Collaborative Arrangements and Licensing Agreements

Traditional Pharmaceutical Alliances and Licensing

Bayer HealthCare

In May 2015, we entered into an exclusive license agreement with Bayer HealthCare to develop and commercialize ISIS-FXI_Rx for the prevention of thrombosis. We are responsible for completing ongoing development activities. Bayer HealthCare is responsible for all other development and commercialization activities for ISIS-FXI_Rx. This transaction is subject to clearances under the Hart-Scott Rodino Antitrust Improvements Act.

Under the terms of the agreement, we are eligible to receive $155 million in near-term payments, including an immediate $100 million payment and a $55 million milestone payment upon advancement of the program following a Phase 2 study in patients with compromised kidney function. Over the term of the agreement, we are eligible to receive up to $375 million in license fees, milestone payments and other payments, including up to $120 million for the achievement of development milestones and up to $110 million for the achievement of commercialization milestones. In addition, we are eligible to receive tiered royalties in the low to high 20 percent range on gross margins of ISIS-FXI_Rx. We will earn the next milestone payment of $55 million upon the advancement of the program following a Phase 2 study of ISIS-FXI_Rxin patients with compromised kidney function.

Our agreement with Bayer HealthCare will continue until the expiration of all payment obligations under the agreement. In addition, the agreement, or any program under the agreement, may terminate early under the following situations:

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Bayer HealthCare may terminate the agreement or any program at any time by providing written notice to us;

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Either we or Bayer HealthCare may terminate the agreement or any program by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement, or the entire agreement if the other party becomes insolvent; and

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If Hart-Scott Rodino clearance is not received by December 31, 2015.

Biogen

We have established four strategic collaborations with Biogen that broaden and expand our severe and rare disease franchise for neurological disorders.

ISIS-SMN_Rx

In January 2012, we entered into a collaboration agreement with Biogen to develop and commercialize ISIS-SMN_Rx for the treatment of SMA. We are currently conducting a Phase 3 study evaluating ISIS-SMN_Rx in infants with SMA and a Phase 3 study evaluating ISIS-SMN_Rx in children with SMA. In addition, we are evaluating ISIS-SMN_Rx in two Phase 2 open-label, multiple-dose, dose-escalation studies, one in children with SMA and one in infants with SMA. Patients from both of the Phase 2 studies continue to have access to ISIS-SMN_Rx through open-label extension dosing. We are responsible for completing the Phase 2 and Phase 3 trials we are currently conducting. If Biogen exercises its option, it will pay us a license fee and will assume all other global development, regulatory and commercialization responsibilities. Biogen has the option to license ISIS-SMN_Rx. Biogen may exercise this option upon completion of and data review of the first successful Phase 2/3 trial or completion of both Phase 2/3 trials. An amendment in December 2014 provided for additional opt-in scenarios, based on the filing or the acceptance of a new drug application or marketing authorization application with the FDA or EMA.

We received an upfront payment of $29 million, which we are amortizing through February 2017. We are also eligible to receive a license fee, milestone payments and royalties up to the mid-teens on any product sales of ISIS-SMN_Rx. In 2014, we and Biogen amended our original agreement to reflect changes made to the clinical development plan for ISIS-SMN_Rx. As a result, we and Biogen agreed to increase the payments that we are eligible to receive under this collaboration by approximately $57 million. Under the terms of the amended agreement, we are eligible to receive up to $327 million in a license fee and payments, including $102 million in substantive milestone and other payments associated with the clinical development of ISIS-SMN_Rx prior to licensing and $150 million in substantive milestone payments if Biogen achieves pre-specified regulatory milestones. In the first quarter of 2015, we earned a $9 million milestone payment for advancing the Phase 3 study of ISIS-SMN_Rx in infants with SMA and we earned a $7 million milestone payment for advancing the open-label extension study of ISIS-SMN_Rx in children with SMA. From inception through March 2015, we have received nearly $110 million in payments for advancing ISIS-SMN_Rx. We will earn the next milestone payment of $8.5 million if we further advance the Phase 3 study in infants with SMA.

