UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the fiscal year ended December 31, 2019

For the transition period from ___________ to ___________

Commission file number 001-38137

Akcea Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

 

 

617-207-0202

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934). Yes ☐ No ☒

The aggregate market value of the common stock held by non‑affiliates of the registrant was approximately $218.4 million as of June 30, 2019 based upon the closing sale price on the Nasdaq Global Select Market reported for such date. Shares of common stock held by each executive officer and director and certain holders of more than 10% of the outstanding shares of the registrant’s common stock have been excluded in that such persons may be deemed to be affiliates. Shares of common stock held by other persons, have not been excluded in that such persons are not deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of common stock outstanding as of February 20, 2020 was 101,073,964.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Information Statement with the Securities and Exchange Commission in connection with the Registrant’s annual meeting of stockholders are incorporated by reference into Part III of this Report. Such information statement will be filed with the Securities and Exchange Commission not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2019.

 

 

 

---

 

FORWARD-LOOKING STATEMENTS

This report on Form 10-K and the information incorporated herein by reference includes forward-looking statements regarding our business. Any statement describing our goals, expectations, financial or other projections, intentions or beliefs, is a forward-looking statement and should be considered an at-risk statement. Such statements are subject to certain risks and uncertainties, particularly risks related to our financial condition and need for additional capital, the clinical development and regulatory review and approval of our medicines, the commercialization of our medicines, our dependence on third parties to develop and commercialize our medicines, our relationship with Ionis Pharmaceuticals, Inc., our controlling stockholder, and risks  related to our business and industry generally, such as risks inherent in the process of discovering, developing and commercializing medicines that are safe and effective for use as human therapeutics. Our forward-looking statements also involve assumptions that, if they never materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report on Form 10-K, including those identified in Item 1A entitled “Risk Factors”. Although our forward-looking statements reflect the good faith judgment of our management, these statements are based only on facts and factors currently known by us. As a result, you are cautioned not to rely on these forward-looking statements. These statements, like all statements in this report, speak only as of the date of this annual report on Form 10-K (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

In this report, unless the context requires otherwise, “Akcea,” “Company,” “we,” “our,” and “us” refers to Akcea Therapeutics, Inc. and its subsidiaries.

TRADEMARKS

"Akcea," the Akcea logo, TEGSEDI, WAYLIVRA and other trademarks or service marks of Akcea Therapeutics, Inc. appearing in this Report are the property of Akcea Therapeutics, Inc. This report contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Report may appear without the ® or TM symbols.

 

2

---

 

AKCEA THERAPEUTICS, INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019

INDEX

 

 

3

---

 

PART I

Item 1. Business

Overview

We are a commercial stage biopharmaceutical company developing and commercializing transformative medicines to treat patients with serious and rare diseases. Our large and advancing pipeline of medicines in late-stage development and medicines on the market allows us to capitalize on our strengths in supporting patients, healthcare professionals and caregivers in treating rare and serious diseases.  To optimize the value of our medicines to treat larger patient populations, we add to our own capabilities the strengths of partners to provide additional expertise, resources and commercial capabilities. We believe our strong relationship with our majority shareholder, Ionis Pharmaceuticals, Inc., or Ionis, should allow us to continue to expand our pipeline.

We have a robust portfolio of antisense medicines on the market and in development covering multiple targets and diseases that we have licensed from Ionis. We are highly focused on commercializing our approved therapies, TEGSEDI and WAYLIVRA. TEGSEDI is indicated to treat adults with the polyneuropathy caused by hereditary transthyretin-mediated amyloidosis, or hATTR amyloidosis, and has been approved and launched in the United States, or U.S., the European Union, or E.U. and Canada as well as approved in Brazil. WAYLIVRA is indicated as an adjunct to diet to treat adult patients with genetically confirmed familial chylomicronemia syndrome, or FCS, who are at high risk for pancreatitis, for whom response to diet and triglyceride lowering therapy has been inadequate. WAYLIVRA has been approved and launched in the E.U.

We are advancing a mature pipeline of novel medicines with the potential to treat multiple diseases. In addition to TEGSEDI and WAYLIVRA, our pipeline includes two medicines in Phase 3 clinical trials, AKCEA-APO(a)-L_Rx which is partnered with Novartis Pharma AG, or Novartis, and AKCEA-TTR-L_Rx. We also have two additional medicines that have each completed a Phase 2 study, AKCEA-ANGPTL3-L_Rx, which is partnered with Pfizer, Inc., or Pfizer, and AKCEA-APOCIII-L_Rx. All of our medicines are based on Ionis’ antisense technology platform.  Our medicines in development use Ionis' advanced LIgand Conjugated Antisense, or LICA, technology, which enhances the effective uptake and activity of these medicines in particular tissues.

We are continuing to optimize our current commercial infrastructure for TEGSEDI and WAYLIVRA, and plan to use this infrastructure for the other medicines in our pipeline. A key element of our commercial strategy is to provide the specialized, patient-centric support required to successfully address serious and rare disease patient populations. We believe our focus on treating patients with inadequately addressed rare and serious diseases allows us to partner efficiently and effectively with the specialized medical community that supports these underserved patient communities. For example, we created Akcea Connect, a drug treatment program made up of dedicated, regionally-based nurse case managers who have a wide range of medical knowledge and experience. This program offers free, private and personalized support to patients, their caregivers and their families in the U.S. Internationally, we are introducing Akcea Connect in each of the countries where we launch with the highest level of patient and physician support allowed by local regulations. Express Scripts’ Accredo Health Group, Inc., or Accredo is our specialty pharmacy partner for the distribution of TEGSEDI in the U.S. We chose Accredo because of their experience with the unique needs of rare disease communities and their proven track record for simplifying access to therapy. Accredo has a team of specialty clinicians, pharmacists and approximately 600 field-based nurses located throughout the U.S. who are augmenting the Akcea Connect team of nurse case managers to provide support and address the needs of the hATTR amyloidosis community. To further support the hATTR amyloidosis community, Akcea and Ambry Genetics Corporation, or Ambry, a Konica Minolta company, launched hATTR Compass™ in the U.S. and Canada, a free-of-charge, confidential genetic testing and genetic counseling program for people suspected to have hATTR amyloidosis. This program is intended to empower patients and their caregivers by providing accurate genetic information, so they can make informed decisions about their healthcare.

As we build Akcea, we continue to execute our strategy to provide our medicines to a significant global patient population in an efficient and timely manner. Depending on the geographic region, the number of patients impacted by the diseases we are treating and the regulatory environment of the local countries, we may choose to build out the commercial infrastructure ourselves, or to partner with another company for commercial sales and distribution. For instance, in August 2018, we entered into a licensing agreement with PTC Therapeutics International Limited, or PTC Therapeutics, to commercialize TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries. Our decision to partner with PTC Therapeutics to accelerate commercial access for patients in Latin America reflects our commitment to bringing TEGSEDI and WAYLIVRA to patients as rapidly as possible. PTC Therapeutics has an established rare disease team in Latin America that has experience in patient identification, in physician and patient education and support programs and in efficiently obtaining market access. PTC Therapeutics’ patient focused approach for rare diseases aligns with our approach, making them an experienced partner for this region. In October 2019, PTC Therapeutics received approval for TEGSEDI in Brazil. PTC Therapeutics anticipates approval in Brazil for WAYLIVRA this year.

4

---

 

To maximize the commercial potential of AKCEA-APO(a)-L_Rx, we have a strategic collaboration with Novartis. In February 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx. Novartis is now responsible for all development and commercialization activities for this medicine, subject to our potential participation in co-commercialization. Novartis initiated the Lp(a) HORIZON study, a Phase 3 study of AKCEA-APO(a)-L_Rx in patients with established cardiovascular disease, or CVD, and elevated levels of lipoprotein(a), or Lp(a). Lp(a) HORIZON is a global CVD outcomes study in which Novartis plans to enroll more than 7,500 patients. We believe Novartis brings significant resources and expertise to the collaboration that can accelerate our ability to deliver this potential therapy to the large population of patients who have high cardiovascular risk due to elevated Lp(a). As part of our collaboration with Novartis, we have the potential to earn up to $900 million in upfront, license and milestone payments. In February 2017, we received $75.0 million in an upfront payment, of which we retained $60.0 million and paid $15.0 million to Ionis as a sublicense fee. We also earned a $150.0 million license fee upon Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx in February 2019, of which we paid $75.0 million to Ionis as a sublicense fee. The $75.0 million sublicense fee due to Ionis was settled by issuing 2,837,373 shares of our common stock to Ionis. We are eligible to receive tiered, double-digit royalties in the mid-teens to low twenty percent range on sales of AKCEA-APO(a)-L_Rx from Novartis and milestone payments of up to $675 million if and when it meets the development, regulatory and sales milestones specified in our agreement. In connection with Novartis’ exercise of its option to exclusively license AKCEA-APO(a)-L_Rx, we and Novartis established a more definitive framework under which we may negotiate the co-commercialization of AKCEA-APO(a)-L_Rx between the two companies 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. We will share any milestone payments and royalties equally with Ionis.

 

Our collaboration with Novartis also included rights to AKCEA-APOCIII-L_Rx. In December 2019, Novartis made a strategic portfolio decision not to exercise its option and terminated its rights to AKCEA-APOCIII-L_Rx and, consequently, we have retained the rights to develop and commercialize AKCEA-APOCIII-L_Rx. In January 2020, we reported positive Phase 2 top line results from this program for the treatment of patients with hypertriglyceridemia. That study showed substantial triglyceride reduction, with 90% of patients achieving normal triglyceride levels at the highest dose level, and an attractive safety and tolerability profile with patients staying on treatment for up to 12 months. We and Ionis plan to initiate a Phase 3 program in FCS for this medicine in 2020 and we are evaluating additional rare and common diseases that are associated with high triglyceride levels. AKCEA-APOCIII-L_Rx also has the potential to favorably impact numerous other risk factors independently associated with CVD.

 

In October 2019, we entered into a collaboration with Pfizer, or the Pfizer Collaboration, for the development and commercialization of AKCEA-ANGPTL3-L_Rx, in which we granted Pfizer exclusive rights to develop and commercialize AKCEA-ANGPTL3-L_Rx worldwide. As part of the Pfizer Collaboration, we have the right to participate in commercialization activities with Pfizer in the U.S. and certain additional markets. We believe Pfizer’s expertise and breadth of experience in cardiovascular and metabolic diseases makes it well suited to accelerate clinical development of AKCEA-ANGPTL3-L_Rx, and to deliver it to the potentially large population of patients in need of additional therapies for these life-threatening diseases. Pfizer is responsible for all development and regulatory activities and costs beyond those associated with the Phase 2 study for which we recently announced positive top line results. As part of our collaboration, we received a license fee of $250.0 million in November 2019. We issued 6,873,344 shares of our common stock in December 2019 to Ionis as payment of a $125.0 million sublicense fee related to this license fee. In addition, we are eligible to receive tiered, double digit royalties in the mid-teens to low twenty percent range on net sales of AKCEA-ANGPTL3-L_Rx from Pfizer and up to $1.3 billion in milestone payments if and when Pfizer meets the development, regulatory and commercialization milestones specified in our agreement. We will share any milestone payments and royalties equally with Ionis.  

Our Strategy

We believe we are on our way to becoming a premier global biopharmaceutical company offering treatments for previously inadequately treated serious and rare diseases. The critical components of our business strategy to achieve this goal include the following:

5

---

 

 

MARKETED THERAPIES

TEGSEDI

TEGSEDI is designed to reduce the production of transthyretin, or TTR, protein. TEGSEDI is now approved in the U.S., E.U., Canada and Brazil.

On October 5, 2018, we received approval from the U.S. Food and Drug Administration, or FDA, for TEGSEDI for the treatment of the polyneuropathy of hATTR amyloidosis in adults. On October 3, 2018, TEGSEDI was approved by Health Canada for the treatment of stage 1 or stage 2 polyneuropathy in adult patients with hATTR amyloidosis. On July 11, 2018, TEGSEDI received marketing authorization, or MA, approval from the European Commission, or EC, for the treatment of stage 1 or stage 2 polyneuropathy in adult patients with hATTR amyloidosis. TEGSEDI was also approved by the Brazilian Health Regulatory Agency, ANVISA, for the treatment of stage 1 or 2 polyneuropathy in adult patients with hATTR, to delay disease progression and improve quality of life. It is being marketed in Brazil by PTC Therapeutics. We estimate that there are approximately 50,000 patients globally with hATTR amyloidosis, the majority of whom have symptoms of polyneuropathy. TEGSEDI is commercially available in over ten countries, and we continue to work toward the ultimate goal of making it available to patients globally. TEGSEDI is a medicine that Ionis discovered and developed using Ionis’ proprietary antisense technology platform.

6

---

 

Disease Background

hATTR amyloidosis is a severe, progressive and life-threatening disease caused by the abnormal formation of the TTR protein and aggregation of TTR amyloid deposits in various tissues and organs throughout the body, including in peripheral nerves, the heart and intestinal tract. The progressive accumulation of TTR amyloid deposits in these organs often leads to intractable peripheral sensorimotor neuropathy, autonomic neuropathy, and/or cardiomyopathy, as well as other disease manifestations. hATTR amyloidosis causes significant morbidity and progressive decline in quality of life, severely impacting activities of daily living. The disease often progresses rapidly and can lead to premature death. The median survival is 4.7 years following diagnosis.

WAYLIVRA

WAYLIVRA is designed to address the serious and unmet medical needs of the underserved FCS patient community. WAYLIVRA was granted conditional marketing authorization approval in the E.U. from the EC on May 3, 2019. WAYLIVRA is indicated as an adjunct to diet in adult patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate.  WAYLIVRA is a medicine that Ionis discovered and is being co-developed by Ionis and Akcea. WAYLIVRA uses Ionis’ proprietary antisense technology platform.

We are focused on the commercial launch for WAYLIVRA in the E.U. and on regulatory discussions for WAYLIVRA in the U.S. and Canada. WAYLIVRA was launched in Germany in August 2019 and we plan to launch in additional countries in the E.U.  in 2020. We are leveraging and optimizing our existing commercial infrastructure in Europe to market WAYLIVRA. In the U.S., on May 10, 2018, the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee voted to support approval of WAYLIVRA for the treatment of people with FCS. On August 27, 2018, we and Ionis announced that we received a Complete Response Letter from the Division of Metabolism and Endocrinology Products of the FDA regarding the New Drug Application for WAYLIVRA. The FDA did not cite any new concerns beyond those described in the Advisory Committee briefing book, in which the main areas of focus were the dosing schedule and management of thrombocytopenia, a deficiency of platelets in the blood. In November 2018, we received a Notice of Noncompliance withdrawal letter, or NON-W, from Health Canada for WAYLIVRA. We and Ionis are engaged in finding a path forward for WAYLIVRA in the U.S. and in Canada.

FCS is a serious and rare disease caused by impaired function of the enzyme lipoprotein lipase, or LPL, and characterized by severe hypertriglyceridemia and a risk of acute pancreatitis. Further, the lives of patients with this disease are impacted daily by the associated symptoms. In our Phase 3 clinical study, we have observed consistent and substantial (>70%) decreases in triglycerides and improvements in other manifestations of FCS, including pancreatitis attacks and abdominal pain. The final study results from the Phase 3 APPROACH study were published in the August 8th, 2019 issue of The New England Journal of Medicine. We believe the safety and efficacy data from the WAYLIVRA program demonstrate a favorable risk-benefit profile for patients with FCS. The FDA and European Medicines Agency, or EMA, have granted orphan drug designation to WAYLIVRA for the treatment of patients with FCS.

In August 2019, we announced topline results from the BROADEN study in patients with familial partial lipodystrophy, or FPL. People with FPL have abnormal subcutaneous fat distribution causing increased incidence of potentially life-threatening pancreatitis, diabetes, extreme insulin resistance and increased liver fat. BROADEN is a randomized, double-blind, placebo-controlled study of 300 mg of WAYLIVRA administered by a subcutaneous injection in patients with FPL. In the study, WAYLIVRA met its primary endpoint demonstrating a statistically significant reduction in triglyceride levels. WAYLIVRA also met a key secondary endpoint with a statistically significant reduction in liver fat. The most common adverse events observed in WAYLIVRA-treated patients were mild or moderate in severity and included injection site reactions, nasopharyngitis, urinary tract infection, and reductions in platelet levels. We are continuing to evaluate the data from this study and are assessing next steps.

7

---

 

PIPELINE

 

 

All products were discovered by Ionis and either developed by Ionis or co-developed by Ionis and Akcea.

LICA Pipeline

The other medicines in our pipeline - AKCEA-APO(a)-L_Rx, AKCEA-ANGPTL3-L_Rx, AKCEA-APOCIII-L_Rx and AKCEA-TTR-L_Rx - utilize Ionis' LICA technology. Ionis’ LICA technology conjugates specific chemical structures or molecules to antisense medicines to increase the efficiency of medicine uptake in a particular tissue. We believe the enhancements from LICA technology have the potential to allow for less frequent administration and significantly lower doses and lower volumes, providing greater patient convenience. Data from a number of Phase 1 studies and Phase 2 studies of the LICA technology have shown that doses up to 30-fold lower than non-LICA medicines resulting in consistent target reductions and a favorable safety and tolerability profile. Our current pipeline includes medicines with the potential to treat patients with ATTR and a wide range of lipid disorders associated with cardiometabolic disease that other technologies, such as small molecules and antibodies, have not been able to adequately address.

Our clinical pipeline contains novel medicines with the potential to treat inadequately addressed serious and rare disorders, as well as disorders affecting large patient populations.

AKCEA-APO(a)-L_Rx (also known as TQJ230)

Novartis is developing AKCEA-APO(a)-L_Rx for patients who are at significant risk of CVD because of their elevated levels of Lp(a). AKCEA-APO(a)-L_Rx inhibits the production of the apolipoprotein(a), or apo(a), protein, thereby reducing Lp(a). Apo(a) is a form of low-density lipoprotein, or LDL, that is very atherogenic (promoting the formation of plaques in the arteries) and very thrombogenic (promoting the formation of blood clots). In September 2018, we reported positive results from the Phase 2 dose-ranging study of AKCEA-APO(a)-L_Rx in patients with elevated levels of Lp(a) greater than 60 mg/dL, and established CVD.

In February 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx. Novartis has initiated the Lp(a) HORIZON study, a Phase 3 cardiovascular outcomes study of AKCEA-APO(a)-L_Rx, also known as TQJ230, in patients with established CVD and elevated levels of Lp(a). We believe Novartis brings significant resources and expertise to the collaboration that can accelerate our ability to deliver this potential therapy to patients at risk of CVD due to elevated levels of Lp(a). If AKCEA-APO(a)-L_Rx is approved, Novartis will be responsible for worldwide commercialization, and we believe that Novartis’ expertise, resources and commercial capability will support broad global reach for AKCEA-APO(a)-L_Rx. As part of the collaboration, we may co-commercialize AKCEA-APO(a)-L_Rx in selected markets, on mutually agreed terms and conditions.

Novartis’ decision to exercise its option to license AKCEA-APO(a)-L_Rx followed positive results from a Phase 2 study in patients with established CVD and elevated levels of Lp(a). The Phase 2 study was designed to evaluate the safety and tolerability of AKCEA-APO(a)-L_Rx and to determine the appropriate dosing for a planned Phase 3 cardiovascular outcomes study.  The randomized, double-blind, placebo-controlled, dose-ranging Phase 2 study included 286 patients with established CVD and high Lp(a) levels (baseline mean of approximately 100mg/dL 250 nmol/L - more than three times the upper limit of normal). The trial had five cohorts:

8

---

 

20 mg (every 4 weeks), 40 mg (every 4 weeks), 60 mg (every 4 weeks), 20 mg (every 2 weeks), and 20 mg (every week). The primary efficacy endpoint was the percent change in Lp(a) from baseline at the primary analysis time point (6 months) compared to placebo. The secondary efficacy endpoints were mean percent change in LDL-C, apoB, OxPL-apoB, OxPL-apo(a), and the number of patients reaching pre-specified thresholds of Lp(a) reduction of <125 nmol/L (<50 mg/dL) or <75 nmol/L (<30 mg/dL). Patients were treated with AKCEA-APO(a)-L_Rx or placebo for at least six months, with some patients treated as long as up to one year. The study met all primary and secondary efficacy endpoints analyzed at 6 months. Results from the study show statistically significant and dose dependent reductions from baseline in Lp(a) levels:

 

 

Approximately 90% of patients completed treatment and the rate of discontinuation was comparable between the active (12.1%) and placebo (14.9%) groups.

Disease Background

Despite the management of LDL-C with statins and other therapies, the incidence of CVD continues to rise dramatically. Lipid disorders are a cause of this continuing rise. Hyperlipoproteinemia(a), defined as levels of Lp(a) above 30mg/dL, which is present in approximately 20% of the general population, is believed to cause CVD.

Currently, there is no effective medicine to specifically and robustly lower elevated levels of Lp(a). Lp(a) levels are determined at birth and, therefore, lifestyle modification, including diet and exercise, do not impact Lp(a) levels. Statins do not have significant effects on Lp(a) levels. Further, we believe the modest reduction (approximately 25%) of Lp(a) by a new class of medicines known as PCSK9 inhibitors is unlikely to materially reduce the risk of cardiovascular events related to hyperlipoproteinemia(a). PCSK9 inhibitors inactivate a protein in the plasma that regulates the number of LDL receptors on the liver cell surface, thereby capturing and removing additional LDL particles from the blood. The only currently known effective way to significantly reduce plasma Lp(a) is to physically remove the particles from blood through a process called apheresis. In this process, the patient's blood is filtered through a machine where the LDL-C and Lp(a) particles are removed and the blood is returned to the patient's body. Since 2010, apheresis has been an approved therapy in Germany to treat patients with hyperlipoproteinemia(a), but it is expensive, time consuming and only performed by a small number of centers worldwide. Lp(a) apheresis has been shown to lower the rate of cardiovascular events, providing support that lowering Lp(a) can provide therapeutic benefit.

A number of expert groups, including the National Institutes for Health, European Society of Cardiology and the National Lipid Association, and publications have stated that Lp(a) is an independent cause of cardiovascular risk. The authors of three such publications evaluated data from over 180,000 participants and used statistical and genetic approaches to evaluate the correlation between Lp(a) levels and cardiovascular risk. The specific techniques the authors used were epidemiological/meta-analyses, Mendelian randomization and genome wide associations. In each technique used, the authors demonstrated a clear relationship between elevated levels of Lp(a) and increased cardiovascular risk.

9

---

 

The graphics below further illustrate these correlations:

 

 

AKCEA-APO(a)-L_Rx Commercial Opportunity

Elevated levels of Lp(a) are associated with increased cardiovascular risk and lowering Lp(a) may reduce the risk. We estimate the eligible population, patients with elevated levels of Lp(a) and prior CVD, to be greater than 8 million people globally. We believe that positive results from a large cardiovascular outcome study will be required to support marketing authorization for the treatment of these patients. Novartis licensed AKCEA-APO(a)-L_Rx and is conducting, at its expense, such a study pursuant to our strategic collaboration and, if approved, will commercialize AKCEA-APO(a)-L_Rx for these patients. As part of the collaboration, we may co-commercialize AKCEA-APO(a)-L_Rx in selected markets, on mutually agreed terms and conditions.

AKCEA-ANGPTL3-L_Rx

Pfizer is developing AKCEA-ANGPTL3-L_Rx to treat patients with certain cardiovascular and metabolic diseases. In October 2019, we entered into a worldwide exclusive licensing agreement with Pfizer for AKCEA-ANGPTL3-L_Rx. We believe Pfizer’s expertise and breadth of experience in cardiovascular and metabolic diseases makes it well suited to accelerate clinical development of AKCEA-ANGPTL3-L_Rx. Pfizer is responsible for all development and regulatory activities and all costs beyond those associated with the Phase 2 study, which recently reported positive top line results in patients with hypertriglyceridemia, type 2 diabetes and non-alcoholic fatty liver disease, or NAFLD.

 

As indicated above, in January 2020, we reported positive topline results from the Phase 2 study of AKCEA-ANGPTL3-L_Rx in 105 patients with hypertriglyceridemia, type 2 diabetes and NAFLD. The study met the primary endpoint of significant triglyceride lowering and multiple secondary endpoints with a favorable safety and tolerability profile. The objective of the dose-ranging Phase 2 study was to evaluate the safety and efficacy of AKCEA-ANGPTL3-L_Rx. The study was multicenter, randomized, double-blind and placebo-controlled. Participants were administered AKCEA-ANGPTL3-L_Rx or placebo via subcutaneous injection for six months. Weekly and monthly dosing was explored in three cohorts with doses ranging from 40 mg to 80 mg of total monthly dose. Observations from the AKCEA-ANGPTL3-L_Rx study included:

 

 

We and Pfizer are discussing the development path for AKCEA-ANGPTL3-L_Rx and Pfizer will determine the strategies for development of this program. Given that we did not see reductions in liver fat or hemoglobin A1c, Pfizer may not pursue development of indications with these endpoints. If AKCEA-ANGPTL3-L_Rx is approved, Pfizer will be responsible for worldwide commercialization, and we believe that Pfizer’s expertise, resources and commercial capability will support broad global reach for AKCEA-ANGPTL3-L_Rx. As part of the collaboration, we have the right to participate in certain commercialization activities with Pfizer in the U.S. and certain additional markets on predefined terms and based on meeting predefined criteria.

10

---

 

 

AKCEA-APOCIII-L_Rx

 

We and Ionis are co-developing AKCEA-APOCIII-L_Rx to inhibit the production of apoC-III, the same protein inhibited by WAYLIVRA, for the rare and common diseases that are associated with elevated triglyceride levels, and we also believe this medicine has the potential to favorably impact numerous other risk factors independently associated with CVD. We believe that the enhancements offered by Ionis' LICA technology can provide greater patient convenience by allowing for significantly lower doses, lower volumes, less frequent administration and a favorable safety and tolerability profile.

 

We recently announced positive top line results from a Phase 2 study of AKCEA-APOCIII-L_Rx in patients with hypertriglyceridemia. The objective of the Phase 2 study was to evaluate the safety and efficacy of different doses and dosing frequencies of AKCEA-APOCIII-L_Rx. The multicenter, randomized, double-blind, placebo-controlled, dose-ranging study included 114 patients with hypertriglyceridemia who are at risk for or have established CVD. Participants were administered AKCEA-APOCIII-L_Rx or placebo via subcutaneous injection for at least six months with some patients being treated for as long as up to a year. Weekly, bi-weekly, and monthly dosing was explored in four cohorts with doses ranging from 10 mg to 50 mg total monthly dose. Observations from the AKCEA-APOCIII-L_Rx study included:

With these data, we and Ionis plan to initiate a Phase 3 program in FCS for this medicine in 2020 and we are evaluating development in additional rare and common diseases that are associated with high triglyceride levels. AKCEA-APOCIII-L_Rx also has the potential to favorably impact numerous other risk factors independently associated with CVD.

 

Disease Background and Commercial Opportunity

 

FCS is an under-recognized disease caused by impaired function of the enzyme lipoprotein lipase, or LPL, and characterized by severe hypertriglyceridemia (>880mg/dL) and a risk of acute pancreatitis. Because of limited LPL function, people with FCS cannot break down chylomicrons, lipoprotein particles that are 90% triglycerides. FCS, which is estimated to affect 3,000 to 5,000 patients worldwide, can lead to many health issues including chronic pain, fatigue, a milky appearance of retinal veins and arteries, neurological symptoms such as depression and memory loss, swelling of the liver and spleen, and fatty deposits in the skin. FCS is a serious and rare disease with no other approved therapies.

 

11

---

 

AKCEA-TTR-L_Rx

We are co-developing AKCEA-TTR-L_Rx with Ionis to treat the broad population of patients with both hereditary and wild-type forms of transthyretin amyloidosis, or ATTR amyloidosis.  Based on its profile, we believe AKCEA-TTR-L_Rx treatment can significantly reduce levels of the TTR protein, which we believe will translate to efficacy in terms of both clinical benefit and quality of life improvements with a favorable safety and tolerability profile. As with other LICA medicines, we believe we can achieve this positive efficacy, safety and tolerability profile with low doses and with the potential for monthly dosing. We and Ionis initiated clinical development of AKCEA-TTR-L_Rx in December 2018 and presented positive Phase 1 data results in September 2019. Data from this study showed a >90% knockdown of TTR following administration in healthy volunteers, and a positive safety and tolerability profile. We and Ionis recently initiated a Phase 3 program which consists of two studies of AKCEA-TTR-L_Rx. The CARDIO-TTRansform study is in patients with both wild type and hereditary forms of TTR-mediated amyloid cardiomyopathy. The NEURO-TTRansform study is in patients with polyneuropathy driven by hATTR amyloidosis.

Disease Background

Transthyretin-mediated amyloid cardiomyopathy, or ATTR-CM, is a progressive, irreversible, and debilitating disease. ATTR-CM is the result of TTR misfolding into clusters called amyloid deposits. These amyloid deposits build up in the cardiac muscle, causing debilitating heart damage and resulting in progressive heart failure—this damage can be disabling, and life-threatening. Amyloid deposits can also cause the heart wall to stiffen, resulting in progressing heart damage. Wild-type ATTR-CM, or wtATTR-CM, develops sporadically, meaning there is no genetic TTR mutation passed on through families. Symptoms for wtATTR-CM, which may initially be mild, typically emerge after age 65.

hATTR amyloidosis is a severe, progressive and life-threatening disease caused by the abnormal formation of the TTR protein and aggregation of TTR amyloid deposits in various tissues and organs throughout the body, including in peripheral nerves, the heart and intestinal tract. The progressive accumulation of TTR amyloid deposits in these organs often leads to intractable peripheral sensorimotor neuropathy, autonomic neuropathy, and/or cardiomyopathy, as well as other disease manifestations. hATTR amyloidosis causes significant morbidity and progressive decline in quality of life, severely impacting activities of daily living. The disease often progresses rapidly and can lead to premature death. The median survival is 4.7 years following diagnosis.

AKCEA-TTR-L_Rx Commercial Opportunity

The introduction of new medicines for the ATTR amyloidosis community should increase awareness and diagnosis while we develop AKCEA-TTR-L_Rx. We believe there are approximately 250,000 people diagnosed with ATTR amyloidosis. It is estimated that there are more than 200,000 people diagnosed with wild-type ATTR cardiomyopathy. There are currently around 50,000 hATTR amyloidosis patients worldwide. We believe the number of people with predominant cardiomyopathy symptoms is significantly underdiagnosed. We believe this is especially true in the African American population in which approximately 3% carry the V122I mutation, one of the most dominant mutations causing ATTR. The epidemiology of wild-type TTR amyloidosis is not well characterized, but we believe the number of patients diagnosed is rapidly increasing.  

Technology Overview

Antisense Technology

Ionis discovered each of the medicines in our pipeline using its innovative antisense technology platform. Antisense technology is based on the use of synthetic nucleic acid sequences, which are primarily used to interrupt the production of a specified protein by targeting the specific corresponding messenger RNA, or mRNA, that encodes that protein. In this way, antisense medicines can be used to reduce the level of proteins that cause, or contribute to, the progression of various diseases. Because there are virtually no undruggable mRNA targets, we believe antisense technology may have broader potential than small molecule- and antibody-based technologies that target proteins. Furthermore, antisense technology has the potential to target a growing number of disease-related genes more directly and efficiently than other protein-directed modalities. We believe this technology represents an important advance in treating diseases.

12

---

 

The production of a protein starts with a process called transcription, where the instructions for making a protein are transcribed from a gene, or DNA, into mRNA. The cell's protein production process is called translation, and antisense medicines can be designed to interrupt this process by causing the destruction of the targeted mRNA and therefore preventing the production of a protein of interest. The graphic below further illustrates the impact of antisense medicines on the production of proteins via this mechanism of action:

 

 

Ionis has made significant improvements in its antisense medicine technology in recent years, most notably the creation of the LICA technology.

