4.	Strategic Collaboration with Novartis

In January 2017, we initiated a strategic collaboration with Novartis for the development and commercialization of AKCEA-APO(a)-L_Rx and AKCEA-APOCIII-L_Rx. Under the Novartis collaboration, Novartis has an exclusive option to further develop and commercialize these drugs. We are responsible for completing a Phase 2 program, conducting an end-of-Phase 2 meeting with the FDA and providing initial quantities of the active pharmaceutical ingredient, or API, for each drug. If Novartis exercises an option for one of these drugs, Novartis will be responsible for all further global development, regulatory and co-commercialization activities and costs for such drug.

We received a $75.0 million upfront payment in the first quarter of 2017, of which we retained $60.0 million and we paid Ionis $15.0 million as a sublicense fee under our license agreement with Ionis. If Novartis exercises its option for a drug, Novartis will pay us a license fee equal to $150.0 million for each drug licensed by Novartis. In addition, for AKCEA-APO(a)-L_Rx, we are eligible to receive up to $600.0 million in milestone payments, including $25.0 million for the achievement of a development milestone, up to $290.0 million for the achievement of regulatory milestones and up to $285.0 million for the achievement of commercialization milestones. In addition, for AKCEA-APOCIII-L_Rx, we are eligible to receive up to $530.0 million in milestone payments, including $25.0 million for the achievement of a development milestone, up to $240.0 million for the achievement of regulatory milestones and up to $265.0 million for the achievement of commercialization milestones. We will earn the next milestone payment of $25.0 million under this collaboration if Novartis advances the Phase 3 study for either drug. We are also eligible to receive tiered royalties in the mid-teens to low twenty percent range on net sales of AKCEA-APO(a)-L_Rx and AKCEA-APOCIII-L_Rx. Novartis will reduce these royalties upon the expiration of certain patents or if a generic competitor negatively impacts the product in a specific country. We will pay 50% of these license fees, milestone payments and royalties to Ionis as a sublicense fee. We plan to co-commercialize any licensed drug commercialized by Novartis in selected markets, under terms and conditions that we plan to negotiate with Novartis in the future, through the specialized sales force we are building to commercialize TEGSEDI^TM (inotersen) and WAYLIVRA^TM (volanesorsen).

At commencement of our strategic collaboration, we identified the following four distinct performance obligations:

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Development activities for AKCEA-APO(a)-L_Rx;

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Development activities for AKCEA-APOCIII-L_Rx;

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API for AKCEA-APO(a)-L_Rx; and

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API for AKCEA-APOCIII-L_Rx.

The development activities and the supply of API are distinct because Novartis or another third party could provide these items without our assistance.

We determined the transaction price for the Novartis collaboration was $108.4 million, comprised of the following:

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$75.0 million from the upfront payment we received;

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$28.4 million for the premium paid by Novartis, which represents the excess of the fair value Ionis received from Novartis' purchase of Ionis' stock at a premium in the first quarter of 2017; and

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$5.0 million for the premium Novartis would have paid to purchase Ionis' stock if we did not complete our IPO within 15 months of the inception of the agreement.

We are recognizing the $75.0 million upfront payment plus the premium paid by Novartis from its purchase of Ionis' stock and the premium associated with Novartis' obligation to purchase Ionis' stock if we did not complete our IPO because we are the party providing the services and API under the collaboration agreement.

None of the development or regulatory milestone payments have been included in the transaction price, as all milestone payments are fully constrained. As part of our evaluation of the constraint, we considered numerous factors, including the fact that achievement of the milestones is outside of our control and contingent upon the success of our clinical trials, Novartis' efforts, and the receipt of regulatory approval. We will re-evaluate the transaction price, including estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

Based on the distinct performance obligations under the Novartis collaboration, we allocated the $108.4 million transaction price based on relative stand-alone selling prices of each of our performance obligations as follows:

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$64.0 million for development services for AKCEA-APO(a)-L_Rx;

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$40.1 million for development services for AKCEA-APOCIII-L_Rx;

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$1.5 million for the delivery of AKCEA-APO(a)-L_Rx API; and

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$2.8 million for the delivery of AKCEA-APOCIII-L_Rx API.

We are recognizing revenue related to each of our performance obligations as follows:

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We will satisfy the development services performance obligation for AKCEA-APO(a)-L_Rx as the research and development services are performed. We expect a significant portion of the research and development services to be completed by December 2018 with the remainder by the end of March 2019. We recognize revenue related to research and development services performed using an input method by calculating costs incurred at each period end relative to total costs expected to be incurred;

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We will satisfy the development services performance obligation for AKCEA-APOCIII-L_Rx as the research and development services are performed. We expect a significant portion of the research and development services to be completed by June 2019 with the remainder by the end of December 2019. We recognize revenue related to research and development services performed using an input method by calculating costs incurred at each period end relative to total costs expected to be incurred;

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We recognized the amount attributed to the AKCEA-APO(a)-L_Rx API supply when we delivered API to Novartis in 2017; and

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We recognized the amount attributed to the AKCEA-APOCIII-L_Rx API supply when we delivered API to Novartis in May 2018.

Additionally, we and Ionis entered into a stock purchase agreement, or SPA, with Novartis. Under the SPA, in July 2017, Novartis purchased $50.0 million of our common stock in a separate private placement concurrent with the completion of our IPO at a price per share equal to the IPO price. Our IPO is discussed in Note 9, Initial Public Offering.

During the three and six months ended June 30, 2018, we earned revenue of $18.3 million and $35.4 million from our strategic collaboration with Novartis, representing 100% of our revenue. In comparison, we earned revenue of $5.7 million and $11.8 million for the same periods in 2017 (as revised). During the three and six months ended June 30, 2018, we recognized $12.6 million and $32.9 million of revenue from amounts that were in our beginning deferred revenue balance. Our consolidated balance sheet at June 30, 2018 and December 31, 2017 (as revised) included deferred revenue of $41.6 million and $70.7 million, respectively, related to our strategic collaboration with Novartis.