6. Collaborative Arrangements and Licensing Agreements

Strategic Partnership

Biogen

We have established four strategic collaborations with Biogen focused on using antisense technology to advance the treatment of neurological and neuromuscular disorders. These collaborations combine our expertise in creating antisense drugs with Biogen's expertise in developing therapies for neurological disorders. We and Biogen are currently developing six drugs to treat neurological diseases under these collaborations, including nusinersen, IONIS-DMPK-2.5_Rx, IONIS-SOD1_Rx, and three drugs to treat undisclosed neurodegenerative diseases, IONIS-BIIB4_Rx,IONIS-BIIB5_Rx and IONIS-BIIB6_Rx. In addition to these six drugs, we and Biogen are evaluating numerous additional targets for the development of drugs to treat neurological diseases.

Nusinersen

In January 2012, we entered into a collaboration agreement with Biogen to develop and commercialize nusinersen for the treatment of SMA. We are currently conducting a Phase 3 study evaluating nusinersen in infants with SMA, for which we completed enrollment in May 2016. We are also conducting a Phase 3 study evaluating nusinersen in children with SMA, for which we completed target enrollment in 2015. We plan to have data from both of these Phase 3 studies in the first half of 2017. In addition, we are evaluating nusinersen in two Phase 2 open-label studies, one in children with SMA and one in infants with SMA. Patients from all of these studies continue to have access to nusinersen through open-label extension dosing. We are responsible for completing the studies we are currently conducting. Biogen has the option to license nusinersen. If Biogen exercises its option, it will pay us a license fee and will assume all other global development, regulatory and commercialization responsibilities. 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. In June 2015, we and Biogen amended the development plan for nusinersen to include conducting the open-label extension study for the Phase 3 studies in infants and children.

Under the terms of the agreement, 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 tiered royalties up to the mid-teens on any sales of nusinersen. Over the term of the collaboration, we are eligible to receive up to $346 million in a license fee and payments, including up to $121 million in substantive milestone and other payments associated with the clinical development of nusinersen prior to licensing and up to $150 million in substantive milestone payments if Biogen achieves pre-specified regulatory milestones. From inception through March 2016, we have received nearly $150 million in payments for advancing nusinersen. In the first quarter of 2016, we earned $9.5 million in milestone payments for advancing nusinersen. In May 2016, we earned a $2 million milestone payment when we completed enrollment in the Phase 3 study in infants. We will earn the next payment of $75 million if Biogen licenses nusinersen and we will earn the next milestone payment of up to $60 million if Biogen receives regulatory approval for nusinersen.

IONIS-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, IONIS-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. We are currently evaluating IONIS-DMPK-2.5_Rx in a Phase 1/2 clinical study in patients with DM1. 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 October 2018. In June 2015, we and Biogen amended the development plan for IONIS-DMPK-2.5_Rx under which we are eligible to earn additional milestone payments of up to $4.2 million for further advancing the Phase 1/2 study of IONIS-DMPK-2.5_Rx. Over the term of the collaboration, we are eligible to receive up to $263 million in a license fee and substantive milestone payments, including up to $63 million in development milestone payments and up to $130 million in milestone payments if Biogen achieves pre-specified regulatory milestones. In addition, we are eligible to receive tiered royalties up to the mid-teens on any sales of IONIS-DMPK-2.5_Rx. From inception through March 2016, we have received nearly $39 million in payments for advancing IONIS-DMPK-2.5_Rx. We will earn the next milestone payment of $1.4 million if we further advance IONIS-DMPK-2.5_Rx and we will earn a $35 million milestone payment if we initiate a Phase 2 study for IONIS-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 up 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. We are currently advancing IONIS-BIIB4_Rx under this collaboration. 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 tiered royalties up to the mid-teens on sales from any drugs resulting from each of the three programs. From inception through March 2016, we have received $43 million in payments under this collaboration. In February 2016, we earned a $3 million milestone payment for further advancing IONIS-BIIB4_Rx. We will earn the next milestone payment of up to $10 million for the continued development of IONIS-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. We are currently advancing three drugs, IONIS-SOD1_Rx, IONIS-BIIB5_Rx, and IONIS-BIIB6_Rx, under this collaboration. 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 tiered royalties up to the mid-teens on sales from any 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 tiered single-digit royalties on sales from any drugs using non-antisense modalities developed under this collaboration. From inception through March 2016, we have received more than $140 million in payments under this collaboration. We will earn the next milestone payment of up to $10 million if we advance a program 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:



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



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;



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



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, 2016, we earned revenue of $21.3 million from our relationship with Biogen, which represented 58 percent of our total revenue for that period. In comparison, we earned revenue of $39.2 million for the same period in 2015, which represented 63 percent. Our condensed consolidated balance sheet at March 31, 2016 included deferred revenue of $85.7 million related to our relationship with Biogen.