The unique properties of our antisense medicines provide several potential advantages over traditional drug discovery technologies. These advantages include:

 

 

Our Relationship with Ionis

Ionis formed Akcea as a wholly-owned subsidiary to complete development of and commercialize Ionis’ medicines to treat lipid disorders. We began business operations in January 2015. We licensed our cardiometabolic franchise from Ionis at the beginning of 2015. Prior to licensing these medicines, Ionis’ employees performed all of the development, regulatory and manufacturing activities for these medicines either themselves or through third-party providers. As such, Ionis incurred all of the expenses associated with these activities and reported them in its consolidated financial statements. We licensed TEGSEDI and AKCEA-TTR-L_Rx from Ionis in April 2018. Prior to then, Ionis had been advancing these medicines in development and incurring the expenses for those activities. Under our license agreements with Ionis, Ionis continued and is continuing to conduct certain development, regulatory and manufacturing activities for our medicines and we reimburse Ionis for these services. Also, under these license agreements, we are required to pay Ionis sublicense fees based on amounts we receive under license and collaboration agreements with others. In the past, Ionis has accepted certain payments owed by us in the form of Akcea common stock, rather than cash, which was determined based on

13

---

 

mutual agreement at the then fair market value of Akcea’s common shares. For example, as a result of the $250.0 million upfront license fee that we received in November 2019 from Pfizer as a result of the license agreement with Pfizer, we settled our $125.0 million obligation to Ionis in Akcea common stock. Ionis also accepted $75.0 million in Akcea common stock as payment for our obligation resulting from the $150.0 million license fee that we received from Novartis in February 2019 as a result of Novartis exercising their option to license AKCEA-APO(a)-L_Rx. However, Ionis may not choose to accept stock for future payments we owe Ionis. As of December 31, 2019, Ionis owned approximately 76 percent of our outstanding stock. As a result, we are controlled by Ionis and are a “controlled company” under the marketplace rules of the Nasdaq Stock Market, or Nasdaq.

Exclusive Rights to Our Development Pipeline and Intellectual Property; Right of First Negotiation

Ionis is a leading company researching and developing antisense medicines. Under our agreements with Ionis, we have rights to Ionis' proprietary technologies for use with our medicines. Specifically, we obtained an exclusive license from Ionis to globally commercialize our pipeline of medicines, including TEGSEDI, WAYLIVRA, AKCEA-APO(a)-L_Rx, AKCEA-ANGPTL3-L_Rx, AKCEA-APOCIII-L_Rx and AKCEA-TTR-L_Rx. Ionis also agreed that it would not work on its own or with other parties to develop or commercialize antisense medicines that target the same gene targets as the medicines we are developing and commercializing. We also have access to future improvements Ionis may make to its antisense technology platform, such as improved manufacturing technologies.

In addition, Ionis has granted us a right of first negotiation with respect to Ionis development candidates that are designed to treat a rare cardiometabolic disease or a rare inherited metabolic disease.

Separately, Ionis also recently committed to potentially out-licensing additional medicines from its wholly owned pipeline to us, and we are currently in discussions with Ionis to potentially in-license a product that complements our rare disease expertise. We believe that our strong relationship with Ionis will continue to be a strategic advantage for Akcea, especially as Ionis’ pipeline continues to grow and expand into new rare disease areas for which Akcea could be a potential commercialization partner.

Our 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. In February 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx. Novartis initiated a Phase 3 study of AKCEA-APO(a)-L_Rx in patients with CVD and elevated levels of Lp(a). Novartis is now responsible for all future development and commercialization activities for AKCEA-APO(a)-L_Rx. We are eligible to receive tiered, double-digit royalties in the mid-teens to low twenty percent range on sales of AKCEA-APO(a)-L_Rx from Novartis and milestone payments if and when it meets the development, regulatory and sales milestones specified in our agreement. In connection with Novartis’ exercise of its option to exclusively license AKCEA-APO(a)-L_Rx, we and Novartis established a more definitive framework under which we may negotiate the co-commercialization of AKCEA-APO(a)-L_Rx between the two companies 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. We will share any milestone payments and royalties equally with Ionis.

 

In December 2019, Novartis made a strategic portfolio decision not to exercise its option and to terminate its rights to AKCEA-APOCIII-L_Rx and, consequently, we now retain the rights to AKCEA-APOCIII-L_Rx. In January 2020, we reported positive Phase 2 top line results from this program in the treatment of patients with hypertriglyceridemia who are at risk for, or have established, CVD. We and Ionis plan to initiate a Phase 3 program in FCS for this medicine in 2020 and we are evaluating development in additional rare and common diseases that are associated with high triglyceride levels. AKCEA-APOCIII-L_Rx also has the potential to favorably impact numerous other risk factors independently associated with CVD.

Under our Novartis agreement, we received $75.0 million in an upfront option payment in February 2017, of which we retained $60.0 million and paid Ionis a $15.0 million sublicense fee, and Novartis purchased $100.0 million of Ionis' common stock at a premium. We also received a $150.0 million license fee when Novartis exercised its option to license AKCEA-APO(a)-L_Rx in February 2019, for which we issued 2,837,373 shares of our common stock to Ionis in March 2019, as payment for a $75.0 million sublicense fee. In addition to the upfront payment and license fee we are eligible to receive up to $675.0 million in milestone payments from Novartis for AKCEA-APO(a)-L_Rx, 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. We are also eligible to receive tiered, double-digit royalties in the mid-teens to low twenty percent range on net sales of AKCEA-APO(a)-L_Rx, and 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 share any milestone payments and royalties equally with Ionis.

14

---

 

If Novartis stops developing or commercializing AKCEA-APO(a)-L_Rx and we subsequently commercialize the medicine on our own or with another party, we are required to negotiate in good faith and mutually agree with Novartis the terms of a royalty payable to Novartis on the returned medicine.

The agreement with Novartis will continue until the expiration of all payment obligations under the agreement. In addition, the agreement as a whole or with respect to any medicine under the agreement may terminate early under the following situations:

Under certain circumstances, the agreement with Novartis provides a mechanism to ensure that patients who were being treated with AKCEA-APO(a)-L_Rx prior to such termination or who desire access to AKCEA-APO(a)-L_Rx can continue to have access to AKCEA-APO(a)-L_Rx while the regulatory and commercial responsibilities for AKCEA-APO(a)-L_Rx are transitioned from Novartis to us. Additionally, in January 2017, 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 Strategic Collaboration with Pfizer

In October 2019, we entered into a license agreement with Pfizer, which has a potential aggregate transaction value of up to $1.6 billion, plus royalties, which we would generally be required to share equally with Ionis. The calculation of potential aggregate transaction value assumes that Pfizer successfully develops and achieves regulatory approval for AKCEA-ANGPTL3-L_Rx in multiple indications in the U.S., E.U. and Japan, and that Pfizer achieves pre-specified sales targets with respect to AKCEA-ANGPTL3-L_Rx. In addition to the upfront payment of $250.0 million that we received in November 2019, we are eligible to receive up to $1.3 billion in milestone payments, including up to $205.0 million for the achievement of development milestones, up to $250.0 million for the achievement of regulatory milestones and up to $850.0 million for the achievement of commercialization milestones. We are also eligible to receive tiered, double-digit royalties in the mid-teens to low twenty percent range on net sales of AKCEA-ANGPTL3-L_Rx, and Pfizer 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 share any milestone payments and royalties equally with Ionis.

The agreement with Pfizer will continue until the expiration of the last to expire royalty term with respect to AKCEA-ANGPTL3-L_Rx in all countries worldwide. In addition, the agreement may terminate early under the following situations:

If the agreement with Pfizer is terminated, we and Pfizer will negotiate in good faith terms governing transitional arrangements to ensure continuity of supply of AKCEA-ANGPTL3-L_Rx to patients.

 

 

Competition

The commercialization of new medicines is competitive, and we may face worldwide competition from major pharmaceutical companies, specialty pharmaceutical companies, biotechnology companies, nutraceutical companies and ultimately generic pharmaceutical companies. Our competitors may develop or market therapies that are more effective, safer, more convenient to use, or less costly than any that we are commercializing, or may obtain regulatory or reimbursement approval for their therapies more rapidly than we may obtain approval for ours. Many of our competitors have substantially greater financial, technical and human resources than we have. Additionally, mergers and acquisitions in the pharmaceutical industry may result in even more resources being

15

---

 

concentrated in our competitors. Competition may increase further as a result of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields.

TEGSEDI faces competition from medicines such as ONPATTRO, marketed by Alnylam Pharmaceuticals, Inc., or Alnylam, for hATTR amyloidosis patients with polyneuropathy, VYNDAQEL ^® and VYNDAMAX™, both marketed by Pfizer, available in the U.S. for patients with both hereditary and wild type ATTR cardiomyopathy, or ATTR-CM, and available in the E.U. for stage 1 hATTR amyloidosis with polyneuropathy. VYNDAQEL was also recently approved by the EC for the treatment of wild-type or hereditary transthyretin amyloidosis in adult patients with ATTR-CM. ONPATTRO, which is an RNAi therapy made by Alnylam, is currently approved in the U.S., E.U and either approved or seeking approval in other geographies. The product label for TEGSEDI in the U.S. has a boxed warning for thrombocytopenia and glomerulonephritis, requiring periodic blood and urine monitoring, and TEGSEDI also has a Risk Evaluation and Mitigation Strategy, or REMS, program. Although ONPATTRO requires intravenous administration and pre-treatment with steroids, it does not have a boxed warning or REMS. Beyond these medicines that are either marketed or under regulatory review, there are also additional medicines in clinical development. Alnylam is developing next generation RNAi medicine, vutrisiran, which is currently in Phase 3 clinical development in hATTR amyloidosis with polyneuropathy and cardiomyopathy and wtATTR-CM. Alnylam is conducting additional clinical work for ONPATTRO and it is possible that Pfizer could do additional clinical work with VYNDAMAX and/or VYNDAQEL. Eidos is developing AG10 for patients with ATTR with cardiomyopathy and is currently enrolling a Phase 3 study.

With respect to WAYLIVRA to treat patients with FCS, NeuroBo Pharmaceuticals’ Gemcabene is being studied in patients with severe hypertriglyceridemia, defined as triglycerides above 500 mg/dL. NeuroBo announced in June 2018 that Gemcabene met its Phase 2b primary endpoint and demonstrated statistically significant lowering of triglycerides in severe hypertriglyceridemia. In August 2018, however, the FDA requested that NeuroBo produce data from a sub-chronic toxicology study to lift the partial clinical hold that was issued in 2004.  NeuroBo has announced that they will be submitting the request to lift the partial hold in the first half of 2020.

Amryt Pharma’s Myalept, or metreleptin, is in a Phase 2 trial for FPL patients who also have NASH. Metreleptin is currently approved for use in the U.S. and E.U. in generalized lipodystrophy, or GL patients. Metreleptin does not affect apoC-III levels. ApoC-III levels have been shown to be elevated in FPL patients and directly correlated to triglyceride levels. In addition, many patients with FCS and FPL use diet, niacin, fish oils and/or fibrates to reduce their elevated triglycerides. Niacin, fish oils and fibrates are generally not effective in patients with FCS. The ultra-low-fat diet that patients with FCS and FPL are required to maintain is extremely burdensome to patients and their families. Based on our WAYLIVRA clinical experience, including in individuals with FCS, we believe that WAYLIVRA will work equally well as a single agent or in combination with other triglyceride-lowering medicines or approaches.

With respect to WAYLIVRA and AKCEA-APOCIII-L_Rx, Arrowhead Pharmaceuticals, Inc., or Arrowhead, has presented Phase 1/2a clinical data of ARO-APOC3, an RNAi-based drug targeting apoC-III for treatment of hypertriglyceridemia and FCS.  The key points presented included safety and tolerability. Arrowhead plans to initiate a pivotal Phase 3 study in 2020.  To our knowledge, there are currently no other direct competitors for lowering apoC-III in clinical development.

With respect to AKCEA-APO(a)-L_Rx, we are not aware of any other medicines currently in clinical development specifically for the treatment of hyperlipoproteinemia(a) and associated cardiovascular disease. Arrowhead and Amgen have a Phase 1 program ongoing for AMG890, formerly referred to as ARO-LPA, which uses an RNAi medicine conjugated with a GalNAc for the same target as AKCEA-APO(a)-L_Rx. Under its strategic collaboration agreement with Alnylam, Ionis received an exclusive, royalty-bearing license to Alnylam's chemistry, RNA targeting mechanism and target-specific intellectual property for oligonucleotides against apo(a), which means that Alnylam agreed not to use the exclusively licensed technology to develop or commercialize an oligonucleotide against apo(a).

AKCEA-ANGPTL3-L_Rx may compete with Evinacumab, a monoclonal antibody that binds to ANGPTL3 that Regeneron Pharmaceuticals, Inc. is developing. Evinacumab is currently in Phase 3 development for the treatment of homozygous familial hypercholesterolemia, or HoFH and Regeneron expects to file a New Drug Application, or NDA, in 2020. Evinacumab is also in Phase 2 development for severe forms of hypercholesterolemia and sever hypertriglyceridemia. Arrowhead also has an ongoing clinical program with an ANGPTL3 inhibitor, ARO-ANG3 which is currently in Phase 1 in patients with hypercholesterolemia and hypertriglyceridemia. Arrowhead has said it plans to initiate Phase 3 for this program this year.

Intellectual Property

We have in-licensed numerous patents and patent applications and possess substantial know-how and trade secrets relating to TEGSEDI, WAYLIVRA and our other medicines in development and, more generally, the development and commercialization of

16

---

 

oligonucleotide therapeutics. Our objective is to continue to develop and strengthen our proprietary position to further protect our medicines.

We obtained our rights to the patents covering TEGSEDI, WAYLIVRA and our other medicines in development and our rights in Ionis' proprietary technology platform and know-how under our development, commercialization and license agreements with Ionis. We seek to expand our portfolio of patents and patent applications by filing and prosecuting existing patent rights and filing additional patent applications.

We seek patent protection in significant markets and/or countries for each medicine in development. We also seek to maximize patent term. The patent exclusivity period for a medicine will prevent generic medicines from entering the market during this period. Patent exclusivity depends on a number of factors, including initial patent term or, the natural term, and available patent term extensions based upon delays caused by the regulatory approval process.

TTR, TEGSEDI and AKCEA-TTR-L_Rx Intellectual Property

We have an exclusive license under Ionis' TTR patent estate to develop and commercialize TEGSEDI and the LICA follow-on medicine, AKCEA-TTR-L_Rx.  

The TTR patent estate includes granted U.S. patents covering the TEGSEDI compound, composition, and uses (e.g. US 8,101,743; US 8,697,860; US 9,061,044; and US 9,399,774) that together provide a natural patent term to 2031. We have applied for patent term extension to recapture a portion of the term lost during regulatory review.  The issued claims protect TEGSEDI from generic competition in the U.S. until at least 2031.  Similar patents covering TEGSEDI are granted in several foreign jurisdictions including Europe and Japan.

The TTR patent estate also includes granted and pending claims covering AKCEA-TTR-L_Rx worldwide. Granted claims in Europe cover the sequence of AKCEA-TTR-L_Rx and its use in treating transthyretin amyloidosis with natural patent term to 2031 (EP2563920). Claims covering the specific chemical composition of AKCEA-TTR-L_Rx and use in treating transthyretin amyloidosis are pending and have a natural patent term to 2034. Such patents may qualify for patent term extensions that may be obtained based on development and regulatory timeframes.

ApoC-III, WAYLIVRA and AKCEA-APOCIII-L_Rx Intellectual Property

We have an exclusive license under Ionis' apoC-III patent estate to develop and commercialize WAYLIVRA and the LICA follow-on medicine, AKCEA-APOCIII-L_Rx. The apoC-III patent estate includes patent claims in the U.S. drawn to the use of antisense compounds complementary to the mRNA of human apoC-III, including compounds designed to the region targeted by WAYLIVRA and AKCEA-APOCIII-L_Rx (US 7,598,227) with a natural patent term of 2023. Similar claims covering compounds complementary to any site on human apoC-III have been granted in Australia.

The apoC-III patent estate also includes issued patent claims to the specific antisense sequence and chemical composition of WAYLIVRA in the U.S. (US 7,750,141), Australia and Europe (EP1622597). The issued claims in the U.S. should protect WAYLIVRA from generic competition in the U.S. until at least 2023. In addition, depending upon the timing, duration and specifics of FDA regulatory review, this patent may be eligible for patent term restoration to recapture a portion of the term lost during such review. We are also pursuing additional patent applications directed to methods of using WAYLIVRA and other apoC-III compounds for treating various disorders, including FCS in jurisdictions worldwide. Claims drawn to methods of using apoC-III specific inhibitors, and specifically compounds designed to target the same sequence as WAYLIVRA and AKCEA-APOCIII-L_Rx, for treating FCS have issued in the U.S. (US 9,593,333) and have a natural term to 2034. Such patents may qualify for patent term extension based on development and regulatory timeframes.

The apoC-III patent estate also includes issued patent claims covering the specific chemical composition of AKCEA-APOCIII-L_Rx in the U.S. (US 9,163,239). The claims should protect AKCEA-APOCIII-L_Rx from generic competition until at least 2034. We are pursuing additional patent coverage for AKCEA-APOCIII-L_Rx in jurisdictions worldwide.

Apo(a) and AKCEA-APO(a)-L_Rx Intellectual Property

We have an exclusive license under Ionis' apo(a) patent estate to develop and commercialize AKCEA-APO(a)-L_Rx. The apo(a) patent estate includes issued patent claims to the specific antisense sequence and chemical composition of AKCEA-APO(a)-L_Rx in the U.S. (US 9,181,550). The issued claims directed to the composition should protect AKCEA-APO(a)-L_Rx from generic competition in the U.S. until at least 2034. Such patents may qualify for patent term extension based on development and regulatory

17

---

 

timeframes. We are also pursuing additional patent applications designed to protect the AKCEA-APO(a)-L_Rx composition and additional dosing and methods of use in jurisdictions worldwide.

ANGPTL3 and AKCEA-ANGPTL3-L_Rx Intellectual Property

We have an exclusive license under Ionis' ANGPTL3 patent estate to develop and commercialize AKCEA-ANGPTL3-L_Rx. The ANGPTL3 patent estate includes issued patent claims drawn to the use of antisense compounds complementary to ANGPTL3 RNA for inhibiting the production of ANGPTL3 (US 8,653,047). The ANGPTL3 patent estate also includes issued patent claims covering the specific antisense sequence and chemical composition of AKCEA-ANGPTL3-L_Rx in the U.S. (US 9,382,540). The issued claims directed to the chemical composition should protect AKCEA-ANGPTL3-L_Rx from generic competition until at least 2035. Such patents may qualify for patent term extension based on development and regulatory timeframes. We are pursuing additional patent claims designed to protect the sequence and chemical composition of AKCEA-ANGPTL3-L_Rx in jurisdictions worldwide.

Trade Secrets

In addition to the protections afforded by patents and other regulatory protections, we may rely, in some circumstances, on trade secrets to protect our technology. Trade secrets may be useful to protect proprietary know-how that is not patentable or which we elect not to patent. Trade secrets may also be useful for processes or improvements for which patents are difficult to enforce. We also protect our medicines and the proprietary technology platform through confidentiality agreements with employees, consultants, advisors, contractors and collaborators. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.

Manufacturing

Ionis has internal capabilities to manufacture medicines. Ionis has dedicated significant resources to develop ways to improve manufacturing efficiency and capacity. Since Ionis can use variants of the same nucleotide building blocks and the same type of equipment to produce our oligonucleotide medicines, Ionis found that the same techniques used to efficiently manufacture one oligonucleotide medicine could help improve the manufacturing processes for many other oligonucleotide medicines. With Ionis’ expertise in optimizing manufacturing of oligonucleotides, we and Ionis believe we can develop new processes to scale up manufacturing of our LICA medicines at commercially competitive prices. By developing several proprietary chemical processes to scale up its manufacturing capabilities, Ionis has greatly reduced the cost of producing oligonucleotide medicines. For example, Ionis has significantly reduced the cost of raw materials through improved yield efficiency, while at the same time increasing capacity to make the medicines. Through both Ionis’ internal research and development programs and collaborations with outside vendors we and Ionis may achieve even greater efficiency and further cost reductions. In connection with Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx, Novartis is responsible for the long-term supply for the licensed medicine. In addition, under our license agreement with Pfizer for AKCEA-ANGPTL3-L_Rx, Pfizer is responsible for the long-term supply for the licensed medicine.

 

TEGSEDI

For TEGSEDI’s commercial drug supply, we are using contract manufacturing organizations, or CMOs, to produce custom raw materials, active pharmaceutical ingredient, or API, and finished goods. Our CMO partners have extensive technical expertise and current good manufacturing practice, or cGMP, experience. We believe our current network of CMO partners are capable of providing sufficient quantities to meet anticipated commercial demands. Additionally, we continue to evaluate relationships with additional suppliers to increase overall capacity as well as reduce risks. While we believe that there are alternate sources of supply that can satisfy our commercial requirements, we cannot be certain that identifying and establishing relationships with such sources, if necessary, would not result in significant delay or material additional costs. We also cannot provide assurance that we will not experience a disruption in supply from our current CMO partners.

CMOs are subject to the FDA’s cGMP requirements and other rules and regulations prescribed by foreign regulatory authorities. We depend on our CMO partners for continued compliance with cGMP requirements and applicable foreign standards.

WAYLIVRA

Ionis has supplied us with API to complete our ongoing activities for WAYLIVRA, including commercial launch in the E.U. and potential commercial launch in the U.S. if approved. We believe the API and drug product are adequate for at least the first two years of WAYLIVRA’s commercial launch. We plan to leverage our relationships with CMOs to procure our own long-term raw material and drug supplies at competitive prices.

18

---

 

LICA Pipeline

We believe we have sufficient manufacturing capacity, through Ionis, to meet our current development needs, including the ongoing studies for AKCEA-APOCIII-L_Rx and AKCEA-TTR-L_Rx. We believe that we have, or will be able to develop or acquire, sufficient supply capacity to meet our anticipated future needs. Ionis has supplied the API and the finished drug product for the clinical studies for each of the medicines in our pipeline through the completion of the on-going studies. Ionis also has agreed to supply and has supplied the API and the finished drug product for our medicines that we are developing ourselves. We and Ionis have long-standing and strong relationships with third-party vendors who can supply us with both API and finished drug product and are currently supplying API and finished drug product to other of Ionis' partners. Ionis also has long-standing and strong relationships with the vendors who supply the key raw materials to Ionis to make our medicines and to a major oligonucleotide CMO. We also believe that with anticipated benefits from increases in scale and improvements in chemistry, through Ionis or third parties, we will be able to manufacture our antisense medicines at commercially reasonable prices.

To date, Ionis has manufactured itself or through a CMO, only limited supplies of LICA for their own and our own nonclinical and clinical studies for LICA-conjugated medicines. LICA enables lower doses than unconjugated oligonucleotides. We believe Ionis’ expertise in optimizing manufacturing of oligonucleotides will enable the development of new processes to scale up manufacturing of these LICA conjugated medicines at commercially competitive prices.

Government Regulation and Approval

United States—FDA Process

In the U.S., the FDA regulates drugs. The Federal Food, Drug and Cosmetic Act, or FDCA, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling and import and export of drugs. To obtain regulatory approvals in the U.S. and in foreign countries, and subsequently comply with applicable statutes and regulations, we will need to spend substantial time and financial resources.

Approval Process

The FDA must approve any new unapproved drug or certain changes to a previously approved drug before a manufacturer can market it in the U.S. If a company does not comply with applicable U.S. requirements, it may be subject to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending applications, Warning or Untitled Letters, clinical holds, drug recalls, drug seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution. The steps we must complete before we can market a drug include:

It generally takes companies many years to satisfy the FDA approval requirements, but this varies substantially based upon the type, complexity and novelty of the drug or disease. Preclinical tests include laboratory evaluation of a drug's chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the drug. The conduct of the preclinical tests must comply with federal regulations and requirements, including GLP. The company submits the results of the preclinical testing to the FDA as part of an IND along with other information, including information about the drug's chemistry, manufacturing and controls, and a proposed clinical study protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after submitting the initial IND.

19

---

 

The FDA requires a 30-day waiting period after the submission of each IND before a company can begin clinical testing in humans in the U.S. If the FDA has neither commented on nor questioned the IND within this 30-day period, the IND sponsor may begin the proposed clinical study. However, the FDA may, within the 30-day time period, raise concerns or questions relating to one or more proposed clinical studies and place the clinical study on a clinical hold. In such a case, the company and the FDA must resolve any outstanding concerns before the company begins the clinical study. Accordingly, the submission of an IND may or may not be sufficient for the FDA to permit the sponsor to start a clinical study. The company must also make a separate submission to an existing IND for each successive clinical study conducted during drug development.

Clinical Studies

Clinical studies involve administering the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. The company must conduct clinical studies:

The company must submit each protocol involving testing on U.S. patients and subsequent protocol amendments to the FDA as part of the IND. The FDA may order the temporary, or permanent, discontinuation of a clinical study at any time, or impose other sanctions, if it believes that the sponsor is not conducting the clinical study in accordance with FDA requirements or presents an unacceptable risk to the clinical study patients. The sponsor must also submit the study protocol and informed consent information for patients in clinical studies to an IRB for approval. An IRB may halt the clinical study, either temporarily or permanently, for failure to comply with the IRB's requirements, or may impose other conditions.

Companies generally divide the clinical investigation of a drug into three or four phases.

While companies usually conduct these phases sequentially, they are sometimes overlapped or combined. A combined phase trial, such as a Phase 1/2 or a Phase 2/3 trial, is one that combines elements of objectives from two ordinarily sequential phases of development. For example, in a Phase 1/2 trial, the objectives may include both dose-finding and initial efficacy. In a Phase 2/3 trial, dosing regimen or population selection objectives are combined with confirmation of the safety and efficacy of the administration schedule in the intended population.

A pivotal study is a clinical study that adequately meets regulatory agency requirements to evaluate a drug's efficacy and safety to justify the approval of the drug. Generally, pivotal studies are Phase 3 studies, but the FDA may accept results from Phase 2 studies if the study design provides a well-controlled and reliable assessment of clinical benefit, particularly in situations in which there is an unmet medical need and the results are sufficiently robust.

The FDA, the IRB or the clinical study sponsor may suspend or terminate a clinical study at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Additionally, an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board or committee, may oversee some clinical studies. This group provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study. We may also suspend or terminate a clinical study based on evolving business objectives and the competitive climate.

20

---

 

Submission of an NDA

After we complete the required clinical testing, we can prepare and submit an NDA to the FDA, which must approve the NDA before we can start marketing the drug in the United States. An NDA must include all relevant data available from pertinent preclinical and clinical studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the drug's chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical studies on a drug, or from a number of alternative sources, including studies initiated by investigators. To support marketing authorization, the data we submit must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational drug to the FDA's satisfaction.

The cost of preparing and submitting an NDA is substantial. The submission of most NDAs is additionally subject to a substantial application user fee, and the manufacturer and/or sponsor under an approved new drug application are also subject to annual program user fees. The FDA typically increases these fees annually.

Once the FDA accepts the filing on the agency's threshold determination that the application is sufficiently complete to permit substantive review, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Under the Prescription Drug User Fee Act, the FDA has a goal of responding to standard review NDAs within ten months after the 60-day filing review period, but this timeframe is often extended. The FDA reviews most applications for standard review drugs within ten to 12 months and most applications for priority review drugs within six to eight months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment or provide a treatment where no adequate therapy exists.

The FDA may also refer applications for novel drugs that present difficult questions of safety or efficacy to an advisory committee. This is typically a panel that includes clinicians and other experts that will review, evaluate and recommend whether the FDA should approve the application. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP and will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the drug unless compliance with cGMP is satisfactory and the NDA contains data that provide evidence that the drug is safe and effective in the indication studied.

The FDA's Decision on an NDA

After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter indicates that the FDA has completed its review of the application and the agency has determined that it will not approve the application in its present form. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional clinical data and/or other significant, expensive and time-consuming requirements related to clinical studies, preclinical studies and/or manufacturing. The FDA has committed to reviewing resubmissions of the NDA addressing such deficiencies in two or six months, depending on the type of information included. Even if such data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Also, the government may establish additional requirements, including those resulting from new legislation, or the FDA's policies may change, which could delay or prevent regulatory approval.

An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a REMS program to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. The requirement for REMS can materially affect the potential market and profitability of the drug. Moreover, the FDA may condition approval on substantial post-approval testing and surveillance to monitor the drug's safety or efficacy. Once granted, the FDA may withdraw drug approvals if a company fails to comply with regulatory standards or identifies problems following initial marketing.

Changes to some of the conditions established in an approved application, including changes in indications, labeling or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing new NDAs. As with new NDAs, the FDA often significantly extends the review process with requests for additional information or clarification.

21

---

 

Expedited review and accelerated approval programs

A sponsor may seek approval of its drug candidate under programs designed to accelerate the FDA's review and approval of NDAs. For example, the FDA may grant Fast Track Designation to a drug intended for treatment of a serious or life-threatening disease or condition that has potential to address unmet medical needs for the disease or condition. The key benefits of Fast Track Designation are the eligibility for priority review, rolling review (submission of portions of an application before the complete marketing application is submitted), and accelerated approval, if the application meets relevant criteria. Based on results of the Phase 3 clinical study(ies) submitted in an NDA, upon the request of an applicant, the FDA may grant the NDA a priority review designation, which sets the target date for FDA action on the application at six months after the FDA accepts the application for filing. The FDA grants priority review where there is evidence that the proposed drug would be a significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a serious condition. If the criteria for priority review are not met, the application is subject to the standard FDA review period of ten months after the FDA accepts the application for filing. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

Under the accelerated approval program, the FDA may approve an NDA on the basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. The FDA generally requires post-marketing studies or completion of ongoing studies after marketing authorization to verify the drug's clinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit. In addition, a sponsor may seek FDA designation of its drug candidate as a breakthrough therapy if the drug can, alone or in combination with one or more other drugs, treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.

Post-approval Requirements

The FDA regulates drugs that we manufacture or distribute pursuant to FDA approvals and has specific requirements pertaining to recordkeeping, periodic reporting, drug sampling and distribution, advertising and promotion and reporting of adverse experiences with the drug. After approval, the FDA must provide review and approval for most changes to the approved drug, such as adding new indications or other labeling claims. There also are continuing, annual program user fee requirements for any marketed drugs, as well as new application fees for supplemental applications with clinical data.

In some cases, the FDA may condition approval of an NDA for a drug on the sponsor's agreement to conduct additional clinical studies after approval. In other cases, a sponsor may voluntarily conduct additional clinical studies after approval to gain more information about the drug. We typically refer to such post-approval studies as Phase 4 clinical studies.

Drug manufacturers are subject to periodic unannounced inspections by the FDA and state agencies for compliance with cGMP requirements. There are strict regulations regarding changes to the manufacturing process, and depending on the significance of the change, it may require prior FDA approval before we can implement it. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our drugs and we expect to continue to rely in the future on third parties for the production of such quantities. Future FDA and state inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of previously unknown problems with a drug or the failure to comply with applicable requirements may result in restrictions on a drug, manufacturer or holder of an approved NDA, including withdrawal or recall of the drug from the market or other voluntary, FDA-initiated or judicial actions that could delay or prohibit further marketing.

22

---

 

The FDA may withdraw approval if a company does not comply with regulatory requirements and maintain standards or if problems occur after the drug reaches the market. If a company or the FDA discovers previously unknown problems with a drug, including adverse events of unanticipated severity or frequency, issues with manufacturing processes or the company's failure to comply with regulatory requirements, the FDA may require revisions to the approved labeling to add new safety information; impose post-marketing studies or other clinical studies to assess new safety risks; or impose distribution or other restrictions under a REMS program. Other potential consequences may include:

The FDA strictly regulates marketing, labeling, advertising and promotion of drugs that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. We could be subject to significant liability if we violated these laws and regulations.

Orphan Drug Designation

The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the U.S., or if it affects more than 200,000 individuals in the U.S. and there is no reasonable expectation that the cost of developing and making the drug for this type of disease or condition will be recovered from sales in the U.S.

Orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical study costs, tax advantages and user-fee waivers. In addition, if a drug receives FDA approval for the indication for which it has orphan designation, the drug has orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the drug with orphan exclusivity.

Pediatric Information

Under the Pediatric Research Equity Act, or PREA, NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which the FDA has granted an orphan designation.

U.S. Patent Term Restoration

Patent term can also be extended based on the amount of time the patented drug spends in regulatory review for drug approval. The length of time between drug launch and patent expiration is significantly less than the full 20-year patent term because companies often obtain the patents relating to a drug early in development and the development path for regulatory approval is long. In the U.S., The Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act) permits a patent holder to seek a patent extension, commonly called patent term restoration, for a patent on a drug governed by the FDCA. The length of patent term restoration is related to the length of time the drug is under regulatory review. Patent term restoration can be a maximum of 5 years and cannot extend the remaining term of a patent beyond a total of 14 years from the date of drug approval. Only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug in that jurisdiction.

23

---

 

Abbreviated New Drug Applications for Generic Drugs

In 1984, with passage of the Hatch-Waxman Act, Congress authorized the FDA to approve generic drugs that are the same as drugs previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an abbreviated new drug application, or ANDA, to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug previously approved under an NDA, known as the reference listed drug, or RLD.

