Conversely, we recognize in full those milestone payments that we earn based on our partners’ activities when our partner achieves the milestone event and we do not have a performance obligation. For example, in the third quarter of 2020, we recognized $18 million in milestone payments when Biogen initiated a Phase 1/2 trial for ION464, our medicine in development targeting alpha-synuclein to treat patients with multiple system atrophy. We concluded that the milestone payments were not related to our R&D services performance obligation. Therefore, we recognized the milestone payments in full in the third quarter of 2020. License fees We generally recognize as revenue the total amount we determine to be the relative stand-alone selling price of a license when we deliver the license to our partner. This is because our partner has full use of the license and we do not have any additional performance obligations related to the license after delivery. For example, in the second quarter of 2020, we earned a $13 million license fee from AstraZeneca when AstraZeneca licensed ION736, a medicine in development targeting FOXP3 to treat cancer. Sublicense fees We recognize sublicense fee revenue in the period in which a party, who has already licensed our technology, further licenses the technology to another party because we do not have any performance obligations related to the sublicense. For example, in the second quarter of 2019, we earned a $20 million sublicense fee when Alnylam Pharmaceuticals sublicensed our technology to Regeneron Pharmaceuticals. Amendments to Agreements From time to time we amend our collaboration agreements. When this occurs, we are required to assess the following items to determine the accounting for the amendment:
| 1) | If the additional goods and/or services are distinct from the other performance obligations in the original agreement; and
| 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 IONIS-FXI-LRx, which Bayer licensed. As part of the 2017 amendment, Bayer paid us $75 million. We are also eligible to receive milestone payments and tiered royalties on gross margins of IONIS-FXIRx and IONIS-FXI-LRx. Under the 2017 amendment, we concluded we had a new agreement with three performance obligations. These performance obligations were to deliver the license of IONIS-FXI-LRx, to provide R&D services and to deliver API. We allocated the $75 million transaction price to these performance obligations. Refer to Note 6, Collaborative Arrangements and Licensing Agreements, in our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of the Bayer collaboration. 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. 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, 2020 and 2019, we recognized $22.5 million and $30.3 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. During the nine months ended September 30, 2020 and 2019, we recognized $84.1 million and $103.5 million of revenue from amounts that were in our beginning deferred revenue balance for each respective period. For further discussion, refer to our revenue recognition policy above. Cost of Products Sold Our cost of products sold includes manufacturing costs, transportation and freight costs and indirect overhead costs associated with the manufacturing and distribution of our products. We also may include certain period costs related to manufacturing services and inventory adjustments in cost of products sold. Prior to obtaining regulatory approval of TEGSEDI in July 2018 and WAYLIVRA in May 2019, we expensed as research and development expenses a significant portion of the costs we incurred to produce the initial commercial launch supply for each medicine. Noncontrolling Interest in Akcea Therapeutics, Inc. Prior to Akcea’s IPO in July 2017, we owned 100 percent of Akcea. At September 30, 2020, our ownership of Akcea was approximately 76 percent. We reflect changes in our ownership percentage in our financial statements as an adjustment to noncontrolling interest in the period the change occurs. In October 2020, we completed the Akcea Acquisition. We will reflect the impact of the Akcea Acquisition in our financial statements in the fourth quarter of 2020. Prior to the Akcea Acquisition, the shares third parties owned represented an interest in Akcea’s equity that we did not control. However, as we maintained overall control of Akcea through our voting interest, we reflected the assets, liabilities and results of operations of Akcea in our condensed consolidated financial statements. Through September 30, 2020 and through the closing of the Akcea Acquisition, we reflected the noncontrolling interest attributable to other owners of Akcea’s common stock on a separate line on our statement of operations and a separate line within stockholders’ equity in our condensed consolidated balance sheet. In addition, through September 