ISIS-DMPK-2.5_Rx

In June 2012, we and Biogen entered into a second and separate collaboration agreement to develop and commercialize a novel antisense drug, ISIS-DMPK-2.5_Rx, targeting DMPK for the treatment of myotonic dystrophy type 1, or DM1. We are responsible for global development of the drug through the completion of the first Phase 2 clinical trial. Biogen has the option to license the drug through the completion of the first Phase 2 trial. If Biogen exercises its option, it will assume all other global development, regulatory and commercialization responsibilities. Under the terms of the agreement, we received an upfront payment of $12 million, which we are amortizing through June 2017. Over the term of the collaboration, we are eligible to receive up to $259 million in a license fee and substantive milestone payments, including up to $59 million in development milestone payments and $130 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive royalties up to the mid-teens on any product sales of the drug. From inception through March 2015, we have received $36 million in payments for advancing ISIS-DMPK-2.5_Rx.We will earn the next milestone payment of $35 million if we initiate a Phase 2 study for ISIS-DMPK-2.5_Rx.

Neurology

In December 2012, we and Biogen entered into a third and separate collaboration agreement to develop and commercialize novel antisense drugs to three targets to treat neurological or neuromuscular diseases. We are responsible for the development of each of the drugs through the completion of the initial Phase 2 clinical study for such drug. Biogen has the option to license a drug from each of the three programs through the completion of the first Phase 2 study for each program. If Biogen exercises its option for a drug, it will assume all further global development, regulatory and commercialization responsibilities for that drug. Under the terms of the agreement, we received an upfront payment of $30 million, which we are amortizing through December 2020. Over the term of the collaboration, we are eligible to receive up to $259 million in a license fee and substantive milestone payments per program. We are eligible to receive up to $59 million in development milestone payments to support research and development of each program, including amounts related to the cost of clinical trials. We are also eligible to receive up to $130 million in milestone payments per program if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive royalties up to the mid-teens on any product sales of drugs resulting from each of the three programs. In February 2015, we earned a $10 million milestone payment when we initiated an IND-enabling toxicology study of ISIS-BIIB4_Rx, a drug for an undisclosed target designed to treat a neurodegenerative disease. From inception through March 31, 2015, we have received $40 million in payments under this collaboration. We will earn the next milestone payment of up to $14 million if we initiate a Phase 1 study for ISIS-BIIB4_Rx.

Strategic Neurology

In September 2013, we and Biogen entered into a fourth and separate collaboration agreement, which is a long-term strategic relationship focused on applying antisense technology to advance the treatment of neurological diseases. As part of the collaboration, Biogen gained exclusive rights to the use of our antisense technology to develop therapies for neurological diseases and has the option to license drugs resulting from this collaboration. The exclusivity for neurological diseases will last through September 2019, and may be extended for any drug development programs being pursued under the collaboration. We will usually be responsible for drug discovery and early development of antisense drugs and Biogen will have the option to license antisense drugs after Phase 2 proof of concept. If Biogen exercises its option for a drug, it will assume all further global development, regulatory and commercialization responsibilities for that drug. Biogen will be responsible for all of the drug discovery and development activities for drugs using other modalities.

Under the terms of the agreement, we received an upfront payment of $100 million and are eligible to receive milestone payments, license fees and royalty payments for all drugs developed through this collaboration, with the specific amounts dependent upon the modality of the molecule advanced by Biogen. If we have a change of control during the first six years of the collaboration, we may be required to refund Biogen a portion of the $100 million upfront payment, with the amount of the potential refund decreasing ratably as we progress through the initial six year term of the collaboration. We are amortizing the $100 million upfront payment through September 2019. Because the amortization period for the upfront payment will never be less than the initial six year term of the collaboration, the amount of revenue we recognize from the upfront payment will never exceed the amount that Biogen could potentially require us to refund.

For each antisense molecule that is chosen for drug discovery and development under this collaboration, we are eligible to receive up to approximately $260 million in a license fee and substantive milestone payments. We are eligible to receive up to approximately $60 million for the achievement of research and development milestones, including amounts related to the cost of clinical trials, and up to $130 million for the achievement of regulatory milestones. In addition, we are eligible to receive royalties up to the mid-teens on any product sales of antisense drugs developed under this collaboration. If other modalities are chosen, such as small molecules or monoclonal antibodies, we are eligible to receive up to $90 million in substantive milestone payments, including up to $35 million for the achievement of research and development milestones and up to $55 million for the achievement of regulatory milestones. In addition, we are eligible to receive single-digit royalties on any product sales of drugs using non-antisense modalities developed under this collaboration. From inception through March 2015, we have received $125 million in payments under this collaboration. In April 2015, we earned a $10 million milestone payment for validating a fourth target under this collaboration. We will earn the next milestone payment of up to $10 million if we choose another target to advance under this collaboration.