Specifically, in order to approve an ANDA, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form and the strength of the drug. At the same time, the FDA must also determine that the generic drug is bioequivalent to the RLD. Under the statute, a generic drug is bioequivalent to an RLD if "the rate and extent of absorption of the generic drug do not show a significant difference from the rate and extent of absorption of the listed drug…"

Upon approval of an ANDA, the FDA indicates that the generic drug is "therapeutically equivalent" to the RLD and it assigns a therapeutic equivalence rating to the approved generic drug in its publication "Approved Drug Products with Therapeutic Equivalence Evaluations," also referred to as the "Orange Book." Physicians and pharmacists consider an "AB" therapeutic equivalence rating to mean that a generic drug is fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA's designation of an "AB" rating often results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.

The FDCA provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity. In cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the original product approval. The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations that were conducted by or for the applicant and are essential to the approval of the application, and are not bioavailability or bioequivalence studies. This three-year exclusivity period often protects changes to a previously approved drug, such as a new dosage form, route of administration, combination or indication.

Hatch-Waxman Patent Certification and the 30-month Stay

Upon approval of an NDA or a supplement thereto, NDA sponsors must list with the FDA each patent with claims that cover the applicant's drug or a method of using the drug. Each of the patents listed by the NDA sponsor is published in the Orange Book. When an ANDA applicant files its application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference drug in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval. Specifically, the applicant must certify with respect to each patent that:

A certification that the new drug will not infringe the already approved drug's listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use, the FDA will not approve the ANDA application until all the listed patents claiming the referenced drug have expired.

If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision in the infringement case that is favorable to the ANDA applicant.

24

---

 

Disclosure of Clinical Study Information

Sponsors of clinical studies of FDA-regulated products, including drugs, are required to register and disclose certain clinical study information. Information related to the product, patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical study is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical studies after completion. Disclosure of the results of these studies can be delayed until the new drug or new indication being studied has been approved. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

Healthcare Reform

In the U.S. and foreign jurisdictions, the legislative landscape continues to evolve. There have been a number of legislative and regulatory changes to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the PPACA, was enacted, which includes measures that have significantly changed health care financing by both governmental and private insurers. The provisions of the PPACA of importance to the pharmaceutical and biotechnology industry are, among others, the following:

Since its enactment there have been judicial and Congressional challenges to or proposals to amend certain aspects of PPACA. We expect there will be additional challenges and amendments to it in the future.

In addition, other health reform measures have been proposed and adopted in the U.S. since PPACA was enacted. For example, as a result of the Budget Control Act of 2011, providers are subject to Medicare payment reductions of 2% per fiscal year through 2025 unless additional Congressional action is taken. Further, the American Taxpayer Relief Act of 2012 reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments from providers from three to five years. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.

25

---

 

European Union—EMA Process

In the E.U., drugs follow a similar demanding process as that we described above for the U.S., and the ICH Common Technical Document is the basis for applications. Prior to submitting a European Marketing Authorization Application, or MAA, it is necessary to gain approval of a detailed Pediatric Investigation Plan, or PIP, with the European Medicines Agency's Pediatric Committee, or PDCO. After gaining PIP approval, E.U. regulatory authorities can authorize the drug using either the centralized authorization procedure or national authorization procedures.

Centralized Procedure

Under the centralized procedure, after the EMA issues an opinion, the EC issues a single marketing authorization valid across the E.U., as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human drugs that: are derived from biotechnology processes, such as genetic engineering; contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions; and are officially designated orphan drugs. For drugs that do not fall within these categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long as the drug concerned is a significant therapeutic, scientific or technical innovation, or if its authorization would be in the interest of public health. WAYLIVRA has been granted a Promising Innovative Medicine, or PIM, Designation by the United Kingdom's Medicines and Healthcare products Regulatory Agency, or MHRA, for the treatment of people with FCS. A PIM Designation is an early indication that a medicinal product is a promising candidate for the Early Access to Medicines Scheme, or EAMS, in the UK, intended for the treatment, diagnosis or prevention of a life-threatening or seriously debilitating condition, with the potential to address an unmet medical need.

National Authorization Procedures

There are also two other possible routes to authorize medicinal products in several countries, which are available for products that fall outside the scope of the centralized procedure:

Good Manufacturing Practices

Like the FDA, the EMA, the competent authorities of the E.U. Member States, and other regulatory agencies regulate and inspect equipment, facilities and processes used in the manufacturing of drugs prior to approving a drug. If, after receiving clearance from regulatory agencies, a company makes a material change in manufacturing equipment, location or process, additional regulatory review and approval may be required. Once we or our partners commercialize drugs, we will be required to comply with cGMP and drug-specific regulations enforced by the EC, the EMA and the competent authorities of the E.U. Member States following drug approval. Also like the FDA, the EMA, the competent authorities of the E.U. Member States, and other regulatory agencies also conduct regular, periodic visits to re-inspect equipment, facilities and processes following the initial approval of a drug. If, as a result of these inspections, the regulatory agencies determine that our or our partners' equipment, facilities, or processes do not comply with applicable regulations and conditions of drug approval, they may seek civil, criminal or administrative sanctions and/or remedies against us, including the suspension of our manufacturing operations or the withdrawal of our drug from the market.

Data and Market Exclusivity

Similar to the U.S., there is a process to authorize generic versions of innovative drugs in the E.U. Generic competitors can submit abridged applications to authorize generic versions of drugs authorized by EMA through a centralized procedure referencing the innovator's data and demonstrating bioequivalence to the reference drug, among other things. New drugs in the E.U. can receive eight years of data exclusivity coupled with two years of market exclusivity, and a potential one-year extension, if the marketing authorization holder obtains an authorization for one or more new therapeutic indications that demonstrates "significant clinical benefit" in comparison with existing therapies. This system is usually referred to as "8+2." Abridged applications cannot rely on an innovator's data until after expiry of the eight-year date exclusivity term, meaning that a competitor can file an application for a generic drug, but the drug cannot be marketed until the end of the market exclusivity term.

26

---

 

Other International Markets—Drug Approval Process

In some international markets (such as China or Japan), although data generated in U.S. or E.U. studies may be submitted in support of a marketing authorization application, regulators may require additional clinical studies conducted in the host territory, or studying people of the ethnicity of the host territory, prior to the filing or approval of marketing applications within the country.

Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any medicine for which we may obtain regulatory approval. In the U.S. and in other countries, sales of any medicine for which we receive regulatory approval for commercial sale will depend in part on the availability of coverage and reimbursement from third-party payers. Third-party payers include government authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payer will provide coverage for a drug may be separate from the process for setting the reimbursement rate that the payer will pay for the drug. Third-party payers may limit coverage to specific drugs on an approved list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. Moreover, a payer's decision to provide coverage for a drug does not imply that an adequate reimbursement rate will be approved. Additionally, coverage and reimbursement for drugs can differ significantly from payer to payer. One third-party payer's decision to cover a particular drug does not ensure that other payers will also provide coverage for the drug or will provide coverage at an adequate reimbursement rate. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in drug development.

Third-party payers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of drugs and services, in addition to their safety and efficacy. To obtain coverage and reimbursement for any drug that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies to demonstrate the medical necessity and cost-effectiveness of our drug. These studies will be in addition to the studies required to obtain regulatory approvals. If third-party payers do not consider a drug to be cost-effective compared to other available therapies, they may not cover the drug after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its drugs at a profit.

The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and requirements for substitution of generic drugs for branded prescription drugs. By way of example, the PPACA contains provisions that may reduce the profitability of drugs, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies' share of sales to federal health care programs. Adoption of government controls and measures and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for our drugs.

In the European community, governments influence the price of drugs through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those drugs to consumers. Some jurisdictions operate positive and negative list systems under which drugs may only be marketed once a reimbursement price has been agreed to by the government. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical studies that compare the cost effectiveness of a particular drug candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new drugs. In addition, in some countries, cross border imports from low-priced markets exert a commercial pressure on pricing within a country.

The marketability of any medicine for which we receive regulatory approval for commercial sale may suffer if the government and third-party payers fail to provide adequate coverage and reimbursement. In addition, the focus on cost containment measures in the U.S. and other countries has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if we attain favorable coverage and reimbursement status for one or more medicines for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

27

---

 

Sales and Marketing

Numerous regulatory authorities in addition to the FDA, including, in the U.S., the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services, the U.S. Department of Justice, and similar foreign, state and local government authorities, regulate sales, promotion and other activities following drug approval. As described above, the FDA regulates all advertising and promotion activities for drugs under its jurisdiction both prior to and after approval. Only those claims relating to safety and efficacy that the FDA has approved may be used in labeling. Physicians may prescribe legally available drugs for uses that are not described in the drug's labeling and that differ from those we tested and the FDA approved. Such off-label uses are common across medical specialties and often reflect a physician's belief that the off-label use is the best treatment for the patients. The FDA does not regulate the behavior of physicians in their choice of treatments, but FDA regulations do impose stringent restrictions on manufacturers' communications regarding off-label uses. If we do not comply with applicable FDA requirements, we may face adverse publicity, enforcement action by the FDA, corrective advertising, consent decrees and the full range of civil and criminal penalties available to the FDA. Promotion of off-label uses of drugs can also implicate the false claims laws described below.

In the U.S. sales, marketing and scientific/educational programs must also comply with various federal and state laws pertaining to healthcare "fraud and abuse," including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions, limited statutory exceptions and regulatory safe harbors, and the absence of guidance in the form of regulations and very few court decisions addressing industry practices, it is possible that our practices might be challenged under anti-kickback or similar laws. Moreover, recent healthcare reform legislation has strengthened these laws. For example, the PPACA among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes to clarify that a person or entity does not need to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA clarifies that the government may assert that a claim that includes items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment, to third-party payers (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our activities relating to the sale and marketing of our drugs may be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal and civil sanctions, including fines and civil monetary penalties, the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid) and corporate integrity agreements, which impose, among other things, rigorous operational and monitoring requirements on companies. Similar sanctions and penalties also can be imposed upon executive officers and employees, including criminal sanctions against executive officers under the so-called "responsible corporate officer" doctrine, even in situations where the executive officer did not intend to violate the law and was unaware of any wrongdoing.

Given the significant penalties and fines that can be imposed on companies and individuals if convicted, allegations of such violations often result in settlements even if the company or individual being investigated admits no wrongdoing. Settlements often include significant civil sanctions, including fines and civil monetary penalties, and corporate integrity agreements. If the government were to allege or convict us or our executive officers of violating these laws, our business could be harmed. In addition, private individuals can bring similar actions. Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities. Other healthcare laws that may affect our ability to operate include the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; analogous state laws governing the privacy and security of health information, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, and the Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members. Further, there are an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the lack of clarity in laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state authorities.

Similar rigid restrictions are imposed on the promotion and marketing of drugs in the E.U. and other countries. Even in those countries where we may not be directly responsible for the promotion and marketing of our medicines, if our potential international distribution partners engage in inappropriate activity, it can have adverse implications for us.

28

---

 

The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party, or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the U.S., can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.

Employees

As of February 20, 2020, we employed 294 people. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. Collective bargaining agreements do not cover any of our employees and management considers relations with our employees to be good.

Corporate Information

We incorporated in Delaware in December 2014. Our principal offices are in Boston, Massachusetts. We make available, free of charge, on our website, www.akceatx.com, our reports on Forms 10-K, 10-Q, 8-K and amendments thereto, as soon as reasonably practical after we file such materials with the Securities and Exchange Commission, or SEC. Any information that we include on or link to our website is not a part of this report or any registration statement that incorporates this report by reference. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

Information about our Executive Officers

The following sets forth certain information regarding our executive officers as of February 20, 2020:

 

 

DAMIEN MCDEVITT

Interim Chief Executive Officer

Dr. McDevitt has served as our Interim Chief Executive Officer since September 2019. He has served and continues to serve as a member of our Board of Directors since October 2018. Prior to joining us, from June 2018 to September 2019, Dr. McDevitt was Chief Business Officer of Ionis Pharmaceuticals, Inc. and was a member of Ionis’ executive leadership team, responsible for leading Ionis’ corporate development activities, including corporate communications, business development, competitive intelligence and alliance management. Prior to that, Dr. McDevitt was Senior Vice President, Corporate Development at ACADIA Pharmaceuticals from November 2017 to June 2018. Prior to ACADIA, Dr. McDevitt was at GlaxoSmithKline plc, or GSK, for more than two decades since 1996, where he was instrumental in over 70 global business development transactions involving multiple therapeutic areas, including severe and rare and neuromuscular diseases, among others. He served in various roles with increasing responsibility including Vice President, Head of Business Development for R&D Extended Therapy areas, Head of Worldwide Business Development Asia and head of GSK’s R&D West Coast Innovation Center.

29

---

 

MICHAEL MACLEAN

Chief Financial Officer

Mr. MacLean has served as our Chief Financial Officer since September 2017. Prior to joining us, from September 2015 to September 2017, Mr. MacLean was Chief Financial Officer and Executive Vice President for PureTech Health, an advanced, clinical-stage, public biopharmaceutical company focusing on diseases caused by dysfunctions in the nervous, gastrointestinal and immune systems. Previously, Mr. MacLean served as Senior Vice President of Finance and Chief Accounting Officer of Biogen Inc. where he led the Company's worldwide finance organization. On January 2, 2020, Mr. MacLean delivered us a 90-day notice of resignation from his position as Chief Financial Officer. Mr. MacLean’s resignation will be effective April 1, 2020.

ALEX G. HOWARTH

Chief Operating Officer

Mr. Howarth has served as our Chief Operating Officer since December 2019. Prior to joining us, from January 2019 to November 2019, Mr. Howarth served as President of Lycera Corp. and was Chief Financial Officer of Lycera Corp. from September 2015 to December 2018. Prior to this, from April 2007 to September 2015, Mr. Howarth fulfilled various executive roles including Chief Business Officer and Chief Financial Officer of moksha8. Prior to joining moksha8, from January 2005 to March 2007, Mr. Howarth was Chief Business Officer at Vitae Pharmaceuticals, where he led the company’s business development, legal and commercial operations. Previously, Mr. Howarth held senior positions at GSK, including as Senior Director, Worldwide Business Development, executing licensing transactions across all phases of development in diverse therapeutic areas, and then as Head, Venture Partnerships, focused on partnering GSK’s clinical assets. Before this, he worked at KPMG in London, UK where he qualified as a chartered accountant.

LOUIS ST. L. O'DEA

Chief Medical Officer

Dr. O'Dea has served as our Chief Medical Officer since January 2016. Prior to joining us, Dr. O'Dea was Chief Medical Officer at Oxford Immunotec Global PLC, now a public diagnostics company, from June 2014 to January 2016, overseeing medical affairs and clinical development. Prior to Oxford, Dr. O'Dea was Chief Medical Officer and Head of Regulatory Affairs at Moderna, Inc. from January 2012 to June 2014. Before Moderna, Dr. O'Dea held positions including Chief Medical Officer at Radius Health, Inc., a public biopharmaceuticals company, an academic position at McGill University, and worldwide Head of Clinical Development for Endocrine and Metabolic products at Serono International.

KYLE JENNE

Chief Commercial Officer

Mr. Jenne has served as our Chief Commercial Officer since October 2019. Prior to his promotion, Mr. Jenne served as our U.S. Commercial Head from May 2017 to October 2019. Prior to joining us, Mr. Jenne held leadership positions at Acorda Therapeutics, Inc. from October 2011 to December 2015, at Pfizer Inc. from August 2005 to September 2011, and at Mallinckrodt Pharmaceuticals from December 2015 to May 2017, and was responsible for the design, development and implementation of patient support programs and payer strategies in the U.S. for rare disease products.

30

---

 

ITEM 1A. RISK FACTORS

Investing in our securities involves a high degree of risk. You should consider carefully the following information about the risks described below, together with the other information contained in this Report and in our other public filings, in evaluating our business. If any of the following risks actually occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. As a result, the trading price of our securities could decline, and you might lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks Related to Our Financial Condition and Need for Additional Capital

We have a limited operating history and may never become sustainably profitable.

Ionis Pharmaceuticals, Inc., or Ionis, incorporated us as a Delaware corporation in December 2014, and we have operated as a majority-owned affiliate of Ionis since that time. As such, we have limited experience as a company, and no experience operating independently from Ionis, and have not yet demonstrated that we can successfully overcome many of the risks and uncertainties frequently encountered in new and rapidly evolving fields, particularly the biotechnology and pharmaceutical fields.

As a company, we have limited experience commercializing products. Our ability to generate substantial revenue and achieve profitability from product sales depends on our ability, alone or with strategic partners, to successfully commercialize TEGSEDI^®  (inotersen) and WAYLIVRA^® (volanesorsen) and develop and obtain the regulatory approvals necessary to commercialize the medicines in our pipeline. Although we received our first revenue from product sales in the fourth quarter of 2018, if we are not successful in growing revenue and controlling costs, we will not achieve sustainably profitable operations or positive cash flow. Our ability to generate revenue sufficient to achieve profitability from product sales depends heavily on our success and our current and future strategic partners' success in:

31

---

 

We may not successfully develop our products or generate product revenue sufficient to cover operating expenses or become sustainably profitable. If we cannot achieve or maintain profitability, it would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. If the market price of our common stock declined, you could lose all or part of your investment.

We have experienced significant turnover in our top executives, and our business could be adversely affected by these and other transitions in our senior management team or if any of the resulting vacancies cannot be filled with qualified replacements in a timely manner.

Beginning in September 2019, several changes occurred to our senior leadership team, including the departure of our Chief Executive Officer, our President, and our Chief Operating Officer and the recent resignation of our Chief Financial Officer, whose resignation is to become effective on April 1, 2020, and the appointment of an interim Chief Executive Officer, a new Chief Commercial Officer and a new Chief Operating Officer. The effectiveness of the senior leadership team following these transitions, new leaders as they fill in these roles, and any further transition as a result of these changes, could have a significant impact on our results of operations. In addition, as a result of this turnover, our remaining management team has taken on increased responsibilities, which could divert attention from key business areas, and several key management roles remain vacant.

Management transition is often difficult and inherently causes some loss of institutional knowledge, which could negatively affect our results of operations and financial condition. Our ability to execute our business strategies may be adversely affected by the uncertainty associated with these transitions.

Further, we cannot guarantee that we will not face similar turnover in the future. Our senior management’s knowledge of our business and industry would be difficult to replace, and any further turnover could negatively affect our business, growth, financial conditions, results of operations and cash flows.

We have mostly incurred losses since our inception.

Because medicine development requires substantial lead-time and funding prior to commercialization, we have generally incurred expenses while generating limited revenue from our operating activities since our formation. Our net income was $40.8 million for the year ended December 31, 2019 compared to a net loss of $225.8 million for the year ended December 31, 2018. The primary difference is due to the $248.7 million license fee and research and development revenue related to the Pfizer license agreement for the development and commercialization of AKCEA-ANGPTL3-L_Rx and the $150 million license fee related to Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx in 2019. Although we generated net income in the year ended December 31, 2019, there can be no assurance that we will achieve profitability in future periods. As of December 31, 2019, we had an accumulated deficit of approximately $481.3 million. Most of the losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations. We expect to incur additional operating losses for the foreseeable future, and these losses may increase if we cannot generate substantial revenue.

We will require substantial additional funding to achieve our goals. If we fail to obtain timely funding, we may need to curtail or abandon some of our programs.

All of our medicine programs, except TEGSEDI in the U.S., E.U., Canada and Brazil, and WAYLIVRA in the E.U., will require additional nonclinical and/or clinical testing and/or marketing authorization prior to commercialization. We will need to spend significant additional resources to conduct these activities. Our expenses could increase beyond expectations if the U.S. Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, or other regulatory authorities require us to perform clinical studies and other studies in addition to those that we currently anticipate. As of December 31, 2019, we had cash, cash equivalents and investments equal to $463.7 million. Our operating expenses were $450.5 million and $295.7 million for the years ended December 31, 2019 and December 31, 2018, respectively.

Prior to our IPO, we funded our operating activities through a $100.0 million cash contribution we received from Ionis in 2015, $75.0 million that we received from initiating our collaboration with Novartis and $106.0 million in drawdowns under our line of credit with Ionis, which terminated in 2017. We do not have any firm commitment from Ionis to fund our cash flow deficits or provide other direct or indirect financial assistance to us. Additionally, in July 2017 we received $182.3 million in net proceeds from our IPO including $25.0 million that Ionis invested in our IPO and the Novartis concurrent private placement of $50.0 million. In April 2018, we received $200.0 million from the common stock we issued in connection with the licensing transaction with Ionis

32

---

 

discussed in Note 8, License Agreements and Services Agreement with Ionis, to our consolidated financial statements included in this Annual Report on Form 10-K. On February 22, 2019, we earned a license fee of $150.0 million in connection with Novartis’ option exercise related to AKCEA-APO(a)-L_Rx, for which we issued 2,837,373 shares of our common stock in March 2019 to Ionis as payment of a $75.0 million sublicense fee, as discussed in Note 7, Strategic Collaboration with Novartis and Note 8, License Agreements and Services Agreement with Ionis, to our consolidated financial statements included in this Annual Report on Form 10-K. In November 2019, we received $250.0 million in connection with the Pfizer license agreement for the development and commercialization of AKCEA-ANGPTL3-L_Rx, for which we issued 6,873,344 shares of our common stock in December 2019 to Ionis as payment of a $125.0 million sublicense fee, as discussed in Note 10, License Agreement with Pfizer and Note 8, License Agreements and Services Agreement with Ionis, to our consolidated financial statements included in this Annual Report on Form 10-K. We expect that we will need to raise additional funding to continue developing the medicines in our pipeline and to seek regulatory approval for and to continue to commercialize TEGSEDI, WAYLIVRA and other medicines in our pipeline.

We have received marketing authorization approval for TEGSEDI from the FDA for the treatment of the polyneuropathy of hATTR in adult patients in the U.S., from the European Commission, or EC in the E.U., and from Health Canada in Canada for the treatment of stage 1 or stage 2 polyneuropathy in adult patients with hATTR, and we will continue to incur significant costs commercializing TEGSEDI. Further, on May 3, 2019, we received conditional marketing authorization approval for WAYLIVRA in the E.U. from the EC as an adjunct to diet in adult patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate and we will continue to incur significant costs commercializing WAYLIVRA in the E.U. Even if we obtain marketing authorizations to sell our medicines in development, additional marketing authorizations for WAYLIVRA or marketing authorizations for WAYLIVRA in other indications, we will incur significant costs to commercialize the approved product. Even if we generate substantial revenue from the sale of TEGSEDI, WAYLIVRA, and other future approved products, we may not become sustainably profitable and would need to obtain additional funding to continue operations.

Risks Related to Clinical Development, Regulatory Review and Approval of Our Medicines

If the results of clinical testing indicate that any of our medicines are not suitable for commercial use, we may need to abandon one or more of our drug development programs.

Drug discovery and development has inherent risks and the historical failure rate for medicines is high. Antisense medicines are a relatively new approach to therapeutics. If we cannot demonstrate that our medicines are safe and effective for human use in the intended indication, we may need to abandon one or more of our drug development programs.

If any of our medicines in clinical studies do not show sufficient safety and efficacy in patients with the targeted indication, it would negatively affect our development and commercialization goals for the medicine and we would have expended significant resources with little or no benefit to us.

Even if our medicines are successful in preclinical and earlier-stage clinical studies, the medicines may not be successful in later-stage clinical studies.

Successful results in preclinical or initial clinical studies, including the results of earlier studies for our medicines in development, may not predict the results of subsequent clinical studies, including the Phase 3 study of AKCEA-APO(a)-L_Rx in patients with established cardiovascular disease and elevated levels of lipoprotein(a) or the Phase 3 study of AKCEA-TTR-L_Rx in patients with transthyretin-mediated amyloid cardiomyopathy. There are a number of factors that could cause a clinical study to fail or be delayed, including:

33

---

 

In addition, WAYLIVRA and AKCEA-APOCIII-L_Rx have the same mechanism of action, TEGSEDI and AKCEA-TTR-L_Rx, also have the same mechanism of action and all of our current medicines, including WAYLIVRA, AKCEA-APO(a)-L_Rx, AKCEA-ANGPTL3-L_Rx and AKCEA-APOCIII-L_Rx, are chemically similar to each other and the medicines Ionis and other companies are developing separately. As a result, a safety observation we, Ionis or other companies encounter with one of our or their medicines could have or be perceived by a regulatory authority to have an impact on a different medicine we are developing. This could cause the FDA and other regulators to ask questions or take actions that could harm or delay our ability to develop and commercialize our medicines or increase our costs. For example, the FDA or other regulatory agencies could request, among other things, any of the following regarding one of our medicines: additional information or commitments before we can start or continue a clinical study, protocol amendments, increased safety monitoring, additional product labeling information, and post-approval commitments. For example, in connection with the conditional marketing approval for WAYLIVRA in the E.U., the EC is requiring us to conduct a post-authorization safety study to evaluate the safety of WAYLIVRA on thrombocytopenia and bleeding in FCS patients taking WAYLIVRA. We have an ongoing open label extension study of WAYLIVRA in patients with FCS and an open label extension study of TEGSEDI in patients with hATTR, and an early access program, or EAP, for both WAYLIVRA and TEGSEDI. Adverse events or results from these studies or the EAPs could negatively impact our pending or future marketing approval applications for WAYLIVRA and TEGSEDI in patients with FCS or hATTR amyloidosis or the commercial opportunity for WAYLIVRA or TEGSEDI. In August 2018, we received a Complete Response Letter, or CRL, from the FDA regarding the new drug application for WAYLIVRA in which the FDA determined that the safety concerns identified with WAYLIVRA in our clinical development program outweighed the expected benefits of triglyceride lowering in patients with FCS. We also received a Notice of Noncompliance withdrawal letter, or Non-W, from Health Canada for WAYLIVRA in November 2018. We and Ionis are engaged with the FDA and plan to work with Health Canada to confirm a path forward for WAYLIVRA. As a result, we will need to submit additional data to the FDA and may need to conduct additional clinical studies before obtaining marketing authorization, which in turn could delay or prevent us from generating any revenue or profit from the sale of WAYLIVRA. Any failure or delay in the clinical studies for any of our medicines in development could reduce the commercial potential or viability of our medicines.

We may not have appropriately designed the planned and ongoing clinical studies for our medicines in development to support submission of a marketing application to the FDA and foreign regulatory authorities or demonstrate safety or efficacy at the level required by the FDA and foreign regulatory authorities for product approval.

We have ongoing studies for WAYLIVRA, as well as ongoing or planned studies for AKCEA-TTR-L_Rx, AKCEA-APO(a)-L_Rx, AKCEA-ANGPTL3-L_Rx and AKCEA-APOCIII-L_Rx.

Even if we achieve positive results on the endpoints for these clinical studies, including achievement of the primary endpoint of triglyceride lowering and the secondary endpoint of liver fat reduction for WAYLIVRA in patients with FPL as we reported in August 2019, or any future clinical studies, the FDA or foreign regulatory authorities may believe the clinical studies do not show the appropriate balance of safety and efficacy in the indication being sought or may interpret the data differently than we do, and deem the results insufficient to demonstrate the appropriate balance of safety and efficacy at the level required for product approval. For example, in August 2018, we received a CRL from the FDA regarding the new drug application for WAYLIVRA in which the FDA determined that the safety concerns identified with WAYLIVRA in our clinical development program outweighed the expected benefits of triglyceride lowering in patients with FCS. We also received a NON-W from Health Canada for WAYLIVRA in November 2018. We and Ionis are engaged with the FDA and plan to work with Health Canada to confirm a path forward for WAYLIVRA. As a result, we will need to submit additional data to the FDA and may need to conduct additional clinical studies before obtaining marketing authorization, which in turn could delay or prevent us from generating meaningful revenue or profit from the sale of WAYLIVRA. The Committee for Medicinal Products for Human Use, or CHMP, of the EMA adopted a positive opinion recommending conditional marketing authorization of WAYLIVRA as an adjunct to diet in adult patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate. The positive opinion was subsequently referred to the EC, which grants marketing authorization for medicines in the E.U., as well as to

34

---

 

European Economic Area members Iceland, Liechtenstein and Norway. The EC decided to adopt the CHMP’s positive opinion and on May 3, 2019, we received conditional marketing authorization approval for WAYLIVRA in the E.U. from the EC as an adjunct to diet in adult patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate. Despite this recent conditional marketing authorization from the EC, these risks that we may not have appropriately designed the planned and ongoing clinical studies for WAYLIVRA and our other medicines in development are more likely to occur since we are developing our medicines against therapeutic targets or to treat diseases in which there is little or no clinical experience. In addition, these risks may be more likely to occur for WAYLIVRA since there were some patients in the Phase 3 program that experienced serious platelet events (grade 4 thrombocytopenia), a condition in which the patient has very low platelet levels, and additional patients experienced other adverse events in the program, including patients who discontinued participation in the APPROACH study due to platelet count declines. We believe that the enhanced monitoring we have implemented to support early detection and management of these issues can help manage these safety issues so that patients can continue treatment. Since implementation of the enhanced monitoring, serious platelet events have been infrequent.

We may make modifications to the clinical study protocols or designs of our ongoing clinical studies that delay enrollment or completion of such clinical studies and could delay additional regulatory approvals for WAYLIVRA and initial regulatory approvals for our other medicines in development. Any failure to obtain additional regulatory approvals for WAYLIVRA and initial regulatory approvals for our other medicines in development on the timeline that we currently anticipate, or at all, would have a material and adverse impact on our business, prospects, financial condition and results of operations and could cause our stock price to decline.

Clinical studies for our medicines in development may not demonstrate safety or efficacy at the level required by the FDA and foreign regulatory authorities for product approval.

In January 2019, the CHMP of the EMA adopted a positive opinion recommending conditional marketing authorization of WAYLIVRA as an adjunct to diet in adult patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate. The positive opinion was subsequently referred to the EC, which grants marketing authorization for medicines in the E.U., as well as to European Economic Area members Iceland, Liechtenstein and Norway. The EC decided to adopt the CHMP’s positive opinion and on May 3, 2019, we received conditional marketing authorization approval for WAYLIVRA in the E.U. from the EC as an adjunct to diet in adult patients with genetically confirmed FCS patients who are at high risk for pancreatitis, in whom response to diet and triglyceride lowing therapy has been inadequate. Despite this recent conditional marketing authorization from the EC for WAYLIVRA, the FDA and Health Canada may continue to deem the results from our clinical studies for WAYLIVRA insufficient to demonstrate the appropriate balance of safety and efficacy at the level required for product approval. We and Ionis or our partners are conducting or intend to conduct clinical studies for AKCEA-APO(a)-L_Rx, AKCEA-TTR-L_Rx, AKCEA-ANGPTL3-L_Rx and AKCEA-APOCIII-L_Rx.

Even if positive results on the endpoints for the clinical studies are achieved, the FDA or foreign regulatory authorities may believe the clinical studies do not show the appropriate balance of safety and efficacy in the indication being sought or may interpret the data differently than we do, and may deem the results insufficient to demonstrate the appropriate balance of safety and efficacy at the level required for product approval. For example, in August 2018 we received a CRL from the FDA regarding the new drug application for WAYLIVRA in which the FDA determined that the safety concerns identified with WAYLIVRA in our clinical development program outweighed the expected benefits of triglyceride lowering in patients with FCS. We also received a Non-W from Health Canada for WAYLIVRA in November 2018. We and Ionis are engaged with the FDA and plan to work with Health Canada to confirm a path forward for WAYLIVRA. As a result, we will need to submit additional data to the FDA and may need to conduct additional clinical studies before obtaining marketing authorization, which in turn could delay or prevent us from generating any revenue or profit from the sale of WAYLIVRA. As an additional example, the foreign regulatory authorities could claim that we or our partners have not tested WAYLIVRA for additional indications, AKCEA-APO(a)-L_Rx, AKCEA-TTR-L_Rx, AKCEA-ANGPTL3-L_Rx and AKCEA-APOCIII-L_Rx in a sufficient number of patients to demonstrate that the medicine is safe and effective in patients with other indications to support an application for marketing authorization for the applicable indication. In such a case, we may need to conduct additional clinical studies before obtaining marketing authorization, which would be expensive and delay the development and commercialization of the medicine.

Any failure to obtain approvals for WAYLIVRA in other important markets outside of the E.U., on the timeline that we currently anticipate, or at all, could have a material and adverse impact on our business, prospects, financial condition and results of operations and could cause our stock price to decline.

If we or our partners fail to obtain regulatory approval for our medicines in development, or additional approvals for TEGSEDI and WAYLIVRA, we or our partners cannot sell them in the applicable markets.

We cannot guarantee that any of our medicines in development will be safe and effective, or will be approved or receive additional approvals for commercialization, as applicable. We and our partners must conduct time-consuming, extensive and costly clinical studies to demonstrate the safety and efficacy of each of our medicines in development before they can be approved, or receive additional approvals, for sale. We and our partners must conduct these studies in compliance with FDA regulations and with comparable regulations in other countries.