30, 2020 and through the closing of the Akcea Acquisition, we recorded a noncontrolling interest adjustment to account for the stock options Akcea granted, which if exercised, would have diluted our ownership in Akcea. This adjustment was a reclassification within stockholders’ equity from additional paid-in capital to noncontrolling interest in Akcea equal to the amount of stock-based compensation expense Akcea had recognized. Cash, Cash Equivalents and Investments We consider all liquid investments with maturities of three months or less when we purchase them to be cash equivalents. Our short-term investments have initial maturities of greater than three months from date of purchase. We classify our short-term debt investments as “available-for-sale” and carry them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. We record unrealized gains and losses on debt securities as a separate component of comprehensive income (loss) and include net realized gains and losses in gain (loss) on investments. We use the specific identification method to determine the cost of securities sold. We also have equity investments of less than 20 percent ownership in publicly and privately held biotechnology companies that we received as part of a technology license or partner agreement. At September 30, 2020, we held equity investments in two publicly held companies, ProQR Therapeutics N.V., or ProQR, and Antisense Therapeutics Limited, or ATL. We also held equity investments in five privately held companies, Atlantic Pharmaceuticals Limited, Dynacure SAS, Empirico, Inc., 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 quarter of 2020, we revalued our investments in two privately held companies, Dynacure and Ribo because the companies sold additional equity securities that were similar to those we own. These observable price changes resulted in us recognizing a $6.3 million gain on our investment in Dynacure and a $3 million gain on our investment in Ribo in our condensed consolidated statement of operations during the second quarter of 2020. Inventory Valuation We reflect our inventory on our condensed consolidated balance sheet at the lower of cost or market value under the first-in, first-out method, or FIFO. We capitalize the costs of raw materials that we purchase for use in producing our medicines because until we use these raw materials, they have alternative future uses, 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. We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At September 30, 2020, our physical inventory for TEGSEDI and WAYLIVRA included API that we produced prior to when we obtained regulatory approval. As such, this API has no cost basis as we had previously expensed the costs as R&D expenses. We review our inventory periodically and reduce the carrying value of items we consider to be slow moving or obsolete to their estimated net realizable value based on forecasted demand compared to quantities on hand. We consider several factors in estimating the net realizable value, including shelf life of our inventory, alternative uses for our medicines in development and historical write-offs. We did not record any material inventory write-offs for the nine months ended September 30, 2020. Total inventory was $22.2 million and $18.2 million as of September 30, 2020 and December 31, 2019, respectively, and consisted of the following (in thousands):
|  | September 30, 2020 |  |  | December 31, 2019 |
Raw materials: |  |  |  |  |  |
Raw materials- clinical |  | $ | 9,294 |  |  | $ | 9,363 |
Raw materials- commercial |  |  | 8,582 |  |  |  | 6,520 |
Total raw materials |  |  | 17,876 |  |  |  | 15,883 |
Work in process |  |  | 3,346 |  |  |  | 2,039 |
Finished goods |  |  | 950 |  |  |  | 258 |
Total inventory |  | $ | 22,172 |  |  | $ | 18,180 |
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 determined the lease term at the inception of the 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. 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) or as of the lease inception 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. 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 expected to be realized. 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. Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Basic and Diluted Net Income (Loss) Per Share Basic net income (loss) per share We compute basic net income (loss) per share by dividing the total net income (loss) attributable to our common stockholders by our weighted-average number of common shares outstanding during the period. The calculation of total net income (loss) attributable to our common stockholders for the three and nine months ended September 30, 2020 and 2019 considered our net income (loss) for Ionis on a stand-alone basis plus our share of Akcea’s net income (loss) for the period. To calculate the portion of Akcea’s net loss attributable to our ownership, we multiplied Akcea’s net income (loss) per share by the weighted average shares we owned in Akcea during the period. As a result of this calculation, our total net income (loss) available to Ionis common stockholders for the calculation of net income (loss) per share is different than net income (loss) attributable to Ionis Pharmaceuticals, Inc. common stockholders in the condensed consolidated statements of operations. Our basic net loss per share for the three months ended September 30, 2020, was calculated 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 |