Each of our agreements with Biogen will continue until the earlier of the date all of Biogen's options to obtain the exclusive licenses under the applicable agreement expire unexercised or, if Biogen exercises its option, until the expiration of all payment obligations under the applicable agreement. In addition, each agreement, or any program under an agreement, may terminate early under the following situations:

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Biogen may terminate the agreement or any program at any time by providing written notice to us;

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Under specific circumstances, if we are acquired by a third party with a product that directly competes with a compound being developed under the agreement, Biogen may terminate the affected program by providing written notice to us;

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If, within a specified period of time, any required clearance of a transaction contemplated by an agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, is not received, then either we or Biogen may terminate the affected program by providing written notice to the other party; and

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Either we or Biogen may terminate any program by providing written notice to the other party upon the other party's uncured failure to perform a material obligation under the agreement with respect to the affected program, or the entire agreement if the other party becomes insolvent.

During the three months ended March 31, 2015 and 2014, we earned revenue of $39.2 million and $10.2 million, respectively, from our relationship with Biogen, which represented 63 and 36 percent, respectively of our total revenue for those periods. Our condensed consolidated balance sheet at March 31, 2015 included deferred revenue of $110.8 million related to our relationship with Biogen.

GSK

In March 2010, we entered into a strategic alliance with GSK using our antisense drug discovery platform to seek out and develop new drugs against targets for rare and serious diseases, including infectious diseases and some conditions causing blindness. Our strategic alliance currently includes five drugs in development. GSK has the exclusive option to license drugs resulting from this alliance at Phase 2 proof-of-concept for a license fee. If GSK exercises its exclusive option for any drugs resulting from this alliance, it will be responsible for all further global development, regulatory and commercialization activities for such drug. Under the terms of the agreement, we received a $35 million upfront payment and in May 2011 we received a $3 million payment when we and GSK expanded the collaboration.

In October 2012, we and GSK amended the original agreement to reflect an accelerated clinical development plan for ISIS-TTR_Rx. From inception through March 2015, we have earned $60 million, primarily in milestone payments, from GSK related to the development of ISIS-TTR_Rx. We are also eligible to earn an additional $10 million pre-licensing milestone payment associated with the ISIS-TTR_Rx Phase 2/3 study. In addition, under the amended agreement, we and GSK increased the regulatory and commercial milestone payments we can earn should ISIS-TTR_Rx receive marketing approval and meet pre-agreed sales targets.

In addition to ISIS-TTR_Rx, we have four drugs in development. We are developing ISIS-HBV_Rx, an antisense drug designed to reduce the production of viral proteins associated with hepatitis B virus, or HBV infection. We are also developing ISIS-GSK4-L_Rx and ISIS-RHO-2.5_Rx, which are antisense drugs we designed to treat ocular diseases. In addition, we recently advanced a drug to treat an undisclosed target, ISIS-GSK6-L_Rx, into development.

Under our agreement, if GSK successfully develops all five drugs for one or more indications and achieves pre-agreed sales targets, we could receive license fees and substantive milestone payments of more than $1.3 billion, including up to $220.5 million for the achievement of development milestones, up to $483.5 million for the achievement of regulatory milestones and up to $428 million for the achievement of commercialization milestones. Through March 2015, we have received $129.5 million in payments under this strategic alliance with GSK. We will earn the next milestone payment of $5 million if we further advance ISIS-GSK4_Rx. In addition, we are eligible to receive royalties up to the mid-teens on sales from any product that GSK successfully commercializes under this alliance.

Our alliance with GSK will continue until the earlier of the date that all of GSK's options to obtain the exclusive licenses under the agreement expire unexercised or, if GSK exercises its option, until the expiration of all payment obligations under the agreement. In addition, the agreement, or any program under the agreement, may terminate early under the following situations:

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GSK may terminate any program, other than the ISIS-TTR_Rx program, at any time by providing written notice to us;

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GSK may terminate the ISIS-TTR_Rx program by providing written notice to us after reviewing specific data from the Phase 3 study for the program; and

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Either we or GSK may terminate any program by providing written notice to the other party upon the other party's uncured failure to perform a material obligation under the agreement with respect to the affected program, or the entire agreement if the other party becomes insolvent.

During the three months ended March 31, 2015 and 2014, we earned revenue of $16.5 million and $3.3 million, respectively, from our relationship with GSK, which represented 26 and 12 percent, respectively of our total revenue for those periods. Our condensed consolidated balance sheet at March 31, 2015 included deferred revenue of $9.2 million related to our relationship with GSK.