35

---

 

We or our partners may not obtain necessary regulatory approvals on a timely basis, if at all, for any of our medicines. It is possible that regulatory authorities will not approve TEGSEDI in additional markets or WAYLIVRA in additional markets or for additional indications or any of our other medicines in development, for marketing. If the FDA or another regulatory authority believes that we or our partners have not sufficiently demonstrated the safety or efficacy of any of our medicines in development, the authority will not approve the specific medicine or will require additional studies, which can be time consuming and expensive and which will delay or harm our ability to successfully commercialize the medicine. For example, in August 2018 we received a CRL from the FDA regarding the new drug application for WAYLIVRA in which the FDA determined that the safety concerns identified with WAYLIVRA in our clinical development program outweighed the expected benefits of triglyceride lowering in patients with FCS. We also received a Non-W from Health Canada for WAYLIVRA in November 2018. We and Ionis are engaged with the FDA and plan to work with Health Canada to confirm a path forward for WAYLIVRA. As a result, we will need to submit additional data to the FDA and may need to conduct additional clinical studies before obtaining marketing authorization, which in turn could delay or prevent us from generating any meaningful revenue or profit from the sale of WAYLIVRA.

The FDA or other comparable foreign regulatory authorities can delay, limit or deny approval of a medicine for many reasons, including:

Failure to successfully develop our medicines in development, or to receive marketing authorization for our medicines in important markets or delays in these authorizations would prevent or delay the commercial launch of the medicine, and, as a result, would negatively affect our ability to generate revenue.

We may not be able to benefit from orphan drug designation for WAYLIVRA, TEGSEDI or any of our other medicines.

The FDA and EMA have granted orphan drug designation to TEGSEDI for the treatment of patients with polyneuropathy due to hATTR amyloidosis and to WAYLIVRA for the treatment of patients with FCS. In addition, the EMA has granted orphan drug designation to WAYLIVRA for the treatment of patients with FPL. The FDA, however, refused to grant our request for orphan drug designation for WAYLIVRA for the treatment of patients with FPL in the United States in 2017.

In the United States, under the Orphan Drug Act, the FDA may designate a medicine as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but it can provide financial incentives, such as tax advantages and user-fee waivers, as well as longer regulatory exclusivity periods.

Even if approval is obtained on a medicine that has been designated as an orphan drug, we may lose orphan drug exclusivity if the FDA determines that the request for designation was materially defective or if we cannot assure sufficient quantity of the applicable medicine to meet the needs of patients with the rare disease or condition, or if a competitor is able to gain approval for the same medicine in a safer or more effective form or that makes a major contribution to patient care.

Even if we maintain orphan drug exclusivity for TEGSEDI for the treatment of patients with polyneuropathy caused by hATTR amyloidosis or WAYLIVRA for the treatment of patients with FCS, or obtain orphan drug exclusivity for our other

36

---

 

medicines, the exclusivity may not effectively protect the medicine from competition because regulatory authorities still may authorize different medicines for the same condition.

We may expend our limited resources to pursue a particular medicine or indication and fail to capitalize on medicines or indications that may be more profitable or for which there is a greater likelihood of success.

We will continue to dedicate a substantial amount of our resources to commercialize TEGSEDI and support the continued development of AKCEA-TTR-L_Rx. In addition, we may dedicate a substantial amount of our resources to support the continued development of AKCEA-APOCIII-L_Rx and to commercialize WAYLIVRA in the E.U. for patients with FCS and to develop and seek regulatory approval for WAYLIVRA to treat patients with FPL. As a result, we may forego or delay pursuit of opportunities with our other medicines or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial medicines or profitable market opportunities. Our spending on current and future research and development programs and medicines for specific indications may not yield any commercially viable medicines.

Our medicines could be subject to regulatory limitations following approval.

Following approval of a medicine, we and our partners must comply with comprehensive government regulations regarding the manufacture, marketing and distribution of drug products. Promotional communications regarding prescription medicines must be consistent with the information in the product's approved labeling. We and our partners may not obtain the labeling claims necessary or desirable to successfully commercialize our medicines, including TEGSEDI and WAYLIVRA for FCS in the E.U., and if approved, WAYLIVRA for additional indications, and AKCEA-ANGPTL3-L_Rx, AKCEA-APOCIII-L_Rx, AKCEA-APO(a)-L_Rx, and AKCEA-TTR-L_Rx.

The FDA and foreign regulatory authorities can impose significant restrictions on an approved medicine through the product label and on advertising, promotional and distribution activities. For example:

Prescription medicines may be promoted only for the approved indications in accordance with the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label may be subject to significant liability.

In addition, when approved, the FDA or a foreign regulatory authority may condition approval on the performance of post-approval clinical studies or patient monitoring, which could be time consuming and expensive. For example, in connection with the conditional marketing approval for WAYLIVRA in the E.U., the EC is requiring us to conduct a post-authorization safety study to evaluate the safety of WAYLIVRA on thrombocytopenia and bleeding in FCS patients taking WAYLIVRA. If the results of such post-marketing studies are not satisfactory, the FDA, EC or other foreign regulatory authority may withdraw marketing authorization or may condition continued marketing on commitments from us or our partners that may be expensive and/or time consuming to fulfill.

In addition, if we or others identify side effects after any of our medicines are on the market, if manufacturing problems occur subsequent to regulatory approval, or if we, our manufacturers or our partners fail to comply with regulatory requirements, we or our partners could be subject to:

37

---

 

Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected medicine or could substantially increase the costs and expenses of commercializing such medicine, which in turn could delay or prevent us from generating any revenue or profit from the sale of the medicine.

The development and commercialization of TEGSEDI and WAYLIVRA may place strain on our management team’s time and attention and may divert our management team’s attention from our other existing products.

Although we have personnel with experience commercializing medicines, we ourselves have limited experience commercializing products. We commercially launched TEGSEDI during the fourth quarter of 2018. Following our receipt of conditional marketing authorization approval from the EC, we launched WAYLIVRA in the E.U. in August 2019 as an adjunct to diet in patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate. Launch activities in many of the E.U. countries are ongoing. The commercial launch of TEGSEDI and WAYLIVRA will continue to require significant efforts and the devotion of substantial resources, as we finalize regulatory submissions, manage the manufacturing of sufficient quantities of product to support long-term commercial sales and integrate, optimize or maintain, as applicable, the global sales, marketing, medical, for each of WAYLIVRA and TEGSEDI, and patient support infrastructure, which may place pressure on the management team’s time and attention. These efforts may also divert the attention of the management team from our other business operations, such as the development or commercialization of our other pipeline products, including AKCEA-APO(a)-L_Rx, AKCEA-TTR-L_Rx, AKCEA-ANGPTL3-L_Rx and AKCEA-APOCIII-L_Rx. As a result, our business, results of operations, financial condition and prospects for future growth could be adversely impacted and the market price of our common stock may decline.

Risks Related to Commercialization of Our Medicines

If we cannot optimize and maintain effective marketing and sales capabilities or enter into agreements with third parties to market and sell TEGSEDI and WAYLIVRA, we may not generate significant product revenue from TEGSEDI or WAYLIVRA.

To successfully commercialize TEGSEDI and WAYLIVRA, we must obtain adequate coverage and reimbursement from third party payors and effectively manage our marketing, sales and distribution capabilities or make arrangements with third parties to perform these services. We may not be successful in doing so. To commercialize WAYLIVRA in the initial indications we plan to pursue and to continue the commercialization of TEGSEDI, we will need to optimize and maintain specialty sales forces in the global regions where we currently market or expect to market TEGSEDI and WAYLIVRA, supported by case managers, reimbursement specialists, partnerships with specialty pharmacies, injection training, routine blood and urine monitoring and a medical affairs team.

It is expensive and time consuming for us to maintain our own sales forces and related compliance protocols to market TEGSEDI and WAYLIVRA, and it will be increasingly expensive and time consuming when we commercially launch additional medicines, if approved. We may never successfully optimize or manage this capability and any failure could harm the commercial launch of WAYLIVRA or adversely affect TEGSEDI sales. Additionally, we and our partners, if any, will have to compete with other companies to recruit, hire, train, manage and retain marketing and sales personnel. As a result of our receipt of a CRL from the FDA regarding the new drug application for WAYLIVRA, on September 6, 2018, we enacted a plan to reorganize our workforce to better align with the immediate needs of the business. In connection with this reorganization plan, we reduced our workforce by

38

---

 

approximately 12% and will need to increase our operations and expand our use of third-party contractors if WAYLIVRA is approved in the United States.

We have incurred expenses launching TEGSEDI in the E.U., Canada and the U.S. and launching WAYLIVRA in the E.U. and optimizing and managing the marketing and sales infrastructure. If regulatory requirements or other factors cause the commercialization of TEGSEDI or WAYLIVRA to be less successful than expected in important markets, we would incur additional expenses for having invested in these capabilities prior to realizing any significant revenue from sales of TEGSEDI or WAYLIVRA. Our sales force and marketing teams may not successfully commercialize TEGSEDI or WAYLIVRA.

To the extent we and Ionis decide to rely on third parties to commercialize TEGSEDI or WAYLIVRA in a particular geographic market, we may receive less revenue than if we commercialized TEGSEDI or WAYLIVRA by ourselves. For example, in August 2018, we granted PTC Therapeutics International Limited, or PTC Therapeutics, the exclusive right to commercialize TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries, and we will continue to rely on PTC Therapeutics to commercialize TEGSEDI and WAYLIVRA in those geographic markets. In addition, in August 2018 we entered into an agreement with Accredo Health Group, Inc., or Accredo, a subsidiary of Express Scripts, to be our specialty pharmacy partner for distribution of TEGSEDI in the U.S. Further, we have less control over the sales efforts of other third parties, including PTC Therapeutics and Accredo, involved in commercializing TEGSEDI or WAYLIVRA.

If we cannot effectively optimize and manage our distribution, medical affairs, market access, marketing and sales infrastructure, or find a suitable third party to perform such functions, the sales of TEGSEDI and WAYLIVRA may be adversely affected. Such events may result in decreased sales and lower revenue, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

If we are unable to rely on third-party specialty channels to distribute our medicines to patients we may be unable to generate adequate revenue.

We and our strategic partners have contracted with, rely on and will continue to rely on third-party specialty pharmacies to distribute our medicines to patients. A specialty pharmacy is a pharmacy that specializes in dispensing medications for complex or chronic conditions, a process that requires a high level of patient education and ongoing management. Our management team will need to devote a significant amount of its attention to optimizing and managing this distribution network. If we cannot effectively optimize and manage this distribution process, any future launch by us of AKCEA-APOCIII-L_Rx and AKCEA-TTR-L_Rx and the sales of TEGSEDI and WAYLIVRA, will be adversely affected.

In addition, the use of specialty pharmacies involves certain risks, including, but not limited to, risks that these organizations will:

Any such events may result in decreased sales and lower revenue, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

If the market does not accept our medicines, including TEGSEDI, WAYLIVRA and our medicines in development, we are not likely to generate substantial product revenue or become profitable.

Even though we have obtained marketing authorization approval from the FDA, the EC, Health Canada and ANVISA for TEGSEDI, conditional marketing authorization approval from the EC for WAYLIVRA and if we or our strategic partners obtain a marketing authorization for WAYLIVRA in the United States or Canada or for additional indications and our medicines in development, our success will depend upon the medical community, patients and third-party payers accepting our medicines as medically useful, cost-effective, safe and convenient. Even if the FDA or foreign regulatory authorities authorize our medicines for

39

---

 

commercialization, doctors may not prescribe our medicines to treat patients. We and our partners may not successfully commercialize additional medicines.

Additionally, in many of the markets where we or our partners may sell our medicines in the future, if we cannot agree with the government or other third-party payers regarding the price we can charge for our medicines, then we may not be able to sell our medicines in that market. Similarly, cost control initiatives by governments or third-party payers could decrease the price received for our medicines or increase patient coinsurance to a level that makes the continued commercializing of TEGSEDI and WAYLIVRA as well as the commercializing of our medicines in development, if approved, economically unviable.

The degree of market acceptance for TEGSEDI, WAYLIVRA and our medicines in development depends upon a number of factors, including the:

Based on the profile of our medicines, physicians, patients, patient advocates, payers or the medical community in general may not accept and/or use any medicines that we may develop.

For example, the product label for TEGSEDI in the United States has a boxed warning for thrombocytopenia and glomerulonephritis, requires periodic blood and urine monitoring, and TEGSEDI is available only through a Risk Evaluation and Mitigation Strategy, or REMS, program. Our main competition in the U.S. market for TEGSEDI is ONPATTRO (patisiran), marketed by Alnylam Pharmaceuticals, Inc. Although ONPATTRO requires intravenous administration and pre-treatment with steroids, it does not have a boxed warning or REMS. Additionally, the product label for WAYLIVRA in the E.U. requires regular blood monitoring. In each case, these label requirements could negatively affect our ability to attract and retain patients for these medicines. We believe that the enhanced monitoring we have implemented to support early detection and management of these issues can help manage these safety issues so that patients can continue treatment. Since implementation of the enhanced monitoring, serious platelet events have been infrequent. While we believe we can better maintain patients on TEGSEDI and WAYLIVRA through our patient-centric commercial approach where we plan to have greater involvement with physicians and patients, if we cannot effectively maintain patients on TEGSEDI and WAYLIVRA, we may not be able to generate substantial revenue from TEGSEDI and WAYLIVRA sales.

The patient populations suffering from FCS and FPL are small and have not been established with precision. If the actual number of patients is smaller than we estimate, or if we cannot raise awareness of these diseases and diagnosis is not improved, our revenue and ability to achieve profitability from WAYLIVRA may be adversely affected.

We estimate there are 3,000 to 5,000 FCS patients and an additional 3,000 to 5,000 FPL patients globally. Our estimates of the sizes of the patient populations are based on published studies as well as internal analyses. If the results of these studies or our analyses of them do not accurately reflect the number of patients with FCS and FPL, our assessment of the market potential for WAYLIVRA may be inaccurate, making it difficult or impossible for us to meet our revenue goals, or to obtain and maintain profitability. In addition, as is the case with most orphan diseases, if we cannot successfully raise awareness of these diseases and improve diagnosis, it will be more difficult or impossible to achieve profitability.

In addition, since the patient populations for FCS and FPL are small, the per-patient medicine pricing must be priced appropriately in order to recover our development and manufacturing costs, fund adequate patient support programs and achieve profitability. For these initial indications, we may not maintain or obtain sufficient sales volume at a price that justifies our product development efforts and our sales and marketing and manufacturing expenses.

The patient population suffering from hATTR amyloidosis is small and has not been established with precision. If the actual number of patients is smaller than we estimate, or if we cannot raise awareness of the disease and diagnosis is not improved, our revenue and ability to achieve profitability from either TEGSEDI or AKCEA-TTR-L_Rx may be adversely affected.

We estimate there are 50,000 patients with hATTR amyloidosis globally. Our estimate of the size of the patient population is based on published studies as well as internal analyses. If the results of these studies or our analyses of them do not accurately reflect the number of patients with hATTR amyloidosis, our assessment of the market potential for either TEGSEDI or AKCEA-TTR-L_Rx may be inaccurate, making it difficult or impossible for us to meet our revenue goals, or to obtain and maintain profitability. In

40

---

 

addition, as is the case with most orphan diseases, if we cannot successfully raise awareness of these diseases and improve diagnosis, it will be more difficult or impossible to achieve profitability. For these initial indications, we may not maintain or obtain sufficient sales volume at a price that justifies our product development efforts and our sales and marketing and manufacturing expenses.

If we or our partners fail to compete effectively, WAYLIVRA, TEGSEDI and our medicines in development will not contribute significant revenue.

Our competitors engage in drug discovery throughout the world, are numerous and include, among others, major pharmaceutical companies and specialized biopharmaceutical firms. Our competitors may succeed in developing medicines that are:

These competitive developments could make WAYLIVRA, TEGSEDI and our medicines in development, obsolete or non-competitive. Further, all of our medicines are delivered by injection, which may render them less attractive to patients than non-injectable products offered by our current or future competitors.

Many of our competitors have substantially greater financial, technical and human resources than we do. In addition, many of these competitors have significantly greater experience than we do in conducting preclinical testing and human clinical studies, in obtaining FDA and other regulatory authorizations and in commercializing pharmaceutical products. Accordingly, our competitors may succeed in obtaining regulatory authorization for products earlier than we do. Marketing and sales capability is another factor relevant to the competitive position of our medicines, and many of our competitors will have greater marketing and sales capabilities than our capabilities.

There are several pharmaceutical and biotechnology companies engaged in the development or commercialization of products against targets that are also targets of medicines in our development pipeline. For example:

41

---

 

If WAYLIVRA, TEGSEDI or the other medicines in our pipeline cannot compete effectively with these and other products with common or similar indications to the medicines in our pipeline, we may not be able to generate substantial revenue from our product sales.

If government or other third-party payers fail to provide adequate coverage and payment rates for TEGSEDI, WAYLIVRA and our medicines in development, our revenue and prospects for profitability will be limited.

In both domestic and foreign markets, sales of our future products will depend in part upon the availability of coverage and reimbursement from third-party payers. The majority of patients in the United States who would fit within our target patient populations for our medicines have their healthcare supported by a combination of Medicare coverage, other government health programs such as Medicaid, managed care providers, private health insurers and other organizations. Coverage decisions may depend upon clinical and economic standards that disfavor new medicines when more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming coverage is approved, the resulting reimbursement payment rates might not be enough to make our medicines affordable. Accordingly, TEGSEDI, and WAYLIVRA for FCS in the E.U. and, if approved, WAYLIVRA in the United States or Canada and for additional indications, and our medicines in development, will face competition from other therapies and medicines for limited financial resources. We may need to conduct post-marketing studies to demonstrate the cost-effectiveness of any future products to satisfy third-party payers. These studies might require us to commit a significant amount of management time and financial and other resources. Third-party payers may never consider our future products as cost-effective. Adequate third-party coverage and reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on investment in product development.

Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medicines exists among third-party payers. Therefore, coverage and reimbursement for medicines can differ significantly from payer to payer. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the PPACA, was passed in March 2010, and substantially changed the way healthcare is financed by both governmental and private insurers, and continues to significantly impact the U.S. pharmaceutical industry. There remain judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. It is unclear how this decision, future decisions, subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. For example, in the United States, recent health reform measures have resulted in reductions in Medicare and other healthcare funding, and there have been several recent U.S. Congressional inquiries and legislation designed to, among other things, reform government program reimbursement methodologies for medicines and bring more transparency to medicine pricing. At the federal level, the Trump administration’s budget proposal for fiscal year 2020 contains further medicine price control measures that could be enacted during the budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain medicines under Medicare Part B, to allow some states to negotiate medicine prices under Medicaid, and to eliminate cost sharing for generic medicines for low-income patients. Further, the Trump administration released a “Blueprint” to lower medicine prices and reduce out of pocket costs of medicines that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of medicines paid by consumers. The Department of Health and Human Services has solicited feedback on some of these measures and, at the same time, has implemented others under its existing authority. While some of these and other measures may require additional authorization to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control medicine costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Third-party coverage and reimbursement for our products or medicines may not be available or adequate in either the United States or international markets, which would negatively affect the potential commercial success of our products, our revenue and our profits.

42

---

 

If we are found in violation of federal or state "fraud and abuse" laws or other healthcare laws and regulations, we may be required to pay a penalty and/or be suspended from participation in federal or state healthcare programs, which may adversely affect our business, financial condition and results of operation.

We may be subject to various federal and state laws pertaining to healthcare "fraud and abuse," including anti-kickback laws and false claims laws. Anti-kickback laws, among other things, make it illegal for a prescription drug manufacturer to pay, or offer to pay, a healthcare provider to refer, purchase or prescribe a particular medicine. Due to the breadth of the statutory and regulatory provisions and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that government authorities and others might challenge our practices under anti-kickback or other fraud and abuse laws. Moreover, recent healthcare reform legislation has strengthened these laws. For example, the intent standard under the federal Anti-Kickback Statute was amended by the PPACA, to a stricter standard such that a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Further, the Affordable Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act. In addition, false claims laws, including the civil False Claims Act, prohibit anyone from, among other things, knowingly and willingly presenting, or causing to be presented for payment, to government third-party payers, including Medicare and Medicaid claims for reimbursed medicines that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our activities, including those relating to the sale and marketing of our products may be subject to scrutiny under these healthcare fraud and abuse laws. If we violated such laws, we could face a combination of:

Given the significant penalties and fines that the government can impose on companies and individuals if convicted, allegations of violations often result in settlements even if the company or individual being investigated admits no wrongdoing. Settlements often include significant civil sanctions, including fines and civil monetary penalties, and corporate integrity agreements. If the government were to allege or convict us or our employees, including our executive officers of violating these laws, our business could be harmed. In addition, private individuals may bring similar actions under the False Claims Act through civil whistleblower or qui tam actions on behalf of the government and such individuals and may share in amounts paid by the entity to the government in recovery or settlement. Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing focus on these laws by law enforcement authorities. To the extent we have access to protected health information we could be subject to foreign and federal and state health information privacy and security laws, including without limitation, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and analogous foreign and state laws governing the privacy and security of health information, such as the General Data Protection Regulation, or GDPR in the E.U., and the California Consumer Privacy Act, or CCPA, in California, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect. Our failure to comply with applicable federal and state health information privacy and security laws could subject us to significant fines and multi-year corrective action plans. In addition, the Physician Payments Sunshine Act, requires certain manufacturers of medicines, devices, biologic and medical supplies to report annually to the Center for Medicare and Medicaid Services, or CMS, certain information related to payments and other transfers of value to physicians, as defined by such law, and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members. TEGSEDI commercially launched in the U.S. in the fourth quarter of 2018 and as such we are now required to report annually to CMS certain information related to payments and other transfers of value we may provide to physicians and teaching hospitals. Beginning in 2022, we will also be required to report information related to payments and other transfers of value to certain other healthcare professionals. Further, an increasing number of state and local laws require manufacturers to report certain pricing and marketing information. Certain states also require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; and require the registration of pharmaceutical sales representatives. If we do not fully comply with such laws, many of which may differ from each other in significant ways, thus complicating compliance efforts, we could be subject to the penalty provisions of the pertinent state and local authorities.

43

---

 

Similar rigid restrictions related to anti-kickbacks and promoting and marketing medicinal products apply in the E.U. and other countries. Authorities in these countries strictly enforce these restrictions. Even in those countries where we will not be directly responsible for promoting and marketing our products, inappropriate activity by any of our international commercialization partners we may have could harm us.

Risks Related to Dependence on Third Parties

We plan to substantially depend on our collaboration with Novartis to develop and commercialize AKCEA-APO(a)-L_Rx.

We granted Novartis an exclusive option to exclusively license AKCEA-APO(a)-L_Rx pursuant to our strategic collaboration, option and license agreement with Novartis. In February 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx. We plan to substantially depend on Novartis to further develop and commercialize AKCEA-APO(a)-L_Rx. We initiated this collaboration primarily to have Novartis:

Since Novartis has exercised its option to license AKCEA-APO(a)-L_Rx, we will rely on Novartis to further develop, obtain regulatory approvals for, and commercialize it. In general, we cannot control the amount and timing of resources that Novartis devotes to our strategic collaboration. If Novartis fails to use commercially reasonable efforts to further develop, obtain regulatory approvals for, or commercialize AKCEA-APO(a)-L_Rx, or if Novartis' efforts are not effective, our business may be negatively affected. Novartis could pursue other technologies or develop other medicines either on its own or in collaboration with others to treat the same diseases as we and Novartis plan to treat with AKCEA-APO(a)-L_Rx. Novartis could pursue these technologies and develop these other medicines at the same time as it is developing or commercializing AKCEA-APO(a)-L_Rx, and Novartis is not required to inform us of such activities.

Our strategic collaboration with Novartis may not continue for various reasons. Novartis can terminate our agreement at any time. If Novartis stops developing or commercializing AKCEA-APO(a)-L_Rx, we will have to seek additional sources for funding and may have to delay or reduce our development and commercialization plans for this medicine.

In addition, given Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx, Novartis is responsible for the long-term supply of drug substance and finished drug product for AKCEA-APO(a)-L_Rx.

Our strategic collaboration with Novartis may not result in the successful commercialization of AKCEA-APO(a)-L_Rx. If Novartis does not successfully develop, manufacture or commercialize AKCEA-APO(a)-L_Rx, we may receive limited or no revenues for this medicine.

We plan to substantially depend on our license agreement with Pfizer to develop and commercialize AKCEA-ANGPTL3-L_Rx.

We granted Pfizer a worldwide, exclusive license to develop and commercialize AKCEA-ANGPTL3-L_Rx. We plan to substantially depend on Pfizer to further develop and commercialize AKCEA-ANGPTL3-L_Rx. We entered into this license agreement with Pfizer primarily to have Pfizer:

Since Pfizer has licensed exclusive, worldwide rights to AKCEA-ANGPTL3-L_Rx, we will rely on Pfizer to further develop, obtain regulatory approvals for, and commercialize it. In general, we cannot control the amount and timing of resources that Pfizer devotes to AKCEA-ANGPTL3-L_Rx. If Pfizer fails to use commercially reasonable efforts to further develop, obtain regulatory approvals for, or commercialize AKCEA-ANGPTL3-L_Rx, or if Pfizer’s efforts are not effective, our business may be negatively affected. Pfizer could pursue other technologies or develop other medicines either on its own or in collaboration with others to treat the same diseases as we and Pfizer plan to treat with AKCEA-ANGPTL3-L_Rx. Pfizer could pursue these technologies and develop these other medicines at the same time it is developing or commercializing AKCEA-ANGPTL3-L_Rx, and Pfizer is not required to inform us of such activities_.

44

---

 

Our agreement with Pfizer may not continue for various reasons. Pfizer can terminate our agreement at any time. If Pfizer stops developing or commercializing AKCEA-ANGPTL3-L_Rx, we will have to seek additional sources for funding and may have to delay or reduce our development and commercialization plans for this medicine.

In addition, Pfizer will be responsible for the long-term supply of drug substance and finished drug product for AKCEA-ANGPTL3-L_Rx.

Our agreement with Pfizer may not result in the successful commercialization of AKCEA-ANGPTL3-L_Rx. If Pfizer does not successfully develop, manufacture or commercialize AKCEA-ANGPTL3-L_Rx, we may receive limited or no revenues for this medicine.

We plan to substantially depend on our collaboration with PTC Therapeutics to commercialize TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries.

In August 2018, we granted PTC Therapeutics International Limited the exclusive right to commercialize TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries. We plan to substantially depend on PTC Therapeutics to commercialize these medicines in those geographic markets.

In general, we cannot control the amount and timing of resources that PTC Therapeutics devotes to our strategic collaboration. If PTC Therapeutics fails to use commercially reasonable efforts to obtain regulatory approvals for, or commercialize these medicines, or if PTC Therapeutics’ efforts are not effective, our business may be negatively affected. PTC Therapeutics could pursue other technologies or develop other medicines either on its own or in collaboration with others to treat the same diseases as we and PTC plan to treat with TEGSEDI and WAYLIVRA. PTC Therapeutics could pursue these technologies and develop these other medicines at the same time as it is developing or commercializing TEGSEDI and WAYLIVRA, and PTC Therapeutics is not required to inform us of such activities.

Our strategic collaboration with PTC Therapeutics may not continue for various reasons. If PTC Therapeutics stops commercializing a medicine, we will have to seek additional sources for funding and may have to delay or reduce our commercialization plans for TEGSEDI and WAYLIVRA in Latin America or certain Caribbean countries.

Our strategic collaboration with PTC Therapeutics may not result in the successful commercialization of TEGSEDI or WAYLIVRA in Latin America or certain Caribbean countries. If PTC Therapeutics does not successfully commercialize TEGSEDI or WAYLIVRA, we may receive limited revenue for TEGSEDI or no revenue for WAYLIVRA in Latin America or certain Caribbean countries.

Certain of our medicines may compete with our other medicines, which could reduce our expected revenues.

Certain of our medicines inhibit the production of the same protein.  For example, WAYLIVRA inhibits the production of the same protein as AKCEA-APOCIII-L_Rx and TEGSEDI inhibits the same protein as AKCEA-TTR-L_Rx. We believe the enhancements we incorporated into AKCEA-APOCIII-L_Rx and AKCEA-TTR-L_Rx can provide greater patient convenience by allowing for significantly lower doses and less frequent administration compared to WAYLIVRA and TEGSEDI, respectively. As such, to the extent physicians and patients elect to use AKCEA-APOCIII-L_Rx or AKCEA-TTR-L_Rx instead of WAYLIVRA or TEGSEDI, it will reduce the revenue we derive from those medicines. In addition, while AKCEA-ANGPTL3-L_Rx, AKCEA-APOCIII-L_Rx and WAYLIVRA use different mechanisms of action, if AKCEA-ANGPTL3-L_Rx can effectively lower triglyceride levels in FCS patients, it may likewise reduce the revenue we derive from WAYLIVRA and AKCEA-APOCIII-L_Rx.

If we cannot manufacture our medicines or contract with a third party to manufacture our medicines at costs that allow us to charge competitive prices to buyers, we will not be able to operate profitably.

To successfully commercialize TEGSEDI, and WAYLIVRA for FCS in the E.U. and, if approved, WAYLIVRA in the United States or Canada and for additional indications, and our medicines in development, we will need to optimize and manage large-scale commercial manufacturing capabilities either on our own or through a third-party manufacturer. In addition, as our drug development pipeline matures, we will have a greater need for clinical study and commercial manufacturing capacity. We have no direct experience manufacturing pharmaceutical products of the chemical class represented by our medicines, called oligonucleotides, on a commercial scale for the systemic administration of a medicine. We currently rely and expect to rely for the foreseeable future on Ionis' manufacturing capacity and efficiency and the capacity and efficiency of third parties to produce our oligonucleotide medicines, and our business could be negatively affected if Ionis and these third parties ceased to provide us with this capability for any reason. In addition, there are a small number of suppliers for certain raw materials that we use to manufacture our medicines, and some of these suppliers will need to increase their scale of production to meet our projected needs for commercial manufacturing. Further, if we cannot continue to acquire raw materials from these suppliers on commercially reasonable terms or at all, we may be required to find alternative suppliers, which could be expensive and time consuming and negatively affect our ability to develop or commercialize our medicines in a timely manner or at all. We may not be able to manufacture our medicines at a cost or in quantities necessary to make commercially successful products.

45

---

 

We do not have long-term supply agreements for our medicines. We cannot guarantee that we will have a steady supply of medicine to complete clinical studies, make registration batches for approval or satisfy market demand if commercialized at prices that are commercially acceptable. In addition, if we need to change manufacturers for any reason, we will need to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with verifying a new manufacturer could negatively affect our ability to develop medicines in a timely manner or within budget.

Also, manufacturers must adhere to the FDA's current Good Manufacturing Practices regulations and similar regulations in foreign countries, which the applicable regulatory authorities enforce through facilities inspection programs. Our contract manufacturers may not comply or maintain compliance with Good Manufacturing Practices, or similar foreign regulations. Non-compliance could significantly delay or prevent receipt of marketing authorization for our medicines, including authorizations for WAYLIVRA and our medicines in development, or result in enforcement action after authorization that could limit the commercial success of our medicines, including WAYLIVRA, TEGSEDI and our medicines in development.

We depend on Ionis and third parties to conduct our clinical studies for our medicines and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

We depend on Ionis and independent clinical investigators, contract research organizations and other third-party service providers to conduct the clinical studies for our medicines, including AKCEA-TTR-L_Rx and AKCEA-APOCIII-L_Rx, and expect to continue to do so in the future. For example, we use Ionis and clinical research organizations for the clinical studies for WAYLIVRA, AKCEA-TTR-L_Rx and our other medicines in development and rely on Novartis to develop AKCEA-APO(a)-L_Rx. We rely heavily on these parties for successful execution of our clinical studies, but do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that these third parties conduct each of our clinical studies in accordance with the general investigational plan, approved protocols for the study and applicable regulations. Ionis and parties may not complete activities on schedule or may not conduct our clinical studies in accordance with regulatory requirements or our stated protocols. The failure of these parties to carry out their obligations or a termination of our relationship with these parties could delay or prevent the development, marketing authorization and commercialization of our medicines, including authorizations for WAYLIVRA, AKCEA-APO(a)-L_Rx, AKCEA-TTR-L_Rx and our other medicines in development.

We may seek to form additional partnerships in the future with respect to WAYLIVRA, AKCEA-APOCIII-L_Rx and our other medicines in development, and we may not realize the benefits of such partnerships.