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 |  |  |  |  |  |  |  |  |  |  | 6,774 |
Net loss available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | (31,048 | )
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 139,708 |
Basic net loss per share |  |  |  |  |  |  |  |  |  | $ | (0.22 | )
Our basic net loss per share for the nine months ended September 30, 2020, was calculated 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 |
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 loss |  |  |  |  |  |  |  |  |  |  | (3,049 | )
Net loss available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | (111,225 | )
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 139,497 |
Basic net loss per share |  |  |  |  |  |  |  |  |  | $ | (0.80 | )
Our basic net income per share for the three months ended September 30, 2019, was calculated as follows (in thousands, except per share amounts):
Three months ended September 30, 2019 |  | Weighted Average Shares Owned in Akcea |  |  | Akcea’s Net Income Per Share |  |  | Basic Net Income Per Share Calculation |
Ionis’ portion of Akcea’s net loss |  |  | 70,221 |  |  | $ | (0.34 | ) |  | $ | (23,772 | )
Akcea’s net loss attributable to our ownership |  |  |  |  |  |  |  |  |  | $ | (23,772 | )
Ionis’ stand-alone net income |  |  |  |  |  |  |  |  |  |  | 49,930 |
Net income available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | 26,158 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 140,551 |
Basic net income per share |  |  |  |  |  |  |  |  |  | $ | 0.19 |
Our basic net income per share for the nine months ended September 30, 2019, was calculated as follows (in thousands, except per share amounts):
Nine months ended September 30, 2019 |  | Weighted Average Shares Owned in Akcea |  |  | Akcea’s Net Loss Per Share |  |  | Basic Net Income Per Share Calculation |
Ionis’ portion of Akcea’s net loss |  |  | 69,681 |  |  | $ | (0.40 | ) |  | $ | (28,174 | )
Akcea’s net loss attributable to our ownership |  |  |  |  |  |  |  |  |  | $ | (28,174 | )
Ionis’ stand-alone net income |  |  |  |  |  |  |  |  |  |  | 140,938 |
Net income available to Ionis common stockholders |  |  |  |  |  |  |  |  |  | $ | 112,764 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  | 139,800 |
Basic net income per share |  |  |  |  |  |  |  |  |  | $ | 0.81 |
Diluted net income (loss) per share For the three and nine months ended September 30, 2020, we incurred a net loss; therefore, we did not include dilutive common equivalent shares in the computation of diluted net loss per share because the effect would have been anti-dilutive. Common stock from the following would have had an anti-dilutive effect on net loss per share:
| ● | 0.125 percent convertible senior notes;
| ● | 1 percent convertible senior notes;
| ● | Dilutive stock options;
| ● | Unvested restricted stock units; and
| ● | Employee Stock Purchase Plan, or ESPP.
For the three and nine months ended September 30, 2019, we had net income available to Ionis common stockholders. As a result, we computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period. We calculated our diluted net income per share for the three months ended September 30, 2019 as follows (in thousands except per share amounts):
Three Months Ended September 30, 2019 |  | Income (Numerator) |  |  | Shares (Denominator) |  |  | Per-Share Amount |
Net income available to Ionis common stockholders |  | $ | 26,158 |  |  |  | 140,551 |  |  | $ | 0.19 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Shares issuable upon exercise of stock options |  |  | — |  |  |  | 1,993 |  |  |  |  |
Shares issuable upon restricted stock award issuance |  |  | — |  |  |  | 844 |  |  |  |  |
Shares issuable related to our Employee Stock Purchase Plan |  |  | — |  |  |  | 20 |  |  |  |  |
Income available to Ionis common stockholders |  | $ | 26,158 |  |  |  | 143,408 |  |  | $ | 0.18 |
We calculated our diluted net income per share for the nine months ended September 30, 2019 as follows (in thousands except per share amounts):
Nine months ended September 30, 2019 |  | Income (Numerator) |  |  | Shares (Denominator) |  |  | Per-Share Amount |