Research, Development and Commercialization Partners

GSK

In March 2010, we entered into an alliance with GSK using our antisense drug discovery platform to discover and develop new drugs against targets for rare and serious diseases, including infectious diseases and some conditions causing blindness. Our alliance currently comprises five drugs in development, including our Phase 3 drug IONIS-TTR_Rx. We are responsible for completing the Phase 3 study we are currently conducting for IONIS-TTR_Rx. GSK has the option to license IONIS-TTR_Rx. If GSK exercises its option it will pay us a license fee. GSK has the exclusive option to license the other 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 $38 million in upfront and expansion payments, which we are amortizing through March 2017.

In October 2012, we and GSK amended the original agreement to reflect an accelerated clinical development plan for IONIS-TTR_Rx. We are currently evaluating IONIS-TTR_Rx in a broad Phase 3 development program. We have completed enrollment in the Phase 3 study in patients with FAP. From inception through March 2016, we have earned $60 million from GSK related to the development of IONIS-TTR_Rx, primarily in milestone payments. In addition, under the amended agreement, we and GSK increased the regulatory and commercial milestone payments we can earn should IONIS-TTR_Rx receive marketing authorization and meet pre-agreed sales targets. In September 2015, we and GSK amended the development plan for IONIS-TTR_Rx to support the Phase 3 cardiomyopathy study, which GSK plans to conduct.

In addition to IONIS-TTR_Rx, we have four drugs in development with GSK. We are developing two antisense drugs we designed to reduce the production of viral proteins associated with hepatitis B virus, or HBV, infection; IONIS-HBV_Rx and IONIS-HBV-L_Rx, a follow-on drug using our LICA technology. We are also developing IONIS-GSK4-L_Rx and IONIS-RHO-2.5_Rx, which are antisense drugs we designed to treat ocular diseases. In March 2016, we and GSK amended the development plan for IONIS-HBV_Rx to allow GSK to conduct all further development activities for this program.

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 $1.0 billion, including up to $168.5 million for the achievement of development milestones, up to $363.5 million for the achievement of regulatory milestones and up to $338 million for the achievement of commercialization milestones. Through March 2016, we have received more than $145 million in payments under this alliance with GSK. In the first quarter of 2016, we earned a $1.5 million milestone payment when GSK initiated a Phase 1 study of IONIS-HBV-L_Rx. We will earn the next milestone payment of up to $1.5 million if we further advance a program under this collaboration. In addition, we are eligible to receive tiered 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:



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



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



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, 2016, we earned revenue of $5.0 million, from our relationship with GSK, which represented 14 percent of our total revenue for that period. In comparison, we earned revenue of $16.5 million for the same period in 2015, which represented 26 percent of our total revenue for that period. Our condensed consolidated balance sheet at March 31, 2016 included deferred revenue of $4.4 million related to our relationship with GSK.

Kastle Therapeutics

In May 2016, we entered into an agreement with Kastle Therapeutics under which Kastle acquired the global rights to develop and commercialize Kynamro. Kynamro is approved in the United States for use in patients with homozygous familial hypercholesterolemia to reduce low density lipoprotein-cholesterol, apolipoprotein B, total cholesterol and non-high density lipoprotein-cholesterol as an adjunct to lipid lowering medications and diet. Under the terms of the agreement, we are eligible to receive up to $95 million, which includes a $15 million up-front payment we earned in May 2016, a $10 million payment we will receive in May 2019 and up to $70 million in sales milestones. Beginning in 2017, we will earn tiered royalties on global sales of Kynamro that average in the mid to low teens. In addition, we also received a 10 percent common equity position in Kastle. Sanofi Genzyme will earn a three percent royalty on sales of Kynamro and three percent of the cash payments we receive from Kastle.