Although we intend to continue developing and commercializing WAYLIVRA and AKCEA-APOCIII-L_Rx for patients with FCS and FPL ourselves, we may form partnerships, create joint ventures or collaborations or enter into licensing arrangements with third parties for the development and commercialization of our medicines in development. For example, we have granted PTC Therapeutics an exclusive license to commercialize WAYLIVRA in Latin America and certain Caribbean countries. We face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Any delays in entering into new strategic partnership agreements related to our medicines could delay the development and commercialization of our medicines and reduce their competitiveness even if they reach the market. Moreover, we may not be successful in our efforts to establish other strategic partnerships or other collaborative arrangements for any additional medicines because the potential partner may consider that our development pipeline is not advanced enough to justify a collaborative effort, or that WAYLIVRA and our other medicines in development do not have the requisite potential to demonstrate safety and efficacy in the target populations in other geographic markets. In addition, we will need to mutually agree with Ionis on the terms of any additional sublicenses to a third party for WAYLIVRA and our other medicines in development. If we cannot mutually agree on terms for a sublicense to a third party or if Ionis does not agree to a sublicense at all, it could delay our ability to develop and commercialize WAYLIVRA and our other medicines in development. Even if we are successful in establishing such a strategic partnership or collaboration, we cannot be certain that, following such a strategic transaction or collaboration, we will be able to progress the development and commercialization of the applicable medicines as envisioned, or that we will achieve the revenue that would justify such transaction. If we do not accurately evaluate the commercial potential or target market for a particular medicine, we may relinquish valuable rights to that medicine through future collaboration, licensing or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights.

46

---

 

Risks Related to Our Relationship with Ionis

Ionis controls the direction of our business, and the concentrated ownership of our common stock will prevent you and other stockholders from influencing significant decisions.

Ionis owned 77,094,682 shares of our common stock, or approximately 76 percent, of the economic interest and voting power of our outstanding common stock as of December 31, 2019, which ownership will be expected to increase further if we achieve certain milestone events and pay the associated milestone payment in shares of common stock pursuant to the payment election. As long as Ionis beneficially controls a majority of the voting power of our outstanding common stock, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors. Even if Ionis were to control less than a majority of the voting power of our outstanding common stock, it may influence the outcome of such corporate actions so long as it owns a significant portion of our common stock. If Ionis continues to hold its shares of our common stock, it could remain our controlling stockholder for an extended period of time or indefinitely.

The licensing transaction with Ionis and our common stock issuances to Ionis in connection with our achievement of the TEGSEDI regulatory milestones and our sublicense fee payments to Ionis pursuant to our agreements with Novartis and Pfizer have increased Ionis’ ownership percentage, and this increase, along with Ionis’ increased reliance on us as a commercialization partner, given that we will be commercializing at least two Ionis-developed products (WAYLIVRA and TEGSEDI), may increase the length of time during which Ionis will control us. As a general matter, the TEGSEDI license agreement and the related Investor Rights Agreement increased Ionis’ control over our affairs. In addition, our TEGSEDI licensing agreement requires Ionis’ consent to the budget related to the commercialization of TEGSEDI and AKCEA-TTR-L_Rx.

Ionis' interests may not be the same as, or may conflict with, the interests of our other stockholders. You will not be able to affect the outcome of any stockholder vote while Ionis controls the majority of the voting power of our outstanding common stock. As a result, Ionis can control, directly or indirectly and subject to applicable law, all matters affecting us, including:

Because Ionis' interests may differ from ours or yours, actions that Ionis takes with respect to us, as our controlling stockholder, may not be favorable to us or you.

We intend to license additional medicines from Ionis but may not be successful in completing such licenses or on favorable terms, which may adversely affect our long-term strategy as a company and the value of our stock. If we are successful in completing additional licenses with Ionis, we could be exposed to additional risk of shareholder derivative litigation.

On November 11, 2019, a purported Company stockholder filed an action in the Delaware Court of Chancery captioned City of Cambridge Retirement System v. Crooke, et al., C.A. No. 2019-0905, or the Delaware Action. The plaintiff in the Delaware Action asserts claims against (i) current and former members of our board of directors; and (ii) Ionis Pharmaceuticals, Inc., or collectively, the Defendants. The plaintiff asserts derivative claims on behalf of Akcea, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of our stockholders. The plaintiff in the Delaware action asserts that the Defendants breached their fiduciary duties in connection with the licensing transaction we and Ionis entered into regarding inotersen and AKCEA-TTR-L_Rx. The plaintiff also asserts an unjust enrichment claim against Ionis. We and the Defendants have moved to dismiss the plaintiff’s complaint. This litigation could result in substantial costs and a diversion of management’s resources and attention, which could harm our business and the value of our common stock.

 

We plan to enter into one or more additional licensing transactions with our majority shareholder, Ionis. While we believe we may be successful in our efforts to consummate one or more additional licensing transactions with Ionis, we may not be successful in consummating such transactions or may do so on terms that are less favorable than we anticipated or that were expected by our stockholders, which could adversely affect our stock price. If we successfully enter into additional licensing transactions with Ionis, such transactions could result in shareholder derivative suits being filed against us in addition to the current Delaware Action. Any additional litigation could result in additional substantial costs and a further diversion of management’s resources and attention, which could harm our business and the value of our common stock.

47

---

 

As a “controlled company” under the marketplace rules of the Nasdaq Stock Market, we may rely on exemptions from certain corporate governance requirements that provide protection to stockholders of companies that are subject to such requirements.

Ionis beneficially owns more than 50% of the voting power of our outstanding common stock. As a result, we are a “controlled company” under the marketplace rules of the Nasdaq Stock Market, or Nasdaq, and eligible to rely on exemptions from Nasdaq corporate governance requirements generally obligating listed companies to maintain:

Currently, a majority of our board is composed of independent directors. However, currently our compensation committee is not entirely composed of independent directors. As a controlled company, we have, currently do, and may in the future avail ourselves of some or all of these exemptions. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to the Nasdaq corporate governance requirements described above.

If Ionis sells a controlling interest in our company to a third party in a private transaction, you may not realize a change of control premium on shares of our common stock, and we may become subject to the control of a presently unknown third party.

Ionis owns a significant equity interest in our company. This means that Ionis could choose to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company.

Ionis' ability to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire your shares of our common stock, could prevent you from realizing any change of control premium on your shares of our common stock that may otherwise accrue to Ionis on its private sale of our common stock. Additionally, if Ionis privately sells its significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. In addition, if Ionis sells a controlling interest in our company to a third party, such a sale could negatively impact or accelerate any future indebtedness we may incur, and negatively impact any other commercial agreements and relationships, all of which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our operating results and financial condition.

Certain of our directors and officers may have actual or potential conflicts of interest because of their positions with Ionis.

Joseph “Skip” Klein, III, a board member for Ionis, and B. Lynne Parshall, Senior Strategic Advisor and board member for Ionis, serve on our board of directors and retain their positions or engagements with Ionis. In addition, B. Lynne Parshall was appointed as Chair of our board of directors in December 2019 and entered into an agreement with us in January 2020 to provide strategic advisor services to us. In addition, Damien McDevitt, Ph.D. was the Chief Business Officer of Ionis until he was appointed as our interim Chief Executive Officer in September 2019. These individuals own Ionis equity and Ionis equity awards. Their relationship with Ionis and the ownership of any Ionis equity or equity awards creates, or may create the appearance of, conflicts of interest when we ask these individuals to make decisions that could have different implications for Ionis than the decisions have for us. In addition, our certificate of incorporation provides for the allocation of certain corporate opportunities between us and Ionis. Under these provisions, neither Ionis or its other affiliates, nor any of their officers, directors, agents or stockholders, will have any obligation to present to us certain corporate opportunities. For example, a director of our company who also serves as a director, officer or employee of Ionis or any of its other affiliates may present to Ionis certain acquisitions, in-licenses, potential development programs or other opportunities that may be complementary to our business and, as a result, such opportunities may not be available to us. To the extent attractive corporate opportunities are allocated to Ionis or its other affiliates instead of to us, we may not be able to benefit from these opportunities.

48

---

 

The resources Ionis provides us under the license agreements and the services agreement may not be sufficient for us to operate as a standalone company, and we may experience difficulty in separating our resources from Ionis.

Because we have not operated separately from Ionis in the past, we may have difficulty doing so. We will need to acquire resources in addition to, and eventually in lieu of, those provided by Ionis to our company, and may also face difficulty in separating our resources from Ionis' resources and integrating newly acquired resources into our business. In addition, Ionis may prioritize its own research, development, manufacturing and other needs ahead of the services Ionis has agreed to provide us, or Ionis employees who conduct services for us may prioritize Ionis' interests over our interests. Our business, financial condition and results of operations could be harmed if we have difficulty operating as a standalone company, fail to acquire resources that prove to be important to our operations or incur unexpected costs in separating our resources from Ionis' resources or integrating newly acquired resources.

We may not realize the benefits of the licensing transaction with Ionis if we are unable to successfully transition, integrate and support the development and commercialization of TEGSEDI and AKCEA-TTR-L_Rx.

As a result of the licensing transaction with Ionis, we need to successfully transition, integrate and support the assets we acquired related to the commercialization and development of TEGSEDI and AKCEA-TTR-L_Rx if we are to realize any of the potential benefits of the licensing transaction. The failure to meet these integration challenges, including the addition of TEGSEDI commercial team and other employees from Ionis and the coordination across geographies between our headquarters in Massachusetts and our commercialization team in other locations, including major global markets, could seriously harm our results of operations. Our failure to implement an orderly integration could result in failure of, or delays in, the development or commercialization of TEGSEDI and AKCEA-TTR-L_Rx. Such failure or delay could adversely impact our business, results of operations, financial condition and prospects for future growth.

We will incur incremental costs as a standalone company.

Ionis currently performs or supports many important corporate functions for our company. Our consolidated financial statements reflect charges for these services on an allocation basis. Under our services agreement with Ionis, we can use these Ionis services for a fixed term established on a service-by-service basis. However, we generally will have the right to terminate a service earlier if we give notice to Ionis. Partial reduction in the provision of any service requires Ionis' consent. In addition, either party will be able to terminate the agreement due to a material breach of the other party, upon prior written notice, subject to limited cure periods.

We will pay Ionis mutually agreed upon fees for these services, based on Ionis' costs of providing the services. Since we negotiated the services agreement in the context of a parent subsidiary relationship, the terms of the agreement, including the fees charged for the services, may be higher or lower than those that would be agreed to by parties bargaining at arm's length for similar services and may be higher or lower than the costs reflected in the allocations in our historical consolidated financial statements. Ionis will pass third party costs through to us at Ionis' cost. In addition, while Ionis provides us these services, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited.

We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we will receive from Ionis under our services agreement. Additionally, after the agreement terminates, we may not sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from Ionis. When we begin to operate these functions separately, if we do not have our own adequate systems and business functions in place, or cannot obtain them from other providers, we may not operate our business effectively or at comparable costs, and our business may suffer. In addition, we have historically received informal support from Ionis, which may not be addressed in our services agreement. The level of this informal support will diminish and could end in the future.

We may not be able to fully realize the expected benefits of our license agreements with Ionis.

We have development, commercialization and license agreements with Ionis pursuant to which, subject to certain restrictions, we and Ionis will share development responsibilities for WAYLIVRA, TEGSEDI, AKCEA-APOCIII-L_Rx, and AKCEA-TTR-L_Rx. We are paying for research and development costs and reimbursing Ionis for Ionis' employees supporting our development activities. Until we build or acquire our own capabilities to replace those Ionis is providing to us, particularly development, regulatory and manufacturing services, we will be heavily dependent on Ionis.

49

---

 

While we and Ionis intend the license agreements, on the whole, to bolster our capabilities, certain terms of the license agreements and the other related agreements with Ionis may limit our ability to achieve the expected benefits of these transactions, including:

Each of the foregoing terms and Ionis' other rights under the license agreements, could limit our ability to realize the expected benefits of the license agreements or otherwise limit our ability to pursue transactions or development efforts other stockholders may view as beneficial. Further, if Ionis does not continue to own a significant portion of our equity, Ionis' incentive to help us would be diminished. If we fail to achieve the expected benefits of our agreements with Ionis, it may be more difficult, time consuming or expensive for us to develop and commercialize WAYLIVRA, AKCEA-APO(a)-L_Rx, AKCEA-APOCIII-L_Rx, AKCEA-TTR-L_Rx and our other medicines in development and continue the commercialization of TEGSEDI, or may result in our medicines being later to market than those of our competitors or prevent them from ever getting to market. If these events cause delays in new product development we could lose the first in class products in a given therapeutic area.

Risks Related to Our Intellectual Property

If we breach our obligations under any of our license agreements with Ionis, we could lose our rights to WAYLIVRA, TEGSEDI and our other medicines in development.

We obtained our rights to WAYLIVRA, TEGSEDI and our other medicines in development under our license agreements with Ionis. If we breach our obligations under these license agreements and, as a result, Ionis subsequently exercises its right to terminate it, we generally would not be able to continue to develop or commercialize TEGSEDI, WAYLIVRA and our other medicines in development that incorporate Ionis' intellectual property, and Ionis would receive a royalty-free, nonexclusive license to our improvements to those programs, meaning we would lose the benefits of our investment in these programs. If we breach our obligations under the license agreement with respect to AKCEA-APO(a)-L_Rx and Ionis consequently exercises its right to terminate the license agreement, our strategic collaboration with Novartis would convert into a direct strategic collaboration between Novartis and Ionis, and Ionis would receive all of the revenue and other benefits associated with that strategic collaboration. Similarly, if we breach our obligations under the license agreement with respect to TEGSEDI or WAYLIVRA and, Ionis consequently exercises its right to terminate the license agreement, then our strategic collaboration with PTC Therapeutics in Latin America and certain Caribbean countries would convert into a direct strategic collaboration between PTC Therapeutics and Ionis, and Ionis would receive all of the revenue and other benefits associated with that strategic collaboration. In addition, if we breach our obligations under the license agreement with respect to AKCEA-ANGPTL3-L_Rx and, Ionis consequently exercises its right to terminate the license agreement, then our strategic collaboration with Pfizer would convert to a direct license between Pfizer and Ionis, and Ionis would receive all of the revenue and other benefits associated with that license agreement.

50

---

 

If we cannot protect our patent rights or our other proprietary rights, others may compete more effectively against us.

Our success depends to a significant degree upon whether we can continue to secure and maintain intellectual property rights that protect TEGSEDI, WAYLIVRA and our medicines in development. However, patents may not issue from any of our pending patent applications in the United States or in other countries and we may not be able to obtain, maintain or enforce our owned or licensed patents and other intellectual property rights which could impact our ability to compete effectively. In addition, the scope of any of our owned or licensed patents may not be sufficiently broad to provide us with a competitive advantage. Furthermore, other parties may successfully challenge, invalidate or circumvent our issued patents or patents licensed to us so that our patent rights do not create an effective competitive barrier or revenue source.

Composition of matter patents on the active pharmaceutical ingredient for a product are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. Our WAYLIVRA patent portfolio currently includes:

The natural term of the issued U.S. patent covering the WAYLIVRA composition of matter will expire in 2023, but we plan to seek to extend the U.S. patent expiration beyond 2023 based upon the development and regulatory review period in the United States. The natural term of the granted European and Australian patents covering WAYLIVRA will expire in 2024, but we plan to seek to extend each of these patents beyond 2024 based upon the development and regulatory review periods in Europe and Australia.

The natural term of the last expiring issued U.S. patent covering the composition of matter of TEGSEDI will expire in 2031. Patents issued in other countries will have the same natural term. We plan to seek to extend the term of one patent covering TEGSEDI in the U.S., and any other jurisdictions where such extension is available, based upon the development and regulatory review periods for TEGSEDI and in accordance with applicable laws.

We cannot be certain that the U.S. Patent and Trademark Office, or U.S. PTO, and courts in the United States or the patent offices and courts in foreign countries will consider the claims in our owned or licensed patents and applications covering WAYLIVRA, TEGSEDI and our other medicines in development as patentable. Method-of-use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications, physicians may prescribe these products off-label. Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent, including through legal action.

If we or any licensor partner loses or cannot obtain patent protection for TEGSEDI, WAYLIVRA or our medicines in development it could have a material adverse impact on our business.

Intellectual property litigation could cause us to spend substantial resources and prevent us from pursuing our programs.

From time to time we may have to defend our intellectual property rights. If we are involved in an intellectual property dispute, we may need to litigate to defend our rights or assert them against others. Disputes can involve arbitration, litigation or proceedings declared by the U.S. PTO or the International Trade Commission or foreign patent authorities. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios.

51

---

 

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability and the ability of our strategic partners to develop, manufacture, market and sell our medicines and use our proprietary technologies without infringing the proprietary rights and intellectual property of third parties. Extensive litigation regarding patents and other intellectual property rights is common in the biotechnology and pharmaceutical industries. We may in the future become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our medicines and technology, including interference, derivation, reexamination, post-grant review, opposition, cancellation or similar proceedings before the U.S. PTO or its foreign counterparts.

Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. For example, a potential competitor was issued a patent which they have broadly characterized in their annual report on Form 10-K for the year ended December 31, 2018 as being directed to single-stranded antisense polynucleotide molecules capable of inhibiting expression of the human transthyretin gene, and having certain combinations of structural features. This third party has also attempted to broadly characterize certain other patents that they hold. While we believe that we would have substantial defenses in the event this competitor brought a claim against us with respect to TEGSEDI or AKCEA-TTR-L_Rx, patent litigation is inherently uncertain, involves substantial cost and is a distraction to management. Moreover, our stock price may be impacted by the existence of or developments during a litigation, even developments that are preliminary in nature.

We may not be aware of all such intellectual property rights potentially relating to our medicines and their uses. If a third party claims that WAYLIVRA, TEGSEDI or our medicines in development or our technology infringe its patents or other intellectual property rights, we or our partners may have to discontinue an important product or product line, alter our products and processes, pay license fees or cease certain activities. We may not be able to obtain a license to needed intellectual property on favorable terms, if at all. There are many patents issued or applied for in the biotechnology industry, and we may not be aware of patents or patent applications held by others that relate to our business. This is especially true since patent applications in the United States are filed confidentially for the first 18 months. Moreover, the validity and breadth of biotechnology patents involve complex legal and factual questions for which important legal issues remain. Thus, we do not know with certainty that our medicines or our intended commercialization thereof, does and will not infringe or otherwise violate any third party's intellectual property.

We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

Filing, prosecuting and defending patents on our medicines in all countries and jurisdictions throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those we could obtain in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.

Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products. In addition, competitors may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patent rights or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop competitors from infringing our patent rights or misappropriating our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit our right to enforce our patent rights against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. We must ultimately seek patent protection on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

52

---

 

In addition, proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patent rights at risk of being invalidated or interpreted narrowly, could put our owned or licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent protection for TEGSEDI, WAYLIVRA and our medicines in development, our business may be materially harmed.

Depending upon the timing, duration and specifics of the first FDA marketing authorization of TEGSEDI, WAYLIVRA and our medicines in development, a United States patent that we own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments allow the owner of an approved product to extend patent protection for up to five years as compensation for patent term lost during product development and the FDA regulatory review process. During this period of extension, the scope of protection is limited to the approved product and approved uses.

In 2018 we applied for patent term extensions to U.S. patents covering the TEGSEDI compound, composition and uses to recapture a portion of the term lost during regulatory review. Although we have applied for patent term extension for TEGSEDI, and plan on seeking patent term restoration for our other products, we may not succeed if, for example, we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we cannot obtain patent term restoration or the term of any such patent restoration is less than we request, our competitors may enter the market and compete against us sooner than we anticipate, and our ability to generate revenue could be materially adversely affected.

Changes in United States patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the United States Congress, the federal courts, and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

If we and our partners do not adequately protect the trademarks and trade names for our products, then we and our partners may not be able to build name recognition in our markets of interest and our business may be adversely affected.

Our competitors or other third parties may challenge, infringe or circumvent the trademarks or trade names for our products. We and our partners may not be able to protect these trademarks and trade names. In addition, if the trademarks or trade names for one of our products infringe the rights of others, we or our partners may be forced to stop using the trademarks or trade names, which we need for name recognition in our markets of interest. If we cannot establish name recognition based on our trademarks and trade names, we and our partners may not be able to compete effectively and our business may be adversely affected.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

53

---

 

Should any of these events occur, they could significantly harm our business, results of operations and prospects.

Risks Related to Our Business and Industry

We will need to optimize the size of our organization, and we may experience difficulties in managing optimization.

We are currently a small company. To continue the commercialization of TEGSEDI and WAYLIVRA, and to commercialize our medicines in development that we are responsible for commercializing, we will need to optimize our operations and expand our use of third-party contractors. We plan to continue to optimize our compliance, financial and operating infrastructure to ensure the maintenance of a well-managed company including hiring additional staff within our regulatory, clinical and medical affairs groups and an in-house commercial organization initially focused on marketing and selling TEGSEDI and WAYLIVRA. We have added a significant number of new employees to our sales and marketing capability to commercialize TEGSEDI.

We may also anticipate needs for growth that do not materialize. For example, in anticipation of WAYLIVRA’s potential approval, in the second half of 2017, we added a significant number of new employees to our sales and marketing functions to prepare to commercialize WAYLIVRA. However, as a result of our receipt of a complete response letter, or CRL, from the FDA regarding the new drug application for WAYLIVRA, on September 6, 2018, we enacted a plan to reorganize our workforce to better align with the immediate needs of our business. In connection with this reorganization plan, we reduced our workforce by approximately 12%. If WAYLIVRA is subsequently approved in the United States, we will again need to increase our operations and expand our use of third-party contractors. We cannot assure you that we will not build out our compliance, financial or operating infrastructure again in anticipation of developments that do not occur or that occur later than we anticipate.

The current and future growth or optimization will impose significant added responsibilities on our management, including the need to maintain, integrate, optimize and manage additional employees. In addition, to meet our obligations as a public company, we will need to increase or optimize our general and administrative capabilities. Our current management, personnel and systems may not be adequate to support this growth or optimization. Our future financial performance and our ability to commercialize our medicines and to compete effectively will depend, in part, on our ability to manage any future growth or optimization effectively. To that end, we must be able to:

54

---

 

Our staff, financial resources, systems, procedures or controls may be inadequate to support our operations and our management may be unable to successfully manage future market opportunities or our relationships with customers and other third parties.

If we do not progress in our programs as anticipated, the price of our securities could decrease.

For planning purposes, we estimate and may disclose the timing of a variety of clinical, regulatory and other milestones, such as when we anticipate a certain medicine will enter into clinical trials, when we anticipate completing a clinical study, when we anticipate filing an application for marketing authorization, or when we or our partners plan to commercially launch a medicine. We base our estimates on present facts and a variety of assumptions. Many underlying assumptions are outside of our control. If we do not achieve milestones in accordance with our or our investors' or securities analysts' expectations, including milestones related to WAYLIVRA, TEGSEDI and our medicines in development, the price of our securities could decrease.

The loss of key personnel, or an inability to attract and retain highly skilled personnel, could make it more difficult to run our business and reduce our likelihood of success.

We are dependent on the principal members of our management and scientific staff. We do not have employment agreements with any of our executive officers that would prevent them from leaving us. The loss of management and key scientific employees might slow the achievement of important research and development goals. It is also critical to our success that we recruit and retain qualified scientific personnel to perform development work and marketing, sales and commercial support personnel to perform commercialization activities. We may not be able to attract and retain skilled and experienced scientific and commercial personnel on acceptable terms because of intense competition for experienced personnel among many pharmaceutical and health care companies, universities and non-profit research institutions. In addition, failure to successfully complete clinical studies, obtain regulatory approvals or effectively commercialize medicines may make it more challenging to recruit and retain qualified personnel.

We are exposed to potential product liability claims, and insurance against these claims may not be available to us at a reasonable rate in the future or at all.

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of therapeutic products, including potential product liability claims related to TEGSEDI, WAYLIVRA and our medicines in development. We have clinical study insurance coverage and commercial product liability insurance coverage. In addition, Novartis has agreed to indemnify us against specific claims arising from Novartis' development and commercialization of AKCEA-APO(a)-L_Rx, PTC Therapeutics has agreed to indemnify us against specific claims arising from PTC Therapeutics’ commercialization of TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries, and Pfizer has agreed to indemnify us against specific claims arising from Pfizer’s development and commercialization of AKCEA-ANGPTL3-L_Rx. However, this insurance coverage and indemnities may not be adequate to cover claims against us. Insurance may not be available to us at an acceptable cost, if at all. Regardless of their merit or eventual outcome, products liability claims may result in decreased demand for our medicines, injury to our reputation, withdrawal of clinical study volunteers and loss of revenue. Thus, whether or not we are insured or indemnified, a product liability claim or product recall may result in losses that could be material.

Because we use biological materials, hazardous materials, chemicals and radioactive compounds, if we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our development and manufacturing activities involve the use of potentially harmful biological materials as well as materials, chemicals and various radioactive compounds that could be hazardous to human health and safety or the environment. We cannot completely eliminate the risk of contamination, which could cause:

In such an event, we may be held liable for any resulting damages, and any liability could exceed our resources. Although we carry insurance in amounts and types that we consider commercially reasonable, we do not have insurance coverage for losses relating to an interruption of our development, manufacturing or commercialization efforts caused by contamination, and the coverage or

55

---

 

coverage limits of our insurance policies may not be adequate. If our losses exceed our insurance coverage, our financial condition would be adversely affected.

A variety of risks associated with operating our business and marketing our medicines internationally could materially adversely affect our business.

In addition to our U.S. operations, we are commercializing TEGSEDI in Europe and Canada, and WAYLIVRA in the E.U. and, following approval, plan to establish operations to commercialize our products in other countries globally. We face risks associated with our current and planned international operations, including possible unfavorable regulatory, pricing and reimbursement, political, tax and labor conditions, which could harm our business. Because we have international operations we are subject to numerous risks associated with international business activities, including:

The United Kingdom’s exit from the E.U. could increase these risks.

Our business activities outside of the United States are subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate, including the United Kingdom's Bribery Act 2010. In many other countries, the healthcare providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, any dealings with these prescribers and purchasers may be subject to regulation under the FCPA. There is no certainty that all employees and third-party business partners (including our distributors, wholesalers, agents, contractors and other partners) will comply with anti-bribery laws. In particular, we do not control the actions of manufacturers and other third-party agents, although we may be liable for their actions. Violation of these laws may result in civil or criminal sanctions, which could include monetary fines, criminal penalties, and disgorgement of past profits, which could have a material adverse impact on our business and financial condition.

The impact on us of the vote by the United Kingdom to leave the European Union cannot be predicted.

On June 23, 2016, the United Kingdom, or the U.K., voted to leave the E.U. in an advisory referendum, which is generally referred to as Brexit. In January 2020, the U.K. and E.U. entered into a withdrawal agreement pursuant to which the U.K. formally withdrew from the E.U. on January 31, 2020. Following such withdrawal, the U.K. entered into a transition period scheduled to end on December 31, 2020, or the Transition Period. During the Transition Period, the U.K. will remain subject to E.U. law and maintain access to the E.U. single market and to the global trade deals negotiated by the E.U. on behalf of its members. Negotiations are expected to continue in relation to the customs and trading relationship between the U.K. and the E.U. following the expiry of the Transition Period.

56

---

 

In addition, as a result of Brexit, the EMA, formerly situated in London, relocated to Amsterdam. Following the Transition Period, there is a risk that the relocation will interrupt current administrative routines and occupy resources, which may generally adversely affect our dealings with the EMA. Further, there is considerable uncertainty resulting from a lack of precedent and the complexity of the U.K. and E.U.’s intertwined legal regimes as to how Brexit (following the Transition Period) will impact the life sciences industry in Europe, including our company, including with respect to ongoing or future clinical trials. The impact will largely depend on the model and means by which the U.K.’s relationship with the E.U. is governed post‑Brexit. For example, following the Transition Period, the U.K. will no longer be covered by the centralized procedures for obtaining E.U.-wide marketing authorization from the EMA and, unless a specific agreement is entered into, a separate process for authorization of medicines, including our product candidates, will be required in the U.K., the potential process for which is currently unclear. Brexit may adversely affect and delay our ability to commercialize, market and sell our product candidates in the U.K. Brexit may also result in a reduction of funding to the EMA if the U.K. no longer makes financial contributions to European institutions, such as the EMA. If U.K. funding is so reduced, it could create delays in the EMA issuing regulatory approvals for our product candidates and, accordingly, have a material adverse effect on our business, financial condition, results or prospects.

If a natural or man-made disaster strikes our development or manufacturing facilities or otherwise affects our business, it could delay our progress developing and commercializing our medicines.

We currently rely on Ionis to manufacture our clinical supplies and commercial supply of active pharmaceutical ingredient for WAYLIVRA in a manufacturing facility located in Carlsbad, California and third-party contract manufacturing organizations to manufacture drug product. For TEGSEDI, we rely on third party contract manufacturing organizations to manufacture active pharmaceutical ingredient and finished drug product. The facilities and the equipment required to develop and manufacture our medicines would be costly to replace and could require substantial lead time to repair or replace. Natural or man-made disasters, including, without limitation, earthquakes, floods, fires and acts of terrorism may harm these facilities. If a disaster affects these facilities, our and our partners' development and commercialization efforts would be delayed. Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. In addition, a shutdown of the U.S. government, including the FDA could harm or delay our development and commercialization activities.

Our business and operations would suffer in the event of computer system failures.

We are dependent upon our own or third-party information technology systems, infrastructure and data, including mobile technologies, to operate our business. The multitude and complexity of our computer systems may make them vulnerable to service interruption or destruction, disruption of data integrity, malicious intrusion, or random attacks. Likewise, data privacy or security incidents or breaches by employees or others may pose a risk that sensitive data, including our intellectual property, trade secrets or personal information of our employees, patients, customers or other business partners may be exposed to unauthorized persons or to the public. Cyber-attacks are increasing in their frequency, sophistication and intensity. Cyber-attacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability. Our business partners face similar risks and any security breach of their systems could adversely affect our security posture. A security breach or privacy violation that leads to disclosure or modification of or prevents access to patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to litigation or other liability under laws and regulations that protect personal data, any of which could disrupt our business and/or result in increased costs or loss of revenue. Moreover, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have invested, and continue to invest, in the protection of our data and information technology infrastructure, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and operations and/or result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm to us. In addition, our liability insurance may not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related breaches.

Risks Related to Our Common Stock

We are an "emerging growth company" and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

57

---

 

An active public trading market for our common stock may not be sustained.

Prior to the completion of our IPO in July 2017, no public market for our common stock existed. An active public trading market for our common stock may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares. Additionally, as of December 31, 2019, Ionis owned approximately 76 percent of our outstanding common stock. Ionis intends to hold its shares of our common stock for the foreseeable future, which could reduce the public market for our stock.

The market price for our common stock may be volatile, which could contribute to the loss of your investment.

Fluctuations in the price of our common stock could contribute to the loss of all or part of your investment. There has been a public market for our common stock for a limited period of time. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our common stock and our common stock may trade at prices significantly below your purchase price. In such circumstances the trading price of our common stock may not recover and may experience a further decline.

Factors affecting the trading price of our common stock may include:

58

---

 

Broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general, and Nasdaq and the market for biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of ours, may not be predictable. A loss of investor confidence in the market for biotechnology or pharmaceutical stocks or the stocks of other companies which investors perceive to be similar to us, the opportunities in the biotechnology and pharmaceutical market or the stock market in general, could depress our stock price regardless of our business, prospects, financial conditions or results of operations.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market may cause our stock price to decline.

Sales of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. As of December 31, 2019 Ionis owned 77,094,682 shares, or approximately 76 percent, of our common stock. Novartis owned 6,250,000 shares of common stock pursuant to our agreements with them. Novartis will not sell, in any single trading day, an amount of shares that is more than 10% of the daily trading volume of our common stock for that trading day. While the shares of common stock held by Ionis are eligible for sale in the public market, any sales by Ionis will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, 18,500,000 shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. To the extent the holders of these shares sell them into the market or our stockholders believe these sales might occur, the market price of our common stock could decline.

We cannot predict with certainty whether or when Ionis will sell a substantial number of shares of our common stock. Ionis' sale of a substantial number of shares, or a perception that such sales could occur, could significantly reduce the market price of our common stock.

59

---

 

We do not expect to pay any cash dividends for the foreseeable future.

You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our operations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

We could be subject to additional tax liabilities.

We are subject to U.S. federal, state, local and sales taxes in the United States and foreign income taxes, withholding taxes and transaction taxes in foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period for which a determination is made.

 

Our ability to use our net operating loss carryovers and certain other tax attributes may be limited.

 

Under the Internal Revenue Code of 1986, as amended, or the Code, a corporation is generally allowed a deduction for net operating losses, or NOLs, carried over from a prior taxable year. Under that provision, we can carryforward our NOLs to offset our future taxable income, if any, until such NOLs are used or expire. The same is true of other unused tax attributes, such as tax credits.

 

Under the Tax Cut and Jobs Act of 2017, or the Tax Act, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the federal Tax Act.

In addition, under Section 382 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percent change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards or other tax attributes is materially limited, it would harm our future operating results by effectively increasing our future tax obligations. In addition, a change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate could materially affect us.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management's attention and resources, which could harm our business.