Net income available to Ionis common stockholders |  | $ | 112,764 |  |  |  | 139,800 |  |  | $ | 0.81 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Shares issuable upon exercise of stock options |  |  | — |  |  |  | 2,208 |  |  |  |  |
Shares issuable upon restricted stock award issuance |  |  | — |  |  |  | 793 |  |  |  |  |
Shares issuable related to our Employee Stock Purchase Plan |  |  | — |  |  |  | 20 |  |  |  |  |
Income available to Ionis common stockholders |  | $ | 112,764 |  |  |  | 142,821 |  |  | $ | 0.79 |
For the three and nine months ended September 30, 2019, the calculation excluded our 1 percent convertible senior notes, or 1% Notes, because the effect on diluted earnings per share was anti-dilutive. For the three and nine months ended September 30, 2019, we did not have our 0.125 percent convertible senior notes. Convertible Debt At issuance, we accounted for our convertible debt instruments, including our 0.125 percent senior convertible notes, or 0.125% Notes, and 1% Notes that may be settled in cash upon conversion (including partial cash settlement) by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate on the date the notes were issued. In reviewing debt issuances, we were not able to identify any comparable companies that issued non-convertible debt instruments at the time of the issuance of the convertible notes. Therefore, we estimated the fair value of the liability component of our notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. We assigned 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 our debt at a discount. We are amortizing our debt issuance costs and debt discount over the life of the convertible notes as additional non-cash interest expense utilizing the effective interest method. In August 2020, the FASB issued guidance simplifying the accounting for convertible debt instruments. See the section titled “Impact of Recently Issued Accounting Standards” below for details. Segment Information Through September 30, 2020, we had two operating segments, our Ionis Core segment and Akcea Therapeutics. Akcea is focused on developing and commercializing medicines to treat patients with serious and rare diseases. We provide segment financial information and results for our Ionis Core segment and our Akcea Therapeutics segment based on the segregation of revenues and expenses that our chief decision maker reviewed to assess operating performance and to make operating decisions. We allocated a portion of Ionis’ development, R&D support and general and administrative expenses to Akcea for work Ionis performed on behalf of Akcea and we billed Akcea for these expenses. Stock-based Compensation Expense We measure stock-based compensation expense for equity-classified awards, principally related to stock options, restricted stock units, or RSUs, 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. The expected term of stock options granted represents the period of time that we expect them to be outstanding. We estimate the expected term of options granted based on historical exercise patterns. For the nine months ended September 30, 2020 and 2019, we used the following weighted-average assumptions in our Black-Scholes calculations: Ionis Employee Stock Options:
|  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |
Risk-free interest rate |  |  | 1.5 | % |  |  | 2.3 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Volatility |  |  | 58.8 | % |  |  | 60.3 | %
Expected life |  | 4.7 years |  |  | 4.6 years |
Ionis Board of Director Stock Options:
|  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |
Risk-free interest rate |  |  | 0.5 | % |  |  | 1.9 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Volatility |  |  | 57.6 | % |  |  | 60.7 | %
Expected life |  | 6.7 years |  |  | 6.6 years |
Ionis ESPP:
|  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |
Risk-free interest rate |  |  | 0.8 | % |  |  | 2.4 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Volatility |  |  | 47.9 | % |  |  | 45.6 | %
Expected life |  | 6 months |  |  | 6 months |
Ionis RSU’s: The fair value of RSUs is based on the market price of our common stock on the date of grant. RSUs vest annually over a four-year period. RSUs granted after June 2020 to our board of directors vest annually. The weighted-average grant date fair value of RSUs granted to employees and our board of directors for the nine months ended September 30, 2020 was $61.72 and $60.20 per share, respectively. Akcea’s Equity Plan In addition to our stock plans, Akcea had its own stock plan under which it granted stock options and RSUs and under which it derived its stock-based compensation expense. In October 2020, as part of the Akcea Acquisition, Akcea’s outstanding equity awards vested under Akcea’s 2015 Equity Incentive Plan. As a result, in the fourth quarter of 2020, Akcea will recognize all unrecognized stock-based compensation under its 2015 Equity Incentive Plan. In conjunction