7.	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 terms of the Novartis collaboration, we agreed to complete a Phase 2 program, conduct an end-of-Phase 2 meeting with the FDA, and provide initial quantities of the active pharmaceutical ingredient, or API, for each drug. Novartis was granted the exclusive option to further develop and commercialize each drug and would be responsible for all further global development, regulatory and commercialization activities and costs for each such drug.

In December 2018, we conducted an end-of-Phase 2 meeting with the FDA. In February 2019, Novartis exercised its exclusive option to further develop and commercialize AKCEA-APO(a)-L_Rx. The accounting treatment for this option exercise is discussed in further detail below.

We are responsible for completing a Phase 2 program, conducting an end-of-Phase 2 meeting with the FDA and providing initial quantities of API for AKCEA-APOCIII-L_Rx_. Novartis has an exclusive option to further develop and commercialize this drug. If Novartis exercises its option for this drug, Novartis will be responsible for all further global development, regulatory and co-commercialization activities and costs for this drug.

We received a $75.0 million upfront payment in the first quarter of 2017, of which we retained $60.0 million and paid Ionis $15.0 million as a sublicense fee under our Cardiometabolic License Agreement with Ionis.

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 revenue on 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 with Novartis.

None of the options or development or regulatory milestone payments under this agreement were included in the upfront transaction price determined in January 2017 as all payments were fully constrained at that time. 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 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 completed the development services performance obligation for AKCEA-APO(a)-L_Rxas of June 30, 2019. As such, all revenue allocated to the AKCEA-APO(a)-L_Rxdevelopment services revenue stream was fully recognized as of the end of the second quarter of 2019;

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We are satisfying the development services performance obligation for AKCEA-APOCIII-L_Rx as the research and development services are performed. We expect research and development services to be completed by mid-2020. 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.

On February 22, 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx. We identified a separate performance obligation upon Novartis’ license of AKCEA-APO(a)-L_Rx because the license is distinct from our other performance obligations. Accordingly, we recognized a license fee of $150.0 million in the first quarter of 2019 because Novartis had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after Novartis exercised its option to license AKCEA-APO(a)-L_Rx. Novartis is responsible for conducting and funding all future development, regulatory and commercialization activities for AKCEA-APO(a)-L_Rx. In the first quarter of 2019, we issued 2,837,373 shares of our common stock to Ionis as payment of the $75.0 million sublicense fee due to Ionis related to the option exercised by Novartis. For AKCEA-APO(a)-L_Rx, we are also eligible to receive up to $675.0 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 $360.0 million for the achievement of commercialization milestones. In connection with Novartis’ exercise of its option to exclusively license AKCEA-APO(a)-L_Rx, Akcea and Novartis established a more definitive co-commercialization framework under which we would negotiate the co-commercialization of AKCEA-APO(a)-L_Rx between us and Novartis in selected markets. Included in this framework is an option by which Novartis could solely commercialize AKCEA-APO(a)-L_Rx in exchange for Novartis paying us increased commercial milestone payments based on sales of AKCEA-APO(a)-L_Rx.

In the third quarter of 2019, we delivered additional AKCEA-APO(a)-L_Rx API to Novartis. We identified a separate performance obligation upon the delivery of the API because the delivery is distinct from other performance obligations. Accordingly, we recognized $5.5 million of research and development revenue in the third quarter of 2019 upon receipt of the API supply by Novartis. Novartis has the option to purchase additional API of AKCEA-APO(a)-L_Rxin the future at agreed upon terms and conditions pursuant to the strategic collaboration agreement.

If Novartis exercises its option for AKCEA-APOCIII-L_Rx, Novartis will pay us a license fee equal to $150.0 million and we will owe half of this amount, or $75.0 million, to Ionis as a sublicense fee. If Novartis exercises its option to license 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. If Novartis licenses AKCEA-APOCIII-L_Rx, we may co-commercialize AKCEA-APOCIII-L_Rx through our specialized sales force in selected markets, under terms and conditions that we plan to negotiate with Novartis in the future.

We will earn the next milestone payment of $25.0 million under this collaboration if Novartis reaches a specific level of enrollment related to 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 pay 50% of license fees, milestone payments and royalties under this agreement to Ionis as a sublicense fee.

During the three and nine months ended September 30, 2019, we earned revenue of $8.5 million and $176.3 million, respectively, from our strategic collaboration with Novartis, representing 100% of our research and development and license revenue. In comparison, we earned revenue of $7.2 million and $42.7 million for the same periods in 2018. During the three and nine months ended September 30, 2019, we recognized $2.3 million and $18.0 million of revenue, respectively, from amounts that were in our beginning deferred revenue balance. In comparison, we recognized $6.8 million and $36.5 million for the same periods in 2018, respectively. Our condensed consolidated balance sheet at September 30, 2019 and December 31, 2018 includes deferred revenue of $10.8 million and $28.8 million, respectively, related to our strategic collaboration with Novartis.