We are subject to derivative shareholder litigation. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on us.

60

---

 

On November 11, 2019, a purported Company stockholder filed an action in the Delaware Court of Chancery captioned City of Cambridge Retirement System v. Crooke, et al., C.A. No. 2019-0905, or the Delaware Action. The plaintiff in the Delaware Action asserts claims against (i) current and former members of our board of directors; and (ii) Ionis Pharmaceuticals, Inc., or collectively, the Defendants. The plaintiff asserts derivative claims on behalf of Akcea, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of our stockholders. The plaintiff in the Delaware action asserts that the Defendants breached their fiduciary duties in connection with the licensing transaction that we and Ionis entered into regarding inotersen and AKCEA-TTR-L_Rx. The plaintiff also asserts an unjust enrichment claim against Ionis. We and the Defendants have moved to dismiss the plaintiff’s complaint. This litigation could result in substantial costs and a diversion of management’s resources and attention, which could harm our business and the value of our common stock.

Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in the State of Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit your opportunity to receive a premium for your shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our bylaws designate the Court of Chancery of the State of Delaware and federal court within the State of Delaware as the exclusive forum for certain types of actions and proceedings that our stockholders may initiate, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware and federal court within the State of Delaware will be exclusive forums for any:

61

---

 

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our bylaws described above. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition. This choice of forum provision does not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act, or any claim for which the federal courts have exclusive jurisdiction.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

As of February 20, 2020, we occupied the following properties:

 

 

Item 3. Legal Proceedings

 

On November 11, 2019, a purported Company stockholder filed the Delaware Action in the Delaware Court of Chancery captioned City of Cambridge Retirement System v. Crooke, et al., C.A. No. 2019-0905. The plaintiff in the Delaware Action asserts claims against (i) current and former members of our board of directors; and (ii) Ionis Pharmaceuticals, Inc. (hereinafter collectively referred to as, the Defendants). The plaintiff asserts derivative claims on behalf of Akcea, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of our stockholders. The plaintiff in the Delaware action asserts that the Defendants breached their fiduciary duties in connection with the licensing transaction that we and Ionis entered into regarding inotersen and AKCEA-TTR-L_Rx. The plaintiff also asserts an unjust enrichment claim against Ionis. We and the Defendants have moved to dismiss the plaintiff’s complaint. We believe that the claims asserted in the Delaware Action are without merit. This litigation could result in substantial costs and a diversion of management’s resources and attention, which could harm our business and the value of our common stock.

Item 4. Mine Safety Disclosures

Not applicable.

62

---

 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded publicly through The Nasdaq Global Select Market under the symbol “AKCA.” Prior to our initial public offering, or IPO, on July 19, 2017, there was no public trading market for our common stock. Our initial public offering was priced at $8.00 per share on July 17, 2017. On February 20, 2020, the closing price of our common stock on The Nasdaq Global Select Market was $18.45 per share.

 

As of February 20, 2020, there were 11 stockholders of record of our common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Set forth below is a chart comparing the total return on an indexed basis of $100 invested on July 19, 2017, which is the date our shares began trading, in our common stock, the NASDAQ Composite Index (total return) and the NASDAQ Biotechnology Index through December 31, 2019. The total return assumes reinvestment of dividends. Historical stockholder return is not necessarily indicative of the performance to be expected for any future periods.

63

---

 

Performance Graph (1)

 

 

Recent Sale of Unregistered Securities

During the year ended December 31, 2019, we did not issue or sell any unregistered securities not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

None.

64

---

 

Item 6. Selected Financial Data

This selected financial data should be read in conjunction with our audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. Our consolidated financial information may not be indicative of our future performance.  Set forth below are our selected consolidated financial data (in thousands, except per share amounts):

 

 

Note: Akcea Therapeutics adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers in fiscal 2018 using the full retrospective method. As a result, all financial information beginning in fiscal 2017 was restated.

65

---

 

 

 

Note: Akcea Therapeutics adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers in fiscal 2018 using the full retrospective method. As a result, all financial information beginning in fiscal 2017 was restated.

66

---

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This financial review presents our operating results for each of the two years in the period ended December 31, 2019, and our financial condition at December 31, 2019. Year-to-year comparisons between 2018 and 2017 have been omitted from this Annual Report on Form 10-K, but may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which specific discussion is incorporated herein by reference. Except for the historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under Item 1A of Part I of this report, "Risk Factors." In addition, the following should be read in connection with the information presented in our consolidated financial statements and the related notes to our consolidated financial statements as indexed on page F-1.

Overview

We are a commercial stage biopharmaceutical company developing and marketing transformative medicines to treat patients with serious and rare diseases. Our large and potentially advancing pipeline of medicines in late-stage development and on the market allows us to capitalize on our strengths in supporting patients, healthcare professionals and caregivers in treating rare and serious diseases.  To optimize the value of our medicines to treat larger patient populations, we add to our own capabilities the strengths of partners to provide additional expertise, resources and commercial capabilities. We believe our strong relationship with our majority shareholder, Ionis Pharmaceuticals, Inc., or Ionis, should allow us to continue to expand our pipeline.

We have a robust portfolio of antisense medicines on the market and in development covering multiple targets and diseases that we have licensed from Ionis. We are highly focused on commercializing our approved therapies, TEGSEDI and WAYLIVRA. TEGSEDI is indicated to treat adults with the polyneuropathy caused by hereditary transthyretin-mediated amyloidosis, or hATTR amyloidosis, and has been approved and launched in the United States, or U.S., the European Union, or E.U. and Canada as well as approved in Brazil. WAYLIVRA is indicated as an adjunct to diet to treat adult patients with genetically confirmed familial chylomicronemia syndrome, or FCS, who are at high risk for pancreatitis, for whom response to diet and triglyceride lowering therapy has been inadequate. WAYLIVRA has been approved and launched in the E.U.

We are advancing a mature pipeline of novel medicines with the potential to treat multiple diseases. In addition to TEGSEDI and WAYLIVRA, our pipeline includes two medicines in Phase 3 clinical trials, AKCEA-APO(a)-L_Rx which is partnered with Novartis Pharma AG, or Novartis, and AKCEA-TTR-L_Rx. We also have two additional medicines that have each completed a Phase 2 study, AKCEA-ANGPTL3-L_Rx, which is partnered with Pfizer, Inc., or Pfizer, and AKCEA-APOCIII-L_Rx. All of our medicines are based on Ionis’ antisense technology platform.  Our medicines in development use Ionis' advanced LIgand Conjugated Antisense, or LICA, technology, which enhances the effective uptake and activity of these medicines in particular tissues.

We are continuing to optimize our current commercial infrastructure for TEGSEDI and WAYLIVRA, and plan to use this infrastructure for the other medicines in our pipeline. A key element of our commercial strategy is to provide the specialized, patient-centric support required to successfully address serious and rare disease patient populations. We believe our focus on treating patients with inadequately addressed rare and serious diseases allows us to partner efficiently and effectively with the specialized medical community that supports these underserved patient communities. For example, we created Akcea Connect, a drug treatment program made up of dedicated, regionally-based nurse case managers who have a wide range of medical knowledge and experience. This program offers free, private and personalized support to patients, their caregivers and their families in the U.S. Internationally, we are introducing Akcea Connect in each of the countries where we launch with the highest level of patient and physician support allowed by local regulations. Express Scripts’ Accredo Health Group, Inc., or Accredo is our specialty pharmacy partner for the distribution of TEGSEDI in the U.S. We chose Accredo because of their experience with the unique needs of rare disease communities and their proven track record for simplifying access to therapy. Accredo has a team of specialty clinicians, pharmacists and approximately 600 field-based nurses located throughout the U.S. who are augmenting the Akcea Connect team of nurse case managers to provide support and address the needs of the hATTR amyloidosis community. To further support the hATTR amyloidosis community, Akcea and Ambry Genetics Corporation, or Ambry, a Konica Minolta company, launched hATTR Compass™ in the U.S. and Canada, a free-of-charge, confidential genetic testing and genetic counseling program for people suspected to have hATTR amyloidosis. This program is intended to empower patients and their caregivers by providing accurate genetic information, so they can make informed decisions about their healthcare.

 

67

---

 

Our goal is to embrace strategies that allow our medicines to be made available to patients in need as broadly as possible. As we build Akcea, we continue to execute a strategy to provide our medicines to the greatest number of patients globally as rapidly as possible. We have built commercial organizations in the U.S., E.U., and Canada, and continue to determine the optimal method to provide access to our medicines beyond the regions in which we have a physical presence through expansion of our own footprint and partnerships with companies with regional strength. Depending on the geographic region, the number of patients impacted by the diseases we are treating and the regulatory environment of the local countries, we may choose to build out the commercial infrastructure ourselves, or to partner with another company for commercial sales and distribution. For instance, PTC Therapeutics International Limited, or PTC Therapeutics, is commercializing TEGSEDI and plans to commercialize WAYLIVRA in Latin America and certain Caribbean countries. Our decision to partner with PTC Therapeutics to accelerate commercial access for patients in Latin America reflects our commitment to bringing TEGSEDI and WAYLIVRA to patients as rapidly as possible. PTC Therapeutics has an established rare disease team in Latin America that has experience in patient identification, in physician and patient education and support programs and in efficiently obtaining market access. PTC Therapeutics’ patient focused approach for rare diseases aligns with our approach, making them an experienced partner for this region. In October 2019, PTC Therapeutics received approval for TEGSEDI in Brazil. PTC Therapeutics anticipates approval in Brazil for WAYLIVRA this year.

Our efforts to treat people with serious and underserved rare diseases are currently focused on transthyretin amyloidosis, or ATTR amyloidosis, and cardiometabolic diseases.

ATTR

TEGSEDI is an antisense medicine designed to reduce the production of the TTR protein. hATTR amyloidosis is a severe, progressive and life-threatening disease caused by the abnormal formation of the TTR protein and aggregation of TTR amyloid deposits in various tissues and organs throughout the body, including in peripheral nerves, the heart and intestinal tract. The progressive accumulation of TTR amyloid deposits in these organs often leads to intractable peripheral sensorimotor neuropathy, autonomic neuropathy, and/or cardiomyopathy, as well as other disease manifestations. hATTR amyloidosis causes significant morbidity and progressive decline in quality of life, severely impacting activities of daily living. The disease often progresses rapidly and can lead to premature death. The median survival is 4.7 years following diagnosis.

 

We estimate that there are approximately 50,000 patients globally with hATTR amyloidosis, the majority of whom have symptoms of polyneuropathy.

TEGSEDI was discovered and developed by Ionis and was licensed by us in April 2018. In addition to TEGSEDI, we and Ionis are co-developing AKCEA-TTR-L_Rx for hereditary and wild-type forms of transthyretin amyloidosis, or ATTR amyloidosis. We and Ionis initiated clinical development of AKCEA-TTR-L_Rx in December 2018 and presented positive Phase 1 data results in September 2019. The data showed a >90% knockdown of TTR following administration in healthy volunteers, and a positive safety and tolerability profile. We and Ionis recently initiated a Phase 3 program for AKCEA-TTR-L_Rx in patients with hereditary and wild type forms of TTR amyloidosis.

Cardiometabolic

Our lipid/cardiometabolic medicines, WAYLIVRA, AKCEA-APO(a)-L_Rx, AKCEA-APOCIII-L_Rx and AKCEA-ANGPTL3-L_Rx, are all based on antisense technology developed by Ionis. WAYLIVRA was granted conditional marketing authorization approval in the E.U. on May 3, 2019 and launched in Germany in August 2019. Our launch preparation activities with respect to WAYLIVRA are ongoing throughout the E.U. The approval of WAYLIVRA in the E.U. follows a positive recommendation by the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, as an adjunct to diet in adult patients with genetically confirmed FCS who are at high risk for pancreatitis, in whom response to diet and triglyceride lowering therapy has been inadequate. We are leveraging and optimizing our existing commercial infrastructure in Europe to market WAYLIVRA. In addition, we are focused on regulatory discussions for WAYLIVRA in the U.S. and Canada. On May 10, 2018, the United States Food and Drug Administration’s, or FDA’s, Endocrinologic and Metabolic Drugs Advisory Committee voted to support approval of WAYLIVRA for the treatment of people with FCS. On August 27, 2018, we and Ionis announced that we received a Complete Response Letter from the Division of Metabolism and Endocrinology Products of the FDA regarding the New Drug Application for WAYLIVRA. The FDA did not cite any new concerns beyond those described in the Advisory Committee briefing book, in which the main areas of focus were the dosing schedule and management of thrombocytopenia. We continue to feel strongly that WAYLIVRA demonstrates a favorable benefit/risk profile in people with FCS, as was reflected in the positive outcome from the Advisory Committee meeting. In November 2018, we received a Notice of Noncompliance withdrawal letter, or NON-W, from Heath Canada for WAYLIVRA. We and Ionis are engaged in finding a path forward for WAYLIVRA in the U.S. and Canada.

68

---

 

FCS is a serious and rare disease caused by impaired function of the enzyme lipoprotein lipase, or LPL, and characterized by severe hypertriglyceridemia and a risk of acute pancreatitis. Further, the lives of patients with this disease are impacted daily by the associated symptoms. In our Phase 3 clinical study, we have observed consistent and substantial (>70%) decreases in triglycerides and improvements in other manifestations of FCS, including pancreatitis attacks and abdominal pain. The final study results from the Phase 3 APPROACH study were published in the August 8^th, 2019 issue of The New England Journal of Medicine. We believe the safety and efficacy data from the WAYLIVRA program demonstrate a favorable risk-benefit profile for patients with FCS. The FDA and EMA have granted orphan drug designation to WAYLIVRA for the treatment of patients with FCS.

In August 2019 we announced topline results from the BROADEN study in patients with familial partial lipodystrophy, or FPL. People with FPL have abnormal subcutaneous fat distribution causing increased incidence of potentially life-threatening pancreatitis, diabetes, extreme insulin resistance and increased liver fat. BROADEN is a randomized, double blind, placebo-controlled study of 300 mg of WAYLIVRA administered by a subcutaneous injection in patients with FPL. In the study, WAYLIVRA met its primary endpoint demonstrating a statistically significant reduction in triglyceride levels. WAYLIVRA also met a key secondary endpoint with a statistically significant reduction in liver fat. The most common adverse events observed in WAYLIVRA-treated patients were mild or moderate in severity and included injection site reactions, nasopharyngitis, urinary tract infection, and reductions in platelet levels. We are continuing to evaluate the data from this study and are assessing next steps.

AKCEA-APO(a)-L_Rx completed Phase 2 in 2018 and Novartis has initiated the Phase 3 program. AKCEA-APOCIII-L_Rx and AKCEA-ANGPTL3-L_Rx both recently completed positive Phase 2 studies.

In December 2019, Novartis made a strategic portfolio decision not to exercise its option and to terminate its rights to AKCEA-APOCIII-L_Rx and, consequently, we now retain the rights to AKCEA-APOCIII-L_Rx. In January 2020, we reported positive Phase 2 top line results from this program in the treatment of patients with hypertriglyceridemia who are at risk for or have established cardiovascular disease. We and Ionis plan to initiate a Phase 3 program in FCS for this medicine in 2020 and we are evaluating development in additional rare and common diseases that are associated with high triglyceride levels. AKCEA-APOCIII-L_Rx also has the potential to favorably impact numerous other risk factors independently associated with CVD.

 

In addition, in October 2019, we entered into a worldwide exclusive license agreement, or the Pfizer Collaboration, with Pfizer Inc., or Pfizer, for the development and commercialization of AKCEA-ANGPTL3-L_Rx. Under the terms of the Pfizer Collaboration, we granted Pfizer an exclusive license, with the right to grant certain sublicenses, to develop, manufacture, commercialize and otherwise exploit AKCEA-ANGPTL3-L_Rx worldwide. We have the right to exercise an option, to participate in commercialization activities with Pfizer in the U.S. and certain additional markets. We believe Pfizer’s expertise and breadth of experience in cardiovascular and metabolic diseases makes it well suited to accelerate clinical development of AKCEA-ANGPTL3-L_Rx. Pfizer is responsible for all development and regulatory activities and all costs beyond those associated with the Phase 2 study for which we recently announced positive top line results.

Commercial Infrastructure

We are continuing to optimize our current commercial infrastructure for TEGSEDI and WAYLIVRA, and plan to use this infrastructure for the other medicines in our pipeline. Depending on the geographic region, the number of patients impacted by the diseases we are treating and the regulatory environment of the local countries, we may choose to build out the commercial infrastructure ourselves, or to partner with another company for commercial sales and distribution. In August 2018, we entered into a licensing agreement with PTC Therapeutics International Limited, or PTC Therapeutics, to commercialize TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries. A key element of our commercial strategy is to provide the specialized, patient-centric support required to successfully address rare disease patient populations. We believe our focus on treating patients with inadequately addressed rare and serious diseases will allow us to partner efficiently and effectively with the specialized medical community that supports these underserved patient communities.

 

To maximize the commercial potential of AKCEA-APO(a)-L_Rx, we have a strategic collaboration with Novartis. In February 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx. Novartis is now responsible for all development and commercialization activities for this medicine, subject to our potential participation in co-commercialization. Novartis initiated the Lp(a) HORIZON study, a Phase 3 study of AKCEA-APO(a)-L_Rx in patients with established cardiovascular disease, or CVD, and elevated levels of lipoprotein(a), or Lp(a). Lp(a) HORIZON is a global CVD outcomes study in which Novartis plans to enroll more than 7,500 patients. We believe Novartis brings significant resources and expertise to the collaboration that can accelerate our ability to deliver this potential therapy to the large population of patients who have high cardiovascular risk due to elevated Lp(a).

 

69

---

 

Our collaboration with Novartis also included rights to AKCEA-APOCIII-L_Rx. In December 2019, Novartis made a strategic portfolio decision not to exercise its option and terminated its rights to AKCEA-APOCIII-L_Rx and, consequently, we have retained the rights to develop and commercialize AKCEA-APOCIII-L_Rx. In January 2020, we reported positive Phase 2 top line results from this program in the treatment of patients with hypertriglyceridemia. We and Ionis plan to initiate a Phase 3 program in FCS for this medicine in 2020 and we are evaluating additional rare and common diseases that are associated with high triglyceride levels. AKCEA-APOCIII-L_Rx also has the potential to favorably impact numerous other risk factors independently associated with CVD.

 

Our strategic collaboration with Novartis has a potential aggregate transaction value of $900.0 million, plus royalties, which we will share equally with Ionis. The calculation of potential aggregate transaction value assumes that Novartis successfully develops and achieves regulatory approval for AKCEA-APO(a)-L_Rx in multiple indications, and that Novartis achieves pre-specified sales targets with respect to AKCEA-APO(a)-L_Rx. In addition to the $75.0 million upfront payment that we received in February 2017 and the $150.0 million license fee that we received in February 2019 for AKCEA-APO(a)-L_Rx, we are 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. We are also eligible to receive tiered, double-digit royalties in the mid-teens to low twenty percent range on net sales of AKCEA-APO(a)-L_Rx, and Novartis will reduce these royalties upon the expiration of certain patents or if a generic competitor negatively impacts the product in a specific country. In connection with Novartis’ exercise of its option to exclusively license AKCEA-APO(a)-L_Rx, we and Novartis established a more definitive framework under which we may negotiate the co-commercialization of AKCEA-APO(a)-L_Rx between the two companies 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. We will share any milestone payments and royalties equally with Ionis.

See Note 7, Strategic Collaboration with Novartis, to our consolidated financial statements for additional information.

In October 2019, we entered into a collaboration with Pfizer which has a potential aggregate transaction value of up to $1.6 billion, plus royalties, which we will share equally with Ionis. The calculation of potential aggregate transaction value assumes that Pfizer successfully develops and achieves regulatory approval for AKCEA-ANGPTL3-L_Rx in multiple indications in the U.S., E.U. and Japan, and that Pfizer achieves pre-specified sales targets with respect to AKCEA-ANGPTL3-L_Rx. In addition to the upfront payment of $250.0 million that we received from Pfizer in November 2019, of which we paid Ionis $125.0 million as a sublicense fee in the form of 6,873,344 shares of our common stock, we are eligible to receive up to $1.3 billion in milestone payments, including up to $205.0 million for the achievement of development milestones, up to $250.0 million for the achievement of regulatory milestones and up to $850.0 million for the achievement of commercialization milestones. We are also eligible to receive tiered, double-digit royalties in the mid-teens to low twenty percent range on net sales of AKCEA-ANGPTL3-L_Rx, and Pfizer 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 share any milestone payments and royalties equally with Ionis. We will achieve the next payment of $75.0 million when Pfizer advances AKCEA-ANGPTL3-L_Rx.  

See Note 10, License Agreement with Pfizer, to our consolidated financial statements for additional information.

Our Relationship with Ionis

Ionis formed Akcea as a wholly-owned subsidiary to complete development of and commercialize Ionis’ medicines to treat lipid disorders. We began business operations in January 2015. We licensed our cardiometabolic franchise from Ionis at the beginning of 2015. Prior to licensing these medicines, Ionis’ employees performed all of the development, regulatory and manufacturing activities for these medicines either themselves or through third-party providers. As such, Ionis incurred all of the expenses associated with these activities and reported them in its consolidated financial statements. We licensed TEGSEDI and AKCEA-TTR-L_Rx from Ionis in April 2018. Prior to then, Ionis had been advancing these medicines in development and incurring the expenses for those activities. Under our license agreements with Ionis, Ionis continued and is continuing to conduct certain development, regulatory and manufacturing activities for our medicines and we will reimburse Ionis for these services. Also, under these license agreements, we are required to pay Ionis sublicense fees based on amounts we receive under license and collaboration agreements with others. Ionis has agreed to accept certain payments owed by us in the form of Akcea common stock, rather than cash, which was determined based on mutual agreement at the then fair market value of Akcea’s common shares. For example, as a result of the $250.0 million upfront license fee that we received in November 2019 from Pfizer upon the closing of the Pfizer License Agreement, we settled our $125.0 million obligation to Ionis in Akcea common stock. Ionis also accepted $75.0 million in Akcea common stock as payment for our obligation resulting from the $150.0 million license fee received in February 2019 from Novartis as a result of Novartis exercising its option to license AKCEA-APO(a)-L_Rx. However, Ionis may not choose to accept stock for future payments we owe Ionis. As of December 31, 2019, Ionis owned approximately 76 percent of our outstanding stock. As a result, we are controlled by Ionis and are a “controlled company” under the marketplace rules of the Nasdaq Stock Market, or Nasdaq.

70

---

 

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, or GAAP. As such, we make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial condition. In the following paragraphs, we describe our most significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results. As described below, there are specific risks associated with these critical accounting policies and we caution that future events rarely develop exactly as one may expect, and that best estimates may require adjustment. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, are as follows:

 

Revenue Recognition

 

We began to record revenues from product sales in the fourth quarter of 2018. Our revenues are also derived from our collaboration agreements with Novartis and Pfizer, and our collaboration and license agreement with PTC Therapeutics. The terms of such collaboration agreements may include consideration such as nonrefundable license fees, funding of research and development services, payments due upon the achievement of clinical and pre-clinical performance-based development milestones, regulatory milestones, sales-based milestones, manufacturing services, and royalties on product sales.

 

Collaboration and License Revenue

 

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or Topic 606, using the full retrospective transition method. Under this method, we revised our consolidated financial statements for prior period amounts including the periods included in this Report on Form 10-K, as if Topic 606 had been effective for such periods.  As a result of our adoption of Topic 606, we made revisions to amounts originally reported for the year ended December 31, 2017 and as of December 31, 2017.

 

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

 

To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, then assess whether each promised good or service is distinct. When we offer options for additional goods or services, such as an option to license a medicine in the future or for additional goods or services to be provided in the future, we evaluate whether such options are material rights that should be treated as additional performance obligations. We typically have concluded that the option to license a medicines or the options for additional goods or services that may be requested in the future under our collaboration agreements are not material rights as the amounts attributable to such options represent standalone selling price, and therefore no consideration is allocated to these items at the inception of an agreement. When a partner exercises its option to license a medicine or requests the additional goods or services, a new performance obligation is created for that item. Once performance obligations are identified, we then recognize as revenue the amount of the transaction price that we allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of either an output or input method. As of December 31, 2019, we had four collaboration and license revenue agreements: our strategic collaboration, option and license agreement with Novartis, which we entered into in January 2017; our TTR development, collaboration and license agreement with Ionis, under which we recognize commercial product revenue related to TEGSEDI sales subsequent to product launch in the fourth quarter of 2018; our collaboration and license agreement with PTC Therapeutics, which we entered into in August 2018; and our license agreement with Pfizer, which we entered into in October 2019. For a complete discussion of the accounting related to our collaborative agreements, see Note 7, Strategic Collaboration with Novartis, Note 8, License Agreements and Services Agreement with Ionis, Note 9, Collaboration and License Agreement with PTC Therapeutics, Note 10, License Agreement with Pfizer, and the section below entitled Product Revenue, Net.

 

Product Revenue, Net

 

Subsequent to obtaining regulatory approval from the United States Food and Drug Administration, or FDA, on October 5, 2018, we began to sell TEGSEDI in the U.S. in the fourth quarter of 2018. The product is distributed through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to the product and represents our sole customer in the U.S. Our U.S. customer distributes TEGSEDI to a specialty pharmacy and a specialty distributor (collectively referred to as “wholesalers”), who then distribute the product to health care providers and patients. On July 11, 2018, we obtained regulatory approval of TEGSEDI in Europe, following which we began to sell TEGSEDI in Europe in the fourth quarter of 2018.  On May 7, 2019, we obtained regulatory approval of WAYLIVRA in Europe, following which we began to sell WAYLIVRA in Europe in the third quarter of 2019. TEGSEDI and WAYLIVRA are distributed through 3PLs that distribute the product to hospitals and pharmacies in Europe.  

71

---

 

 

Revenue from product sales is recognized when the customer obtains control of our product, which occurs upon transfer of title to the customer. Revenue is recognized at the amount that we expect to be entitled to in exchange for the sale of our product. This amount includes both fixed and variable consideration and excludes amounts that are collected from customers and remitted to governmental authorities. We record shipping and handling costs within cost of goods sold on our consolidated statement of operations. 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 expenses on our consolidated statements of operations. 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 have elected not to adjust consideration for the effects of a significant financing component when the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. Our payment terms are generally between thirty to ninety days.

 

Reserves for Variable Consideration

 

Revenue from product sales is recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customers, wholesalers, health care providers and other indirect customers relating to the sale of TEGSEDI and WAYLIVRA. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a reduction of accounts receivable or a current liability. Where appropriate, these estimates take into consideration 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, product revenue net of these reserves reflects our best estimate of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

 

The following are the components of variable consideration related to product revenue:

 

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 they pay for the product and the selling price to the qualified healthcare providers. We record reserves and reduce our product revenue for these chargebacks related to product sold to our U.S. customer during the reporting period as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers in future periods. Our established reserve for chargebacks is included in accrued liabilities on our consolidated balance sheet.

 

Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S., and similar programs in certain countries in Europe. We record reserves for government rebates based on statutory discount rates and estimated utilization in the period in which revenue is recognized. We estimate Medicaid and Medicare rebates based upon estimated payer mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses on our consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription medicine coverage gap for whom we expect 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 our value-based agreement with a certain commercial payer. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued liabilities on our consolidated balance sheet.  This rebate is based on a fixed percentage and includes a price increase limit allowance (price protection).  Our estimate for managed care rebates is based upon estimated payer mix and the resulting applicable contractual rebate rate.

Trade discounts and allowances: We provide customary invoice discounts on sales to our U.S. customer for prompt payment. The discounts are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a reserve that is offset against our accounts receivable balance on our consolidated balance sheet.

72

---

 

Distribution fees: We receive and pay for various distribution services provided by our U.S. and E.U. customers and our U.S. wholesalers. These fees are generally accounted for as a reduction of revenue in the same period the related revenue is recognized, and an establishment of a reserve that is offset against our accounts receivable balance on our consolidated balance sheet. To the extent that the services received are distinct from the sale of products to our customers, we classify these payments as selling, general and administrative expenses.

 

Product Returns: Our U.S. customer has return rights and our wholesalers in the U.S. have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that may be returned and record the estimate as a reduction of revenue and a refund liability included in accrued liabilities in our consolidated balance sheet in the period the related product revenue is recognized. Based on our distribution model, contractual inventory limits with our U.S. customer and wholesalers and the price of TEGSEDI, we believe there will be minimal returns in the U.S. Our E.U. customers only take title to TEGSEDI and WAYLIVRA when an order is received and therefore only maintain inventory levels of our products based on demand. Accordingly, there is limited return risk in the E.U. and we have not recorded any return estimate in the transaction price for products sold in the E.U.

 

Other incentives: In the U.S., other incentives include co-payment assistance that we provide to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance. The calculation of the accrual for co-payment assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue. Our estimate is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued liabilities on our consolidated balance sheet.

 

During the year ended December 31, 2019, we recorded product revenue, net, of $42.3 million, which consisted of $34.6 million of TEGSEDI sales in the U.S., and $7.7 million of TEGSEDI and WAYLIVRA sales in the E.U. This compared to product revenue, net, during the year ended December 31, 2018 of $2.2 million which consisted of $1.2 million of TEGSEDI sales in the U.S., and $1.0 million of TEGSEDI sales in the E.U. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the years ended December 31, 2019 and 2018 (in thousands):

 

 

Inventory

Prior to the regulatory approval of our product candidates, we incur expenses for the manufacturing of drug product that could potentially be available to support the commercial launch of our products. Until the first reporting period when regulatory approval has been received or is otherwise considered probable, we record all such costs as research and development expense.

WAYLIVRA inventory-related costs incurred subsequent to April 1, 2019, and TEGSEDI inventory-related costs incurred subsequent to July 1, 2018, are reflected as inventory on our consolidated balance sheet at the lower of cost or net realizable value under the first-in, first-out, or FIFO, basis. We periodically analyze our inventory levels and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory in excess of expected sales requirements as cost of product sales. The determination of whether inventory costs will be realizable requires estimates by our management and if actual market conditions are less favorable than projected by our management, additional write-downs of inventory may be required which would be recorded as a cost of product sales in the consolidated statement of operations. We recorded inventory write-offs of $0.2 million for the year ended December 31, 2019. We did not record any inventory write-offs for the year ended December 31, 2018.

73

---

 

Intangible Assets

We obtained exclusive licenses from Ionis for specific patents that Ionis owns and maintains related to our medicine pipeline. We recorded our licenses from Ionis as a capital contribution using the carryover basis of Ionis' historical cost for the related patents. We are amortizing our capitalized licenses over their estimated useful life, which is the term of the underlying individual patents owned by Ionis.

In addition, we maintain definite-lived intangible assets related to regulatory milestone payments made to Ionis that are recoverable through future cash flows from approved products, which are capitalized as licensed intangible assets. These assets are amortized over their remaining useful lives, which are generally estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used. Intangible assets are amortized using the economic consumption method if anticipated future revenue can be reasonably estimated. The straight-line method is used when future revenue cannot be reasonably estimated. We use the straight-line method and amortization expense is recorded as a component of cost of sales to the extent the underlying license is related to a commercial product or research and development prior to product commercialization in the consolidated statements of operations.

We assess our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist.  Events that could result in an impairment, or trigger an interim impairment assessment, may include actions by regulatory authorities with respect to us or our competitors, the receipt of additional clinical or nonclinical data regarding our medicine or a potentially competitive medicine, changes in the clinical development program for a medicine candidate or new information regarding potential sales for the medicine.  If impairment indicators are present or changes in circumstance suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet.  If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value. We did not recognize any impairment losses for the years ended December 31, 2019 or 2018.

Estimated Liability for Research and Development Costs

We record accrued liabilities related to expenses for which vendors or service providers have not yet billed us. These liabilities are for products or services that we have received and primarily relate to ongoing nonclinical and clinical studies. These costs primarily include third-party clinical management costs, costs for contract research organizations, laboratory and analysis costs, toxicology studies and investigator grants. We have medicines in concurrent nonclinical and clinical studies at several sites throughout the world. To ensure that we have adequately provided for ongoing nonclinical and clinical research and development costs during the period in which we incur such costs, we maintain an accrual to cover these costs. We update our estimate for this accrual on at least a quarterly basis. The assessment of these costs is a subjective process that requires judgment. Upon settlement, these costs may differ materially from the amounts accrued in our consolidated financial statements. Our historical accrual estimates have not been materially different from our actual amounts.

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 carry forwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

We record a valuation allowance to reduce the balance of our net deferred tax assets to the amount we believe is more-likely-than-not to be realized. Due to our history of financial statement losses and the uncertainty of generating sufficient pre-tax income in future periods, we maintain a full valuation allowance against our net deferred tax assets.  