with the Akcea Acquisition, each of Akcea’s outstanding stock options with an exercise price less than $18.15 per option and each Akcea RSU, in each case whether or not vested, were cancelled. The holder received $18.15 (less any applicable exercise price in the case of options) for each share subject to such award. Each option to purchase Akcea common stock with an exercise price greater than or equal to $18.15 was cancelled with no consideration paid. We will account for all cash payments made for the cancellation of Akcea’s outstanding equity awards as part of the transaction costs recorded to stockholders’ equity in the fourth quarter of 2020. In connection with the Akcea Acquisition, we submitted a listing of additional shares notification form to Nasdaq for Ionis to assume the remaining portion of Akcea’s available equity share pool of approximately 2.8 million shares. This will enable us to make equity grants using these shares for legacy Akcea employees. We submitted this notification pursuant to the exception provided under Rule 5635(c) of The Nasdaq Stock Market LLC Rules (and IM-5635-1 thereunder) that permits an acquiring corporation to use shares available under certain plans acquired in acquisitions and mergers for certain post-transaction grants without further stockholder approval. The following were the weighted-average Black-Scholes assumptions Akcea used under its plan for the nine months ended September 30, 2020 and 2019: Akcea Employee Stock Options:
|  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |
Risk-free interest rate |  |  | 1.1 | % |  |  | 2.3 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Volatility |  |  | 75.0 | % |  |  | 75.6 | %
Expected life |  | 6.1 years |  |  | 6.1 years |
Akcea Board of Directors Stock Options:
|  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |
Risk-free interest rate |  |  | 0.8 | % |  |  | 1.8 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Volatility |  |  | 75.3 | % |  |  | 73.8 | %
Expected life |  | 5.7 years |  |  | 6.3 years |
Akcea ESPP:
|  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |
Risk-free interest rate |  |  | 1.0 | % |  |  | 2.4 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Volatility |  |  | 71.9 | % |  |  | 60.0 | %
Expected life |  | 6 months |  |  | 6 months |
Akcea RSU’s: The fair value of RSUs was based on the market price of Akcea’s common stock on the date of grant. Akcea granted RSUs with various vesting terms between six months and four years. The weighted-average grant date fair value of RSUs granted to employees for the nine months ended September 30, 2020 was $15.57 per share. The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 (in thousands). Our non-cash stock-based compensation expense included $13.8 million and $37.2 million of stock-based compensation expense for Akcea employees for the three and nine months ended September 30, 2020, respectively, compared to $(3.5) million and $29.5 million for the same periods in 2019. In the third quarter of 2019, three Akcea executive officers terminated their employment and entered into separation agreements with Akcea. As a result, in the third quarter of 2019, Akcea reversed $19.1 million of stock-based compensation expense it had previously recognized related to the executive officers’ stock options and RSUs that were no longer going to vest.
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Cost of products sold |  | $ | 315 |  |  | $ | 127 |  |  | $ | 902 |  |  | $ | 383 |
Research, development and patent |  |  | 25,359 |  |  |  | 23,744 |  |  |  | 76,931 |  |  |  | 71,935 |
Selling, general and administrative |  |  | 20,171 |  |  |  | 255 |  |  |  | 57,244 |  |  |  | 39,246 |
Total non-cash stock-based compensation expense |  | $ | 45,845 |  |  | $ | 24,126 |  |  | $ | 135,077 |  |  | $ | 111,564 |
As of September 30, 2020, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options and RSUs was $118.2 million and $87.3 million, respectively, of which $59.7 million was related to Akcea’s 2015 Equity Incentive Plan. 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 Ionis’ non-vested stock options and RSUs over a weighted average amortization period of 1.2 years and 1.5 years, respectively. We will recognize the remaining unrecognized expense of $59.7 million for Akcea’s equity awards in the fourth quarter of 2020 in conjunction with the Akcea Acquisition. Amendments to Equity Plan In June 2020, after receiving approval from our stockholders, we amended our 2002 Non-Employee Directors’ Stock Option Plan. The amendments included:
| ● | An increase to the total number of shares reserved for issuance under the plan from 2 million to 2.8 million shares;
| ● | A reduction to the amount of the automatic awards under the plan;
| ● | A revision to the vesting schedule of awards; and
| ● | An extension of the term of the plan.