We recognized pretax net income of $43.0 million for the year ended December 31, 2019 compared to pretax net losses of $225.4 million and $120.3 million for the years ended December 31, 2018 and 2017, respectively. The pretax net income in 2019 is due to an increase in our research and development and license revenue for the year, primarily related to non-recurring transactions in the first and fourth quarter from Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx and the Pfizer License Agreement, respectively.  Although we generated pretax net income in 2019, given our history of losses, there can be no assurance that we will achieve profitability in future periods. We expect to incur additional operating losses for the foreseeable future and therefore continue to maintain a full valuation allowance against our net deferred tax assets.

We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate due to changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. Our material

74

---

 

assumptions are our forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. Although we believe our estimates are reasonable, we are required to use significant judgment in determining the appropriate amount of valuation allowance recorded against our deferred tax assets.

Results of Operations

In order to analyze and compare our results of operations to other similar companies, we believe it is important to exclude non-cash stock-based compensation expense related to equity awards from our expenses. We believe non-cash stock-based compensation expense is not indicative of our operating results or cash flows from our operations. Further, we internally evaluate the performance of our operations excluding non-cash stock-based compensation expense. All numbers presented below exclude stock-based compensation expense unless otherwise indicated.

Comparison of the Years Ended December 31, 2019 and 2018

Revenue

The following table sets forth our revenue for the periods presented (in thousands):

 

 

Product revenue. In 2019, we recognized product revenue of $42.3 million related to sales of TEGSEDI in the U.S. and E.U. and WAYLIVRA in the E.U. In 2018, we recognized product revenue of $2.2 million related to sales of TEGSEDI in the U.S. and E.U. Subsequent to obtaining regulatory approval from the FDA on October 5, 2018, we began to sell TEGSEDI in the U.S. in the fourth quarter of 2018. On July 11, 2018, we obtained regulatory approval of TEGSEDI in Europe, following which we began to sell TEGSEDI in Europe in the fourth quarter of 2018.  On May 7, 2019, we obtained regulatory approval of WAYLIVRA in Europe, following which we began to sell WAYLIVRA in Europe in the third quarter of 2019.

 

Licensing revenue. In 2019, we recognized licensing revenue of $10.2 million in connection with milestone payments received under the PTC Collaboration and License Agreement, or PTC License Agreement, which were recognized as revenue upon receipt of regulatory approvals for WAYLIVRA in Europe in May 2019 and for TEGSEDI in Brazil in October 2019, at which point the constraint on variable consideration was resolved. The $12.0 million of licensing revenue we recognized in 2018 was related to the upfront payment received from PTC Therapeutics pursuant to our PTC License Agreement.

Research and development and license revenue. In 2019, we recognized $436.1 million in research and development and license revenue from our collaborations with Novartis and Pfizer compared to $50.6 million in 2018. The increase in research and development and license revenue was primarily the result of the $150.0 million license fee related to Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx and the $248.7 million license and development revenue related to the Pfizer License Agreement. As of December 31, 2019, all of the deferred revenue relating to the research and development service performance obligations from our collaboration with Novartis had been recognized.

75

---

 

Cost of sales and license expense

The following table sets forth our cost of sales and license expense for the periods presented (in thousands):

 

 

Cost of sales – product. Product expense of $4.1 million for 2019, compared to $1.7 million for 2018, consisted of period costs and certain fixed costs associated with the manufacturing of TEGSEDI. We do not expect fixed costs will increase in direct correlation to sales. Based on our policy, we expense costs associated with the manufacturing of our products as research and development prior to regulatory approval. Certain product costs of TEGSEDI units recognized as revenue during the years ended December 31, 2019 and 2018 were incurred prior to the regulatory approval in the E.U. in July 2018, and therefore are not included in cost of sales during these years. Certain product costs of WAYLIVRA units recognized as revenue during the year ended December 31, 2019 were incurred prior to regulatory approval in the E.U. in May 2019, and therefore are not included in cost of sales during the year. We expect cost of sales to increase as we deplete these inventories. The cost of units sold during the period for which there was no cost basis was $0.7 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively. All amounts exclude non-cash compensation expense related to equity awards.

Cost of sales expense – intangible asset amortization. For the years ended December 31, 2019 and 2018, intangible asset amortization of $5.7 million and $2.7 million, respectively, consisted of amortization of intangible assets recorded as a result of the achievement of TEGSEDI regulatory milestones in the U.S. and E.U.

Cost of license. Cost of license of $5.4 million and $7.2 million for years ended December 31, 2019 and 2018, respectively, consisted of sublicense expense due to Ionis related to licensing revenue earned as part of the PTC Licensing Agreement.

Research and development expense

The following table sets forth our research and development expenses for the periods presented (in thousands):

 

 

76

---

 

Research and development expenses were $281.0 million for 2019 compared to $120.9 million for the same period in 2018. The increase in research and development expenses was primarily due to sublicensing expense of $75.0 million due to Ionis related to the Novartis option exercise for AKCEA-APO(a)-L_Rx in the first quarter of 2019 and sublicensing expense of $125.0 million due to Ionis related to the upfront payment received in connection with the Pfizer License Agreement in the fourth quarter of 2019. This increase was partially offset by a decrease in research and development expenses primarily due to the completion of clinical activities for AKCEA-APO(a)-L_Rx, and a decrease in development activities related to TEGSEDI and WAYLIVRA. All amounts exclude non-cash compensation expense related to equity awards.

Selling, general and administrative expense

The following table sets forth our selling, general and administrative expenses for the periods presented (in thousands):

 

 

Selling, general and administrative expenses were $156.9 million for 2019 compared to $118.9 million for the same period in 2018. Our selling, general and administrative expenses increased due to the advancement of commercialization activities necessary to sell TEGSEDI in the U.S. and Canada, launch TEGSEDI in additional markets in the E.U., and launch WAYLIVRA in the E.U. All amounts exclude non-cash compensation expense related to equity awards.

Stock-based compensation expense decreased in 2019 compared to 2018 due to the departures of certain of our executive officers in the second half of 2019, as well as an increase in our forfeiture rate estimates.

Net Loss Share

In the first quarter of 2019, the profit sharing provisions for TEGSEDI under the development, commercialization, collaboration and license agreement, or TTR License Agreement, with Ionis became effective. As we are the principal for all commercial activities related to the TTR License Agreement, we record all commercial activities related to TEGSEDI on a gross basis in our consolidated statement of operations, including revenues, cost of sales and sales and marketing expenses. The Ionis share of commercialization costs for TEGSEDI is separately presented within operating expenses in our consolidated statement of operations under the caption “Net loss share from commercial activities under arrangement with Ionis Pharmaceuticals, Inc.” For the year ended December 31, 2019, we recorded $39.7 million of net loss share related to TEGSEDI commercial activities. We did not record any amounts under the profit sharing provisions for TEGSEDI in 2018.

Other income and other expense

Investment income. Investment income for 2019 totaled $5.5 million compared to $5.6 million for the same period in 2018. The decrease in investment income was primarily due to a decrease in the average investment balance during 2019 compared to 2018.

Income tax expense

We recorded income tax expense of $2.2 million for 2019, compared to $0.4 million for 2018. Our income tax expense increased in 2019 due to an increase in our research and development and license revenue for the year, primarily related to non-recurring transactions in the first and fourth quarter from Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx and the Pfizer License Agreement, respectively. These transactions resulted in taxable income in the U.S. for 2019.  

77

---

 

Net Income/Loss and Net Income/Loss Per Share

Net income for 2019 was $40.8 million compared to net loss of $225.8 million for 2018. We realized net income during 2019 compared to the net loss incurred in 2018 primarily due to the $150.0 million license fee related to Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx in the first quarter of 2019, the $248.7 million license and development revenue related to the Pfizer License Agreement in the fourth quarter of 2019, net loss share with Ionis that began in 2019 and further commercialization of TEGSEDI which began in late 2018. This increase was offset in part by sublicense fees due to Ionis of $75.0 million related to Novartis’ exercise of its option to license AKCEA-APO(a)-L_Rx and $125.0 million related to the Pfizer License Agreement. Basic net income per share of common stock owned by Ionis and owned by others for the year ended December 31, 2019 was $0.49 and $0.29, respectively. Basic net loss per common share owned by Ionis and owned by others for the year ended December 31, 2018 was $2.74 and $2.87, respectively. Diluted net income per common share owned by Ionis and owned by others for the year ended December 31, 2019 was $0.48 and $0.29, respectively. Diluted net loss per common share owned by Ionis and owned by others for December 31, 2018 was $2.74 and $2.87, respectively.

Liquidity and Capital Resources

At December 31, 2019, we had cash, cash equivalents and investments of $463.7 million and an accumulated deficit of $481.3 million.

We have funded our operating activities through a $100.0 million cash contribution that we received from Ionis in 2015, $75.0 million from initiating our collaboration with Novartis that we received in the first quarter of 2017 and $106.0 million in drawdowns under our line of credit with Ionis that we received in the first and second quarters of 2017. Our borrowings under our line of credit agreement with Ionis converted into shares of our common stock at the IPO price in connection with the closing of our IPO in July 2017. We no longer have access to the line of credit. Additionally, in July 2017 we received $182.3 million in net proceeds from our IPO, including $25.0 million that Ionis invested in our IPO and the Novartis concurrent private placement of $50.0 million.

In April 2018, the stockholders other than Ionis and its affiliates approved the TTR License Agreement pursuant to which we acquired an exclusive license from Ionis to TEGSEDI and AKCEA-TTR-L_Rx and a stock purchase agreement, or Ionis SPA, with Ionis, our majority shareholder, which we entered into on March 14, 2018. To support our commercialization of TEGSEDI and AKCEA-TTR-L_Rx, Ionis purchased 10.7 million shares of our common stock for $200.0 million.

In February 2019, Novartis exercised its option to license AKCEA-APO(a)-L_Rx as part of our strategic collaboration with Novartis discussed in Note 7, Strategic Collaboration with Novartis. As a result, we received a license fee of $150.0 million of which we issued 2,837,373 shares of our common stock to Ionis as payment of the $75.0 million sublicense fee.

In October 2019, we entered into an agreement with Pfizer for the development and commercialization of AKCEA-ANGPTL3-L_Rx discussed in Note 10, License Agreement with Pfizer. As a result, we received a license fee of $250.0 million in November 2019, of which we issued 6,873,344 shares of our common stock to Ionis as payment of the $125.0 million sublicense fee.

At December 31, 2019, we had working capital of $454.9 million compared to working capital of $186.6 million at December 31, 2018. Working capital increased in 2019 primarily due to the increase in our cash and cash equivalents as a result of upfront payments received when Novartis exercised its option to license AKCEA-APO(a)-L_Rx in the first quarter and upon the execution of the Pfizer License Agreement in the fourth quarter. This increase is offset by activities related to our normal course of business. As of December 31, 2019, our outstanding receivable under our agreements with Ionis was $3.2 million.

TEGSEDI is approved in the U.S., E.U., Canada and Brazil and we are continuing our commercialization efforts in these four regions. We began to generate product revenue from TEGSEDI sales in the fourth quarter of 2018. WAYLIVRA is approved in the E.U. and we are beginning our commercialization efforts in the E.U. We anticipate that we will incur losses for the foreseeable future, and losses may continue to increase as we develop, seek regulatory approval for, and begin to commercialize our other pipeline medicines. We are subject to all of the risks incident in developing and commercializing new medicines and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.

78

---

 

Future Funding Requirements

As of December 31, 2019, we had cash, cash equivalents and investments of $463.7 million. We expect cash, cash equivalents, investments, and cash expected to be generated from sales of TEGSEDI and WAYLIVRA will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the issuance of these financial statements. Until such time, if ever, as we can generate substantial revenue, we may finance our cash needs through additional financing in the future including, but not limited to, through the issuance of our common stock,  other equity or debt financings or collaborations or partnerships with other companies. In any event, we may not generate significant revenue from product sales or our license and collaboration agreements prior to the use of our existing cash, cash equivalents and investments. We do not have any committed external sources of funds. We cannot provide assurances that financing will be available when and as needed or that, if available, the financings will be on favorable or acceptable terms. If we are unable to obtain additional financing when and if we require it, this could have a material adverse effect on our business and results of operations. To the extent we issue additional equity securities, our existing stockholders could experience a dilution of their ownership and such dilution could be substantial.

Our forecast of the period of time through which our financial resources will be adequate to support our operations involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong and we could use our available capital resources sooner than we currently expect. The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

Contractual Obligations and Commitments

Purchase Commitments

Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including, fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  Such obligations are related principally to inventory purchase orders based on our current manufacturing needs and require significant lead times to be fulfilled by our vendors.  Purchase commitments exclude agreements that are cancelable without penalty. As of December 31, 2019 our purchase commitments for the following 12 months were $4.3 million.

79

---

 

Operating Lease

On April 5, 2018, we entered into an operating lease agreement for 30,175 square feet of office space located in Boston, Massachusetts for our corporate headquarters. The lease commencement date was August 15, 2018 and we took occupancy in September 2018. We are leasing this space under a non-cancelable operating lease with an initial term of 123 months and an option to extend the lease for an additional five-year term. We did not include the extension option in our right-of-use asset and lease liability calculation as we do not consider it reasonably certain that we would exercise the option. Under the lease agreement, we received a three-month free rent period, which commenced on August 15, 2018, and a tenant improvement allowance up to $3.8 million. We provided the lessor with a letter of credit to secure our obligations under the lease in the initial amount of $2.4 million, to be reduced to $1.8 million on the third anniversary of the rent commencement date and to $1.2 million on the fifth anniversary of the rent commencement date if we meet certain conditions set forth in the lease at each such time. The letter of credit amount is included in deposits and other assets on the accompanying consolidated balance sheets.

On November 12, 2018, we entered into an operating lease agreement with Ionis Pharmaceuticals to sublease 4,723 square feet of office space located in Carlsbad, California.  The commencement date was March 2018 and the term of the lease is 64 months with a four-month free rent period. There is no extension option for this lease.

On May 8, 2019, we entered into an operating lease agreement for office space located in Dublin, Ireland. The lease commenced in May 2019 and the initial term of the lease is 18 months with an extension option. We have included a 12-month extension period in our right-of-use asset and lease liability calculation as we consider it reasonably certain that we will exercise the option to extend the lease for an additional 12 months. 

Operating lease expense for the years ended December 31, 2019, 2018 and 2017 was $2.1 million, $2.4 million and $0.7 million, respectively. We recognize rent expense on a straight-line basis over the lease term for the lease of our office spaces. Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019 was $2.4 million and was included in net cash used in operating activities in our consolidated statement of cash flows.

Other information related to our operating lease is as follows (dollar amounts in thousands):

 

 

Annual maturities of our operating lease liabilities as of December 31, 2019 are as follows (in thousands):

 

 

Recently Issued Accounting Pronouncements

We describe the recently issued accounting pronouncements that apply to us in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements.

80

---

 

Off-balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the period presented, as defined in the rules and regulations of the SEC.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

We are exposed to changes in interest rates primarily from our investments in certain short-term investments. We place our cash equivalents and short-term investments with reputable financial institutions. We primarily invest our excess cash in commercial paper and debt instruments of the U.S. Treasury, financial institutions, corporations, and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody's, Standard & Poor's, or Fitch, respectively. We have established guidelines relative to diversification and maturities that are designed to maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity. We typically hold our investments for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

 

Foreign Exchange Risk

Our results of operations are subject to foreign currency exchange rate fluctuations as we have foreign subsidiaries, Akcea Therapeutics UK Ltd., or Akcea UK, Akcea Therapeutics Canada, Inc., or Akcea Canada, Akcea Therapeutics France SAS, or Akcea France, Akcea Therapeutics Germany GmbH, or Akcea Germany, Akcea Therapeutics Ireland Limited, or Akcea Ireland, Akcea Therapeutics Portugal or Akcea Portugal, Akcea Therapeutics Spain, or Akcea Spain and Akcea Therapeutics Italy, or Akcea Italy, with functional currencies other than the U.S. dollar. We created these foreign subsidiaries to support our commercialization activities in North America and Europe and to serve as potential entities for future North American and European operations. We translate the foreign subsidiaries' functional currencies to our reporting currency, the U.S. dollar. As a result, our financial position, results of operations and cash flows can be affected by market fluctuations in the foreign currencies to U.S. dollar exchange rate which are difficult to predict. However, because the Akcea foreign subsidiaries currently have limited operations, the effect of fluctuations of the foreign currencies to U.S. dollar exchange rate on our consolidated results is immaterial to our consolidated financial statements.  Our business strategy incorporates potentially significant international expansion therefore we expect that the impact of foreign currency exchange rate fluctuations may become more substantial in the future.

 

Item 8. Financial Statements and Supplementary Data

 

We filed our consolidated financial statements and supplementary data required by this item as exhibits hereto and listed them under Item 15(a)(1) and (2), and incorporate them herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act) that are designed to ensure that information we are required to disclose in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We designed and evaluate our disclosure controls and procedures recognizing that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance and not absolute assurance of achieving the desired control objectives.

81

---

 

As of the end of the period covered by this report on Form 10-K, we carried out an evaluation of our disclosure controls and procedures under the supervision of, and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer. Based on our evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officer and effected by the company's board of preparation of financial statements for external purposes in accordance with GAAP and directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our company's assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the participation of our principal executive and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, based on criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on its assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019, based on those criteria.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the deferral allowed under the JOBS Act for emerging growth companies

Changes in Internal Control Over Financial Reporting

The above assessment did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

82

---

 

PART III

Item 10. Directors, Executive Officers and Corporate Governance

We incorporate by reference the information required by this Item with respect to directors and the Audit Committee from the information under the caption "ELECTION OF DIRECTORS," including in particular the information under "Nominating, Governance and Review Committee" and "Audit Committee," contained in our definitive information statement, or the Information Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019.

We incorporate by reference the required information concerning our Code of Ethics from the information under the caption "Code of Ethics and Business Conduct" contained in the Information Statement. Our Code of Ethics and Business Conduct is posted on our website at http://ir.akceatx.com/media-investors/corporate-governance⁽¹⁾ and is available in print free of charge to any stockholder upon request. We intend to disclose future amendments to, or waivers from, our Code of Ethics and Business Conduct on our website. No such waivers have been issued during fiscal 2019.

 

Item 11. Executive Compensation

We incorporate by reference the information required by this item to the information under the caption "EXECUTIVE COMPENSATION" and "Compensation Committee Interlocks and Insider Participation" contained in the Information Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We incorporate by reference the information required by this item to the information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" contained in the Information Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2019.

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

We incorporate by reference the information required by this item to the information under the captions "Controlled Company; Director Independence" and "Certain Relationships and Related Transactions" contained in the Information Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019.

Item 14. Principal Accounting Fees and Services

We incorporate by reference the information required by this item to the information under the caption "RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" contained in the Information Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019.

 

83

---

 

Part IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1) Index to Financial Statements

We submitted the consolidated financial statements required by this item in a separate section beginning on page F-1 of this Report.

(a)(2) Index to Financial Statement Schedules

We omitted these schedules because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

(a)(3) Index to Exhibits

Item 16. Form 10-K Summary

Not Applicable.

84

---

 

Index to Exhibits

 

85

---

 

86

---

 

 

87

---

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 2^nd day of March, 2020.

 

 

88

---

 

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Damien McDevitt and Michael MacLean, or any of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

89

---

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-1

---

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors of Akcea Therapeutics, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Akcea Therapeutics, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

Adoption of ASU No. 2016-02  

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 2016.

San Diego, California

March 2, 2020

 

F-2

---

 

AKCEA THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

See accompanying notes.

F-3

---

 

AKCEA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share data)

 

 

See accompanying notes.

F-4

---

 

AKCEA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

See accompanying notes.

F-5

---

 

AKCEA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Years Ended December 31, 2019, 2018 and 2017

(In thousands)

 

 

See accompanying notes.

F-6

---

 

AKCEA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

See accompanying notes.

F-7

---

 

 

 

 

See accompanying notes.

F-8

---

 

AKCEA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

We were incorporated in Delaware in December 2014. We were organized by Ionis Pharmaceuticals, Inc., or Ionis, to focus on developing and commercializing medicines to treat patients with rare and serious diseases. On July 19, 2017, we completed our initial public offering, or IPO. As of December 31, 2019, Ionis owned approximately 76% of our common stock and is our majority shareholder. Prior to our IPO, we were wholly owned by Ionis.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP. Certain amounts in the prior period financial statements have been revised to conform to the presentation of the current period financial statements.

The consolidated financial statements include the accounts of Akcea Therapeutics, Inc. ("we," "our," and "us") and our wholly owned subsidiaries. All intercompany transactions and balances were eliminated in consolidation. We included all normal recurring adjustments in the financial statements which we considered necessary for a fair presentation of our financial position and our operating results and cash flows for the years ended December 31, 2019, 2018 and 2017.

In accordance with Accounting Standard Codification, or ASC, 205-40, Going Concern, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Prior to the year ended December 31, 2019, we have incurred losses since our inception and have funded our cash flow deficits primarily through the issuance of capital stock and proceeds from licensing and collaboration agreements. As of December 31, 2019, we had an accumulated deficit of $481.3 million. During the year ended December 31, 2019, we generated a profit of $40.8 million and provided $223.8 million of cash from operations. We expect to return to generating operating losses and negative operating cash flows for the foreseeable future. The transition to sustained profitability is dependent upon the successful development, approval and commercialization of our products and product candidates and the achievement of a level of revenue adequate to support our cost structure.  We believe that our currently available funds of $463.7 million as of December 31, 2019 and cash expected to be generated from sales of TEGSEDI and WAYLIVRA will be sufficient to fund our operations through at least the next 12 months from the issuance of this Annual Report on Form 10-K. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and commercialize our medicines even if we would otherwise prefer to develop and commercialize the medicines ourselves.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses, stock-based compensation and income taxes. Estimates are periodically reviewed in light of changes in facts, circumstances and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Translation of Foreign Currency

For our foreign subsidiaries that report in a functional currency other than U.S. dollars, we translate their assets and liabilities into U.S. dollars using the exchange rate at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates for the period. We translate transactions in our capital accounts at the historic exchange rate in effect at the date of the transaction. We include foreign currency translation adjustments in accumulated other comprehensive income (loss) as a component of stockholders’ equity.

F-9

---

 

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. We place our cash, cash equivalents and short-term investments with reputable financial institutions. We primarily invest our excess cash in commercial paper and debt instruments of the U.S. Treasury, financial institutions, corporations and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody's, Standard & Poor's, or S&P, or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.

 

Cash Equivalents and Short-Term 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 the date of purchase. We classify our short-term investments as available-for-sale and we carry them at fair market value based upon prices for identical or similar items on the last day of the fiscal period. We record unrealized gains and losses as a separate component of comprehensive income (loss) and we include net realized gains and losses in investment income on our consolidated statement of operations. We use the specific identification method to determine the cost of securities sold.

Accounts Receivable

Our accounts receivable balance is comprised of payments due from our partners in connection with our collaborative agreements and from our customers for product sales. We record receivables for product sales net of allowances for prompt payment discounts and other related fees and discounts based on contractual terms with our customers. We have standard payment terms that generally require payment within 30 to 90 days. We do not adjust our receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We provide reserves against trade receivables for estimated losses that may result from a customer's inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve. As of December 31, 2019 and 2018, we did not recognize any reserves for uncollectible accounts.

Inventory

Prior to the regulatory approval of our product candidates, we incur expenses for the manufacturing of drug product that could potentially be available to support the commercial launch of our products. Until the first reporting period when regulatory approval has been received or is otherwise considered probable, we record all such costs as research and development expense.

WAYLIVRA inventory-related costs incurred subsequent to April 1, 2019 and TEGSEDI inventory-related costs incurred subsequent to July 1, 2018 are reflected as inventory on our consolidated balance sheet at the lower of cost or net realizable value under the first-in, first-out, or FIFO, basis. We periodically analyze our inventory levels and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory in excess of expected sales requirements as cost of product sales. The determination of whether inventory costs will be realizable requires estimates by our management and if actual market conditions are less favorable than projected by our management, additional write-downs of inventory may be required which would be recorded as a cost of product sales in the consolidated statement of operations.

At December 31, 2018, a majority of our physical inventory for TEGSEDI was produced prior to when we obtained regulatory approval and accordingly had no cost basis as we recorded the related costs as research and development expense in prior periods. We obtained the first regulatory approval for TEGSEDI in July 2018 and for WAYLIVRA in May 2019. At December 31, 2019, our physical inventory for TEGSEDI and WAYLVRA 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 these costs as R&D expenses.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset. Furniture and fixtures are depreciated over seven years. Computer equipment and software are depreciated over three years. Manufacturing equipment is depreciated over five years. Leasehold improvements are amortized over the shorter of the lease term or the ten-year estimated useful life of the asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

F-10

---

 

Leases

Topic 842 Adoption

In February 2016, the Financial Accounting Standards Board, or FASB, issued amended accounting guidance related to lease accounting. This guidance superseded the lease requirements we previously followed in ASC Topic 840, Leases, or Topic 840, and created a new lease accounting standard, ASC Topic 842, Leases, or Topic 842. Under Topic 842, an entity will record all leases with a term longer than one year on its balance sheet. Further, an entity will record a liability with a value equal to the present value of payments it will make over the life of the lease (lease liability) and an asset representing the underlying leased asset (right-of-use asset). The new accounting guidance requires entities to determine if leases are operating or financing leases. Entities will recognize expense for operating leases on a straight-line basis as an operating expense. If an entity determines a lease is a financing lease, it will record both interest and amortization expense and generally the expense will be higher in the earlier periods of the lease.

We adopted Topic 842 on January 1, 2019 and adjusted our opening consolidated balance sheet on that date to record our operating lease right-of-use assets and lease liabilities. We adopted Topic 842 using the available practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward historical lease classification of those leases we had in place as of January 1, 2019. Results for the year ended December 31, 2019 are presented under Topic 842. Results for the year ended December 31, 2018 are presented in accordance with our historic accounting under Topic 840.

The impact of the adoption of Topic 842 on the accompanying condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):

 

 

We determine if an arrangement contains a lease at inception. We currently only have operating leases. We recognize an operating lease right-of-use asset and associated short and long-term lease liability for operating leases greater than one year on our consolidated balance sheet. We calculate our operating lease right-of-use asset and lease liability based on the present value of the future minimum lease payments we will pay over the lease term. We determine the lease term at the commencement date of the lease and we include renewal options in the lease term if we are reasonably certain that we will exercise the option. As our current leases do not provide an implicit interest rate, we used our incremental borrowing rate in determining the present value of future payments. We estimate the incremental borrowing rate based on the observed interest rates for secured debt issued by companies with similar credit ratings and with similar terms. Our operating lease right-of-use asset also includes any lease payments we made and excludes any tenant improvement allowances we received.

We recognize rent expense for the lease components of our operating leases on a straight-line basis over the term of our lease. We recognize non-lease components, such as common area maintenance expenses, in the period we incur the expense.

 

Intangible Assets

We obtained exclusive licenses from Ionis for specific patents that Ionis owns and maintains related to our medicine pipeline. We recorded our licenses from Ionis as a capital contribution using the carryover basis of Ionis' historical cost for the related patents. We are amortizing our capitalized licenses over their estimated useful life, which is the term of the underlying individual patents owned by Ionis.

In addition, we maintain definite-lived intangible assets related to regulatory milestone payments made to Ionis that are recoverable through future cash flows from approved products, which are capitalized as licensed intangible assets. These assets are amortized over their remaining useful lives, which are generally estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then the shorter period is used. Intangible assets are amortized using the economic consumption method if anticipated future revenue can be reasonably estimated. The straight-line method is used when future revenue cannot be reasonably estimated. We use the straight-line method and amortization expense is recorded as a component of cost of sales to the extent the underlying license is related to a commercial product or research and development prior to product commercialization in the consolidated statement of operations.

F-11

---

 

We assess our intangible assets for impairment if indicators are present or changes in circumstances suggest that impairment may exist.  Events that could result in an impairment or trigger an interim impairment assessment may include actions by regulatory authorities with respect to us or our competitors, the receipt of additional clinical or nonclinical data regarding our medicine or a potentially competitive medicine, changes in the clinical development program for a medicine or new information regarding potential sales for the medicine.  If impairment indicators are present or changes in circumstances suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet.  If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value.

Fair Value of Financial Instruments

We have estimated the fair value of our financial instruments. The amounts reported for cash equivalents, accounts payable and accrued expenses approximate fair value because of their short maturities. We report our investment securities at their estimated fair value based on a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our money market funds and treasury securities classified as available-for-sale securities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. We have not historically held any Level 3 investments. Our securities have been classified as Level 1 or Level 2. We obtain the fair value of our Level 2 investments from our custodian bank and from a professional pricing service. We validate the fair value of our Level 2 investments by understanding the pricing model used by the custodian banks or professional pricing service provider and comparing that fair value to the fair value based on observable market prices. We recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. No transfers between levels have occurred to date.

Revenue Recognition

Collaboration and License Revenue

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or Topic 606, using the full retrospective transition method.  Under this method, we revised our consolidated financial statements for prior period amounts including the periods included in this Report on Form 10-k, as if Topic 606 had been effective for such periods.  As a result of our adoption of Topic 606, we made revisions to amounts originally reported for the year ended December 31, 2017 and as of December 31, 2017.

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, then assess whether each promised good or service is distinct. When we offer options for additional goods or services, such as an option to license a medicine in the future or for additional goods or services to be provided in the future, we evaluate whether such options are material rights that should be treated as additional performance obligations. We typically have concluded that the option to license a medicine or the options for additional goods or services that may be requested in the future under our collaboration agreements are not material rights as the amounts attributable to such options represent standalone selling price, and therefore no consideration is allocated to these items at the inception of an agreement. When a partner exercises its option to license a medicine or requests the additional goods or services, a new performance obligation is created for that item. Once performance obligations are identified, we then recognize as revenue the amount of the transaction price that we allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of an output or input method. As of December 31, 2019, we had four collaboration and license revenue agreements: our strategic collaboration, option and license agreement with Novartis Pharma AG, or Novartis, which we entered into in January 2017; our TTR development, commercialization, collaboration and license agreement with Ionis, which we entered into in April 2018 and pursuant to which we are recognizing commercial product revenue related to TEGSEDI sales subsequent to product launch in the fourth quarter of 2018; our collaboration and license agreement with PTC Therapeutics International Limited, or PTC Therapeutics, which we entered into in August 2018; and our license agreement with Pfizer Inc., or Pfizer, which we entered into in October 2019. For a complete discussion of the accounting related to our license and collaboration agreements, see Note 7, Strategic Collaboration with Novartis, Note 8, License Agreements and Services Agreement with Ionis, Note 9, Collaboration and License Agreement with PTC Therapeutics and Note 10, License Agreement with Pfizer.

F-12

---

 

Product Revenue, Net

 

Subsequent to obtaining regulatory approval from the U.S. Food and Drug Administration, or FDA, on October 5, 2018, we began to sell TEGSEDI in the U.S. in the fourth quarter of 2018. The product is distributed through an exclusive distribution agreement with a third-party logistics company, or 3PL, that takes title to the product and represents our sole customer in the U.S. Our U.S. customer distributes TEGSEDI to a specialty pharmacy and a specialty distributor (collectively referred to as “wholesalers”), who then distribute the product to health care providers and patients. On July 11, 2018, we obtained regulatory approval of TEGSEDI in Europe, following which we began to sell TEGSEDI in the E.U. in the fourth quarter of 2018.  On May 7, 2019, we obtained regulatory approval of WAYLIVRA in the E.U., following which we began to sell WAYLIVRA in the E.U. in the third quarter of 2019. TEGSEDI and WAYLIVRA are distributed through 3PLs that distribute the product to hospitals and pharmacies in the E.U.  

 

Revenue from product sales is recognized when the customer obtains control of our product, which occurs upon transfer of title to the customer. Revenue is recognized at the amount that we expect to be entitled to in exchange for the sale of our product. This amount includes both fixed and variable consideration and excludes amounts that are collected from customers and remitted to governmental authorities. We record shipping and handling costs related to commercial products within cost of goods sold on our consolidated statement of operations. 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 expenses on our consolidated statement of operation. 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 have elected not to adjust consideration for the effects of a significant financing component when the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less. Our payment terms are generally between thirty to ninety days.

 

Reserves for Variable Consideration

Revenue from product sales is recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established related to discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customers, wholesalers, health care providers and other indirect customers relating to the sale of TEGSEDI and WAYLIVRA. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a reduction of accounts receivable or a current liability. Where appropriate, these estimates take into consideration 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, product revenue net of these reserves reflects our best estimate of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings, in the period such variances become known.

The following are the components of variable consideration related to product revenue:

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 they pay for the product and the selling price to the qualified healthcare providers. We record reserves and reduce our product revenue for these chargebacks related to product sold to our U.S. customer during the reporting period as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers in future periods. Our established reserve for chargebacks is included in accrued liabilities on our consolidated balance sheet.