Share Repurchase Program In September 2019, our board of directors approved an initial share repurchase program of up to $125 million of our common stock. In 2019, we repurchased 535,000 shares for $34.4 million. In the first quarter of 2020, we repurchased an additional 1.5 million shares for $90.6 million. Impact of Recently Issued Accounting Standards In June 2016, the FASB issued guidance that changes the measurement of credit losses for most financial assets and certain other instruments. If we have credit losses, this updated guidance requires us to record allowances for these instruments under a new expected credit loss model. This model requires us to estimate the expected credit loss of an instrument over its lifetime, which represents the portion of the amortized cost basis we do not expect to collect. The new guidance requires us to remeasure our allowance in each reporting period we have credit losses. We adopted this new guidance on January 1, 2020. This guidance did not have an impact on our condensed consolidated financial statements. In August 2018, the FASB issued clarifying guidance on how to account for implementation costs related to cloud-servicing arrangements. The guidance states that if these fees qualify to be capitalized and amortized over the service period, they need to be expensed in the same line item as the service expense and recognized in the same balance sheet category. The update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this guidance on January 1, 2020 on a prospective basis. This guidance did not have an impact on our condensed consolidated financial statements. In November 2018, the FASB issued clarifying guidance of the interaction between the collaboration accounting guidance and the new revenue recognition guidance we adopted on January 1, 2018 (Topic 606). Below is the clarifying guidance and how we implemented it (in italics):
| 1) | When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied.
| ● | We are applying all of the associated accounting under Topic 606 when we determine a participant in a collaborative arrangement is a customer.
| 2) | Adds “unit of account” concept to collaboration accounting guidance to align with Topic 606. The “unit of account” concept is used to determine if revenue is recognized or if a contra expense is recognized from consideration received under a collaboration.
| ● | We use the “unit of account” concept when we receive consideration under a collaborative arrangement to determine when we recognize revenue or a contra expense.
| 3) | The clarifying guidance precludes us from recognizing revenue under Topic 606 when we determine a transaction with a collaborative partner is not a customer and is not directly related to the sales to third parties.
| ● | When we conclude a collaboration partner is not a customer and is not directly related to the sales to third parties, we do not recognize revenue for the transaction.
We adopted this new guidance on January 1, 2020. This guidance did not have a significant impact on our condensed consolidated financial statements. In August 2020, the FASB issued guidance which simplifies the accounting for convertible 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 as a result of these changes. Under our current outstanding convertible debt arrangements, we anticipate the following impacts:
| 1) | We will no longer separate our existing convertible debt into debt and equity components. Rather, we will record our convertible debt entirely as a liability on our balance sheet. Additionally, we will no longer recognize a debt discount for the value of the conversion option, instead we will record the face value of the convertible debt at inception;
| 2) | We will record cash interest expense plus amortization of debt issuance costs to interest expense. We will no longer record the amortization of a debt discount to interest expense; and
| 3) | Our EPS calculation will not change under this update. We will continue to use the if-converted method to calculate diluted earnings per share.
This update is effective for our interim and annual periods beginning January 1, 2022, and earlier adoption is permitted as soon as January 1, 2021. We may elect to apply the updated guidance on a retrospective or modified retrospective basis. We plan to adopt this guidance on January 1, 2021 under the full retrospective approach, meaning we will apply the guidance to all periods presented. We are evaluating the impact of the adoption of this standard on our condensed consolidated financial statements.

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