 

Government rebates: We are subject to discount obligations under government programs, including Medicaid and Medicare programs in the U.S., and similar programs in certain countries in Europe. We record reserves for government rebates based on statutory discount rates and estimated utilization in the period in which revenue is recognized. We estimate Medicaid and Medicare rebates based upon estimated payer mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses on our consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we expect 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.

 

F-13

---

 

Managed care rebates: We are subject to rebates in connection with a value-based agreement with a certain commercial payer. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued liabilities on our consolidated balance sheet.  This rebate is based on a fixed percentage and includes a price increase limit allowance (price protection). Our estimate for managed care rebates is based upon estimated payer mix and the applicable contractual rebate rate.

Trade discounts and allowances: We provide customary invoice discounts on sales to our U.S. customer for prompt payment. The discounts are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue, and the establishment of a reserve that is offset against our accounts receivable balance on our consolidated balance sheet.

Distribution fees: We receive and pay for various distribution services provided by our U.S. and E.U. customers and our U.S. wholesalers. These fees are generally accounted for as a reduction of revenue in the same period the related revenue is recognized, and an establishment of a reserve that is offset against our accounts receivable balance on our consolidated balance sheet. To the extent that the services received are distinct from the sale of products to our customers, we classify these payments as selling, general and administrative expenses.

 

Product Returns: Our U.S. customer has return rights and our wholesalers in the U.S. have limited return rights primarily related to the product’s expiration date. We estimate the amount of product sales that may be returned and record the estimate as a reduction of revenue and a refund liability included in accrued liabilities in our consolidated balance sheet in the period the related product revenue is recognized. Based on our distribution model, contractual inventory limits with our U.S. customer and wholesalers and the price of TEGSEDI, we believe there will be minimal returns in the U.S. Our E.U. customers only take title to TEGSEDI and WAYLIVRA when an order is received and therefore only maintain inventory levels of our products based on demand. Accordingly, there is limited return risk in the E.U. and we have not recorded any return estimate in the transaction price for products sold in the E.U.

 

Other incentives: In the U.S., other incentives include co-payment assistance that we provide to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance. The calculation of the accrual for co-payment assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue. Our estimate is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued liabilities on our consolidated balance sheet.

 

During the year ended December 31, 2019, we recorded product revenue, net, of $42.3 million, which consisted of $34.6 million of TEGSEDI sales in the U.S., and $7.7 million of TEGSEDI and WAYLIVRA sales in the E.U. This is compared to the year ended December 31, 2018 product revenue, net, of $2.2 million which consisted of $1.2 million of TEGSEDI sales in the U.S., and $1.0 million of TEGSEDI sales in the E.U. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the years ended December 31, 2019 and 2018 (in thousands):

 

 

F-14

---

 

Cost of Product Sales

As a result of receiving marketing authorization, or MA, approval in the E.U. for WAYLIVRA in May 2019 and TEGSEDI in July 2018, we began recording all WAYLIVRA and TEGSEDI expenses related to commercial product as cost of product sales starting in April 2019 and July 2018, respectively. Cost of product sales consists of manufacturing costs, transportation and freight, and indirect overhead costs associated with the commercial manufacturing and distribution of WAYLIVRA and TEGSEDI. Cost of product sales may also include period costs related to certain commercial manufacturing services and inventory adjustment charges. Additionally, we previously expensed a significant portion of the cost of producing WAYLIVRA and TEGSEDI that we used in the commercial launch of these products as research and development expense prior to the regulatory approval of WAYLIVRA and TEGSEDI.

Commercial Sublicensing Expenses

We incur sublicense expenses under our development, commercialization, collaboration and license agreement, or TTR License Agreement, and our development, commercialization and license agreement, or Cardiometabolic License Agreement, with Ionis related to the medicines we have licensed under these agreements. We include our sublicense fee expenses in cost of license expenses on our consolidated statement of operations for those medicines that are approved for marketing. We recognize sublicense fee expenses in the period they are incurred.

Research and Development Expenses

Our research and development expenses include wages, benefits, facilities, supplies, external services, clinical study and manufacturing costs and other expenses that are directly related to our research and development activities. We expense research and development costs as we incur them. We do not conduct research activities and no such costs are included in these amounts.

If we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our balance sheet and we expense them as the services are provided.

Research and Development Sublicensing Expenses

We incur sublicense expenses under our Cardiometabolic Development, Commercialization and License Agreement with Ionis related to the medicines we have licensed under the agreement. We include our sublicense fee expenses in research and development expenses on our consolidated statement of operations since the applicable medicines are not yet approved for marketing. We recognize sublicense fee expenses in the period they are incurred.

Estimated Liability for Research and Development Costs

We record accrued liabilities related to expenses for which vendors or service providers have not yet billed us. These liabilities are for products or services that we have received and primarily relate to ongoing nonclinical and clinical studies. These costs primarily include third-party clinical management costs, costs for contract research organizations, laboratory and analysis costs, toxicology studies and investigator grants. We have medicines in concurrent nonclinical and clinical studies at several sites throughout the world. To ensure that we have adequately provided for ongoing nonclinical and clinical research and development costs during the period in which we incur such costs, we maintain an accrual to cover these costs. We update our estimate for this accrual on at least a quarterly basis. The assessment of these costs is a subjective process that requires judgment. Upon settlement, these costs may differ materially from the amounts accrued in our consolidated financial statements. Our historical accrual estimates have not been materially different from our actual amounts.

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 employee stock purchase plan, or 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 vesting period in our consolidated statement of operations. We reduce stock-based compensation expense for estimated forfeitures at the time of grant and revise the expense in subsequent periods if actual forfeitures differ from those estimates.

F-15

---

 

We value our stock option awards and stock purchase rights under our ESPP using the Black-Scholes model. The determination of the grant date fair value of options using an option pricing model is affected principally by our common stock fair value  and requires us to make a number of other assumptions, including: the expected life of the option, the volatility of the underlying stock, the risk-free interest rate and expected dividends.

The fair value of RSUs is based on the market price of our common stock on the date of grant. We have granted RSUs with various vesting terms between six months and four years.

Prior to December 2015, Ionis granted our employees options to purchase shares of Ionis' common stock, or Ionis options. In December 2015, we granted our employees holding Ionis options additional options to purchase shares of our common stock, or Akcea options.

We determined the stock-based compensation expense for the Ionis options at the date of grant and recognized compensation expense over the vesting period of the Ionis options. In December 2015, we accounted for the issuance of the Akcea options as a modification to the original grant of the Ionis options because the grant of the Ionis options and Akcea options essentially represented a single stock award as the exercisability provisions of the Ionis option grants and Akcea option grants were interrelated and mutually exclusive. The total compensation expense measured on the modification date was the sum of the grant date fair value of the Ionis options plus any incremental compensation cost resulting from the grant of the Akcea options.

In 2016, we began concurrently granting Ionis options and Akcea options to our employees. Because the exercisability provisions of the awards are interrelated and mutually exclusive as described above, the fair values of the Ionis options and the Akcea options were determined on the date of grant and the option with the greater fair value was recognized over the vesting period of the awards.  Following our IPO in 2017, we no longer concurrently grant Ionis and Akcea options. Our board of directors only receive grants under the Akcea option plan.

Following our IPO, we no longer grant Ionis options to our employees. Under the terms of the Ionis options, when we completed our IPO, the Ionis options our employees were holding were terminated. The termination of the Ionis options was determined not to be a modification, as the options were terminated based upon the existing contractual terms of the option agreements. As such, we continue to recognize expense based on the valuation that was determined on the grant date for options issued in 2016 or on the modification date for options issued in 2015 and 2017.

The fair value of stock options granted under our 2015 Equity Incentive Plan is based on the fair value of our common stock on the date of grant. The fair value of stock options granted under the Ionis 2011 Equity Incentive Plan is based on the fair value of Ionis' common stock on the date of grant. Options granted to employees vest over a four-year period, with 25 percent exercisable at the end of one year from the date of the grant and the balance vesting ratably, on a monthly basis, thereafter and have a term of ten years. Options granted to directors vest annually over a four-year period and have a term of ten years.

See Note 11, Equity and Stock-based Compensation, for additional information regarding our stock-based compensation plans.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of unrealized gains and losses on investments, net of taxes and currency translation adjustments. The following table summarizes changes in accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018 and 2017 (in thousands):

 

 

F-16

---

 

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act of 2017, or the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S federal income taxes on dividends from foreign subsidiaries; (iv) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (v) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (vi) subjecting certain foreign earnings to U.S. taxation through base erosion anti-abuse tax (BEAT) and global intangible low-taxed income (GILTI); (vii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and (vii) modifying the officer’s compensation limitation.

 

Our accounting for the elements of the Tax Act is complete. We have made an accounting policy election to treat taxes due on the GILTI inclusion as a current period expense.

Prior to the completion of our IPO we filed our tax returns on a consolidated and combined basis with Ionis for federal and state income tax purposes, respectively. For financial statement purposes, when we are required to file on a consolidated or combined basis, we calculate our income tax amounts, including net operating losses and tax credit carryforwards, using a separate return methodology which determines income taxes as if we were a separate taxpayer from Ionis.  Effective July 19, 2017, the date of our IPO, we are no longer included in the consolidated federal income tax return with Ionis. We determined the amount of federal tax attributes, primarily net operating losses and tax credit carryforwards, that transferred to us upon deconsolidation from Ionis.  We are still required to file most of our state tax returns on a consolidated or combined basis with Ionis. Therefore, for financial statement purposes we calculated our state income tax amounts using the separate return method. 

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 carry forwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation settlement. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in our consolidated statement of operations. Accrued interest and penalties are included within other long-term liabilities on the consolidated balance sheet.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves for changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including scheduled reversal of deferred tax liabilities, past operating results, the feasibility of tax planning strategies and estimates of future taxable income. Estimates of future taxable income are based on assumptions that are consistent with our plans. Assumptions represent management's best estimates and involve inherent uncertainties and the application of management's judgment. Should actual amounts differ from our estimates, the amount of our tax expense and liabilities could be materially impacted.

We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries. The earnings of non-U.S. subsidiaries are currently expected to be indefinitely reinvested in non-U.S. operations.

F-17

---

 

New Accounting Pronouncements - Recently Issued

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 guidance on January 1, 2020. This guidance is not anticipated to have a significant impact on our consolidated financial statements and disclosures.

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 is not anticipated to have a significant impact on our consolidated financial statements and disclosures.

In August 2018, the FASB updated its disclosure requirements related to Level 1, 2 and 3 fair value measurements. The update included deletion and modification of certain disclosure requirements and additional disclosure related to Level 3 measurements. We adopted this updated guidance on January 1, 2019 and it did not have a significant impact on our disclosures.

In November 2018, the FASB issued clarifying guidance on 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 will implement it (in italics):

We adopted this guidance on January 1, 2020. This guidance is not anticipated to have a significant impact on our consolidated financial statements and disclosures.

 

In December 2019, the FASB issued guidance to simplify the accounting for income taxes. The update includes removing several exceptions to existing guidance and includes several simplification updates, all of which do not apply to our current accounting for income taxes. We adopted this updated guidance in the fourth quarter of 2019. This guidance did not have a significant impact on our consolidated financial statements and disclosures.

Investments

As of December 31, 2019 and 2018, we primarily invested our excess cash in money market funds and debt instruments of the U.S. Treasury, financial institutions, corporations and U.S. government agencies with strong credit ratings and an investment grade rating at or above A-1, P-1 or F-1 by Moody's, S&P or Fitch, respectively. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. We periodically review and modify these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.

F-18

---

 

The following is a summary of our investments at December 31, 2019 and 2018 (in thousands):

 

 

 

We recorded unrealized gains and losses related to the securities listed above as of December 31, 2019 and 2018. We believe that the unrealized losses associated with the decline in value of these securities is temporary and primarily related to the change in market interest rates since purchase. We believe it is more likely than not that we will be able to hold our debt securities to maturity. Therefore, we anticipate a full recovery of the amortized cost basis of our debt securities at maturity.

All of our available-for-sale securities are available to us for use in our current operations. As a result, we categorized all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.

Fair Value Measurements

The following tables present the investments we held at December 31, 2019 and 2018 that are regularly measured and carried at fair value. The table segregates our investments by the level within the fair value hierarchy of the valuation techniques we utilized to determine the respective securities' fair value (in thousands):

 

 

 

F-19

---

 

 

 

The following table presents property and equipment, at cost, and related accumulated depreciation (in thousands):

 

 

Total depreciation expense amounted to $0.8 million, $0.3 million and $0.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. As part of the operating lease for our corporate headquarters, the landlord provided and we utilized a tenant improvement allowance of $3.6 million which is included in our leasehold improvements.

 

The following table presents inventory (in thousands):

 

 

We recorded inventory write-offs of $0.2 million for the year ended December 31, 2019. We did not record any inventory write-offs for the year ended December 31, 2018.

The following table presents intangible assets (in thousands):

 

 

The capitalized regulatory approval milestones are related to a milestone of $40.0 million paid to Ionis which was due upon the approval of TEGSEDI in the E.U. on July 11, 2018 and a milestone of $50.0 million paid to Ionis which was due upon the FDA’s approval of TEGSEDI on October 5, 2018.

F-20

---

 

The Company recorded $5.9 million, $2.9 million and $0.1 million in amortization expense related to intangible assets during the years ended December 31, 2019, 2018 and 2017, respectively. We did not recognize any impairment losses for the years ended December 31, 2019, 2018 or 2017. Estimated future amortization expense for intangible assets as of December 31, 2019 is as follows (in thousands):

 

 

The weighted average remaining amortizable life of our patents was 10.9 years at December 31, 2019.

 

For additional detail of our license agreements with Ionis see Note 8, License Agreements and Services Agreement with Ionis.

Background

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 medicine. Novartis received the exclusive option to license, further develop and commercialize each medicine and, post-option exercise, would be responsible for all further global development, regulatory and commercialization activities and costs for each such medicine.

AKCEA-APO(a)-L_Rx

In February 2019, Novartis exercised its exclusive option to license AKCEA-APO(a)-L_Rx. The accounting treatment for this option exercise is discussed in further detail below.

AKCEA-APOCIII-L_Rx

In December 2019, we received written notice from Novartis that they elected not to exercise their option to license AKCEA-APOCIII-L_Rx and to terminate the strategic collaboration solely in relation to AKCEA-APOCIII-L_Rx.  We are no longer entitled to any future license fees or milestone payments relating to AKCEA-APOCIII-L_RX._. As a result of Novartis’ election not to exercise their option, we retain the rights to further develop and commercialize AKCEA-APOCIII-L_Rx.

 

Accounting Analysis

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 Development, Commercialization and License Agreement with Ionis.

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

 

 

 

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

F-21

---

 

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

 

 

We recognized 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 were 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:

 

 

 

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

 

 

Additionally, we and Ionis entered into a stock purchase agreement, or SPA, with Novartis in 2017. 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.

F-22

---

 

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 the related license fee of $150.0 million in full 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 for 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 may 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 delivery of the API supply to Novartis. Novartis has the option to purchase additional API of AKCEA-APO(a)-L_Rx in the future at agreed upon terms and conditions pursuant to the strategic collaboration agreement.

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 AKCEA-APO(a)-L_Rx.  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. 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 share any milestone payments and royalties equally with Ionis.

During the years ended December 31, 2019, 2018 and 2017, we recorded revenue of $187.4 million, $50.6 million and $43.4 million, respectively, from our strategic collaboration with Novartis. During the year ended December 31, 2019, we recognized $28.8 million of revenue from amounts that were in our beginning deferred revenue balance. There is no remaining deferred revenue related to the Novartis agreement on our consolidated balance sheet as of December 31, 2019. Our deferred revenue balance within our consolidated balance sheet at December 31, 2018 included $28.8 million related to our strategic collaboration with Novartis.

In December 2015, we entered into a development, commercialization and license agreement related to our cardiometabolic franchise and a services agreement with Ionis.  In March 2018, we entered into a new development, commercialization, collaboration and license agreement related to our TTR franchise and amended the services agreement previously in place with Ionis. The following sections summarize these related party agreements with Ionis.

Cardiometabolic Development, Commercialization and License Agreement

Our Cardiometabolic License Agreement with Ionis granted exclusive rights to us to develop and commercialize WAYLIVRA, AKCEA-APO(a)-L_Rx, AKCEA-APOCIII-L_Rx, and AKCEA-ANGPTL3-L_Rx, which are collectively referred to as the Lipid Drugs. Ionis granted us an exclusive license to certain patents to develop and commercialize products containing the Lipid Drugs. Ionis also granted us a non-exclusive license to the Ionis antisense platform technology for us to develop and commercialize products containing the Lipid Drugs. Ionis also granted us non-exclusive rights to manufacture the Lipid Drugs in our own facility or at a contract manufacturer. As part of this agreement, both companies agreed not to work with any other parties to develop or commercialize other RNA-targeting medicines that are designed to inhibit any of the Lipid Drug targets so long as we are developing or commercializing the Lipid Drugs.

F-23

---

 

We and Ionis share development responsibilities for the Lipid Drugs, other than the medicines licensed to Novartis and to Pfizer. We pay Ionis for the research and development expenses it incurs on our behalf, which include both external and internal expenses. External research and development expenses include costs for contract research organizations, or CROs, costs to conduct nonclinical and clinical studies on our medicines, costs to acquire and evaluate clinical study data, such as investigator grants, patient screening fees and laboratory work, and fees paid to consultants. Internal research and development expenses include costs for the work that Ionis' research and development employees perform for us. Ionis charges us a full-time equivalent rate that covers personnel-related expenses, including salaries and benefits, plus an allocation of facility-related expenses, including rent, utilities, insurance and property taxes, for those development employees who work either directly or indirectly on the development of our medicines. We also pay Ionis for the API and drug product we use in our nonclinical and clinical studies for all of our medicines. Ionis manufactures the API for us and charges us a price per gram consistent with the price Ionis charges its pharmaceutical partners, which includes the cost for direct materials, direct labor and overhead required to manufacture the API. If we need the API filled in vials or prefilled syringes for our clinical studies and Ionis contracts with a third party to perform this work, Ionis will charge us for the resulting cost.

As we commercialize each of the Lipid Drugs other than medicines licensed to Novartis and to Pfizer, we will pay Ionis royalties from the mid-teens to the mid-twenty percent range on sales related to the Lipid Drugs that we sell. If we sell a Lipid Drug for a Rare Disease Indication (defined in the agreement as less than 500,000 patients worldwide or an indication that required a Phase 3 program of less than 1,000 patients and less than two years of treatment), we will pay a higher royalty rate to Ionis than if we sell a Lipid Drug for a Broad Disease Patient Population (defined in the agreement as more than 500,000 patients worldwide or an indication that required a Phase 3 program of 1,000 or more patients and two or more years of treatment). Other than with respect to AKCEA-APO(a)-L_Rx licensed to Novartis under the collaboration agreement with Novartis and AKCEA-ANGPTL3-L_Rx licensed to Pfizer under the license agreement with Pfizer, if our annual sales reach $500.0 million, $1.0 billion and $2.0 billion, we will be obligated to pay Ionis sales milestones in the amount of $50.0 million for each sales milestone reached by each Lipid Drug. If and when triggered, we will pay Ionis each of these sales milestones over the subsequent 12 quarters in equal payments. We share 50% of payments we receive from Novartis and Pfizer with Ionis.

We may terminate this agreement if Ionis is in material breach of the agreement. Ionis may terminate this agreement if we are in material breach of the agreement. In each circumstance, the party that is in breach will have an opportunity to cure the breach prior to the other party terminating this agreement.

In the first quarter of 2017, we entered into letter agreements with Ionis to reflect the agreed upon payment terms with respect to the upfront option payment that we received from Novartis and to allocate the premium that Novartis paid for Ionis' common stock in connection with our strategic collaboration with Novartis. In the fourth quarter of 2019, we entered into a letter agreement with Ionis to reflect the agreed upon payment terms with respect to the upfront license fee we received from Pfizer in connection with our license agreement with Pfizer. For additional detail regarding our strategic collaboration with Novartis, see Note 7, Strategic Collaboration with Novartis. For additional detail regarding our license agreement with Pfizer, see Note 10, License Agreement with Pfizer.

TTR Development, Commercialization, Collaboration and License Agreement

On April 17, 2018, our stockholders, other than Ionis and its affiliates, approved the TTR License Agreement and a stock purchase agreement, or Ionis SPA, with Ionis, which was entered into on March 14, 2018. In addition, in connection with these agreements, we entered into an amended and restated services agreement, or Amended Services Agreement, and an amended and restated investor rights agreement, or Amended Investor Rights Agreement, with Ionis.

We determined that the TTR License Agreement and Ionis SPA included provisions that required the approval of our stockholders other than Ionis and its affiliates, which we deemed was not perfunctory in nature; therefore, we concluded that the approved date of the agreements for accounting purposes was April 17, 2018, the date on which such approval was received and the closing of the agreements took place.

In accordance with the terms and provisions of the TTR License Agreement, we received rights to:

F-24

---

 

As consideration for the grant of rights under the TTR License Agreement, we paid an upfront licensing fee of $150.0 million, which was paid through the issuance of 8 million shares of our common stock priced by reference to a trading average at the time of execution of the agreements. In addition, we are obligated to make milestone payments to Ionis in connection with the achievement of certain development, regulatory and commercialization events. These milestone payments include up to $110.0 million, if all TEGSEDI regulatory approval milestones are met; up to $145.0 million, if all AKCEA-TTR-L_Rx regulatory milestones are met; and a total of $1.3 billion, in the form of seven milestone payments, if all sales milestones for the combined products are met. We can elect to pay each milestone payment in cash or shares of our common stock and Ionis may require payment in shares of common stock up until the achievement of the milestone event for aggregate worldwide annual net sales of $750.0 million for the products. Subsequent to the achievement of the milestone event for aggregate worldwide annual net sales of $750.0 million, all subsequent milestone payments must be paid in cash.

The TTR License Agreement will remain in effect until the expiration of all included payment obligations, unless earlier terminated. The TTR License Agreement can be terminated by mutual consent of us and Ionis, by either us or Ionis upon certain events, by either party upon material breach, or by Akcea for convenience upon providing 90 days written notice to Ionis. Upon termination all rights received under the TTR License Agreement will terminate.

To support the commercialization of TEGSEDI and AKCEA-TTR-L_Rx, Ionis purchased 10.7 million shares of our common stock for $200 million under the Ionis SPA.

In connection with the licensing transaction, we amended our Certificate of Incorporation to increase our authorized shares of common stock from 100,000,000 shares to 125,000,000 shares.

We determined that the upfront accounting for the TTR License Agreement should follow the accounting guidance for common control transactions given the nature of the relationship between us and Ionis, including the fact that Ionis maintains a controlling ownership position in us.

In addition, we assessed the identifiable assets that were acquired under the terms of the TTR License Agreement, including the licensed rights to TEGSEDI and AKCEA-TTR-L_Rx, certain batches of TEGSEDI materials, the transfer of a minimal number of employees from Ionis to us and the transfer of certain manufacturing and clinical research agreements to us. We concluded that the licensed rights represented a group of similar identifiable assets and that substantially all of the fair value of the acquisition resides in the licensed rights. As such, we concluded that the acquired assets did not meet the definition of a business and that we should account for the TTR License Agreement as an asset acquisition under common control guidance. Accordingly, we recorded the carrying value of the licensed rights held by Ionis of $0.6 million as an intangible asset at the date of acquisition and we are amortizing the amount over the remaining patent life.  

In connection with the transaction, we also purchased $4.7 million of commercial TEGSEDI inventory held by Ionis. In addition, in the first quarter of 2019, we purchased $13.5 million of clinical TEGSEDI material held by Ionis. Prospectively we are responsible for the procurement of all additional inventory. The inventory and clinical material did not have a carrying value on the books of Ionis at the time of purchase. As such, in accordance with the accounting guidance for common control transactions above, we recorded the purchase of this inventory and clinical material as a reduction of additional paid in capital. This amount represented a cash distribution to Ionis; therefore, we have included this distribution as a distribution to Ionis for purposes of income (loss) per share and we have applied the two–class method as discussed in Note 15, Basic and Diluted Net Income (Loss) Per Share.

We also determined that the TTR License Agreement represented a collaboration arrangement as defined by ASC 808. Prior to April 1, 2018, Ionis was responsible for all costs associated with TEGSEDI and for the period from April 1, 2018 to December 31, 2018, we were responsible for all costs associated with TEGSEDI. We and Ionis share all costs associated with AKCEA-TTR-L_Rx from January 1, 2018 forward on a 50/50 basis. We recorded $3.1 million paid to Ionis for costs related to the period prior to the closing of the TTR License Agreement to equity, as these amounts were previously expensed in the financial statements of Ionis.  This amount also represents a cash distribution to Ionis and was included as an adjustment to the net loss attributable to Ionis for purposes of applying the two-class method for income (loss) per share as discussed in Note 15, Basic and Diluted Net (Loss) Per Share.

F-25

---

 

On July 11, 2018, we received regulatory approval in the E.U. for the treatment of stage 1 or stage 2 polyneuropathy in adult patients with hereditary transthyretin amyloidosis, or hATTR amyloidosis. As a result of the regulatory approval in the E.U., on August 3, 2018, we issued 1,597,571 shares of our common stock to Ionis as payment of the $40.0 million regulatory approval milestone for TEGSEDI. We capitalized this regulatory approval milestone payment as a licensed intangible asset on our consolidated balance sheet as the amount is expected to be recoverable through future cash flows.

On October 5, 2018, we received regulatory approval for TEGSEDI from the FDA for the treatment of polyneuropathy of hereditary transthyretin-mediated amyloidosis in adults in the U.S. As a result of the regulatory approval in the U.S., on October 17, 2018, we issued 1,671,849 shares of our common stock to Ionis as payment of the $50.0 million regulatory approval milestone for TEGSEDI. We capitalized this regulatory approval milestone payment as a licensed intangible asset on our consolidated balance sheet as the amount is expected to be recoverable through future cash flows.

Both milestone payments are being amortized to cost of sales on a straight-line basis over the licensed asset’s expected useful life of approximately 16 years from the date of the initial regulatory approval milestone achievement. Amortization expense for the TTR milestone payments was $5.7 million and $2.7 million for the year ended December 31, 2019 and 2018, respectively.

Profit/(Loss) Share

Under the TTR License Agreement, we and Ionis agreed to share TEGSEDI and AKCEA-TTR-L_Rx profits and losses as follows: for TEGSEDI, beginning on the earlier of (i) the first day of the quarter after receipt of regulatory approval of TEGSEDI in the U.S., or (ii) January 1, 2019, the parties will share profits and losses from the development and commercialization of TEGSEDI (A) on a 60/40 basis (60% to Ionis and 40% to us) through the end of the quarter in which the first commercial sale of AKCEA-TTR-L_Rx occurs, and (B) on a 50/50 basis commencing on the first day of the first quarter thereafter; and for AKCEA-TTR-L_Rx, beginning January 1, 2018, the parties will share all profits and losses from the development and commercialization of AKCEA-TTR-L_Rx on a 50/50 basis.

In the first quarter of 2019, the profit sharing provisions for TEGSEDI under the TTR License Agreement with Ionis became effective. As we are the principal for all commercial activities related to the TTR License Agreement, we record all commercial activities related to TEGSEDI on a gross basis in our consolidated statement of operations, including revenues, cost of sales and sales and marketing expenses. The Ionis share of commercialization costs for TEGSEDI is separately presented within operating expenses in our consolidated statement of operations under the caption “Net loss share from commercial activities under arrangement with Ionis Pharmaceuticals, Inc.” As we are a collaborator with Ionis for the execution of TTR development activities, we record all research and development expenses on a net basis representing our proportionate share of total costs incurred by Ionis and us. Accordingly, only our share of total costs incurred related to development activities under the TTR License Agreement is presented within research and development expense in our consolidated statement of operations.

A summary of the loss share related to the commercial activities under the TTR Agreement is as follows (in thousands):

 

 

A summary of the development expenses related to the TTR License Agreement is as follows (in thousands):

 

 

We did not record any commercial or research and development expense related to the profit/(loss) share under the TTR License Agreement for the years ended December 31, 2018 and 2017.

 

F-26

---

 

Services Agreement

We originally entered into a services agreement with Ionis in December 2015 in conjunction with the Cardiometabolic License Agreement. We entered into the Amended Services Agreement with Ionis in April 2018 in conjunction with the TTR License Agreement (collectively, the service agreements). The primary purpose of the Amended Services Agreement was to allow for the expansion of general and administrative services provided to us by Ionis to cover the TEGSEDI and AKCEA-TTR-L_Rx products under terms substantially similar to the prior services agreement.

Our services agreement with Ionis is designed to be flexible to adjust for our increasing capabilities in various functions. Under the services agreement, Ionis provides us certain services, including, without limitation, general and administrative support services and development support services. Ionis allocated a certain percentage of personnel to perform the services that it provides to us based on its good faith estimate of the required services. We pay Ionis for these allocated costs, which reflect the Ionis full-time equivalent, or FTE, rate for the applicable personnel, plus out-of-pocket expenses, such as occupancy costs, associated with the FTEs allocated to providing us these services. We do not pay a mark-up or profit on the external or internal expenses Ionis bills to us. Ionis invoices us quarterly for all amounts due under the services agreement and payments are due within 30 days of the receipt of an invoice.

In addition, as long as Ionis continues to consolidate our financials, we will comply with Ionis' policies and procedures and internal controls. As long as we are consolidated into Ionis' financial statements under U.S. GAAP, we may continue to access the following services from Ionis:

However, if we wanted to provide the foregoing services internally, and doing so would not negatively impact Ionis' internal controls and procedures for financial reporting, we can negotiate in good faith with Ionis for a reduced scope of services related to the aforementioned services. When Ionis determines it should no longer consolidate our financials, we may mutually agree with Ionis in writing to extend the term of this arrangement in six-month increments.

We can establish our own benefits programs or continue to use Ionis' benefits, however we must provide Ionis a minimum advance notice to opt-out of using Ionis' benefits. We do not currently plan to establish our own benefits programs at this time or in the near future.

Pursuant to our various agreements with Ionis, as of December 31, 2019, Ionis owed us $3.2 million. As of December 31, 2018, we owed Ionis $18.9 million.

F-27

---

 

The following table summarizes the amounts recorded related to transactions with Ionis including amounts related to the TTR License Agreement for the following periods (in thousands) (1):

 

 

 

In August 2018, we entered into a collaboration and license agreement with PTC Therapeutics, or the PTC License Agreement, to commercialize TEGSEDI and WAYLIVRA in Latin America and certain Caribbean countries, or the PTC Territory.

We received a $12.0 million upfront payment from PTC Therapeutics related to TEGSEDI in the third quarter of 2018 upon execution of the PTC License Agreement, of which we paid Ionis $7.2 million as a sublicense fee related to the TTR License Agreement and recorded as a cost of license in our consolidated statement of operations. We received a $6.0 million payment from PTC Therapeutics in the second quarter of 2019 as a result of WAYLIVRA regulatory approval in Europe, of which we paid Ionis $3.0 million as a sublicense fee related to the Cardiometabolic License Agreement and recorded as a cost of license in our consolidated statement of operations. In the fourth quarter of 2019, TEGSEDI received approval in Brazil. As a result, we received a $4.0 million regulatory milestone payment from PTC Therapeutics, of which we paid Ionis $2.4 million as a sublicense fee related to the TTR License Agreement and recorded as a cost of license in our consolidated statement of operations. In addition, we are eligible to receive an additional $4.0 million for the achievement of a regulatory milestone and royalties in the mid-twenty percent range on net sales of TEGSEDI and WAYLIVRA in the PTC Territory. PTC Therapeutics’ obligation to pay royalties to us begins on the earlier of 12 months after the first commercial sale of a product in Brazil or the date that PTC Therapeutics recognizes revenue of at least $10.0 million in the PTC Territory. PTC Therapeutics will reduce these royalties upon the expiration of certain patents or if a generic competitor negatively impacts the market share of the product in the PTC Territory.  Milestone payments and royalties that we are eligible to receive from PTC Therapeutics for TEGSEDI are split 60% to Ionis and 40% to Akcea. All WAYLIVRA milestone payments and royalties that we are eligible to receive from PTC are split 50/50 with Ionis. PTC Therapeutics is solely responsible for the commercialization of the products in the PTC Territory at its sole cost and expense, including the pursuit and maintenance of applicable regulatory approvals. Unless earlier terminated, the PTC License Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries in the PTC Territory have expired.

At the commencement of the PTC License Agreement, we identified two performance obligations, consisting of the transfer of (1) the license to TEGSEDI and related know-how and (2) the license to WAYLIVRA and related know-how, both of which were satisfied during the third quarter of 2018. In addition, we identified a customer option related to PTC Therapeutics’ option to purchase supply of product from us for its development and commercial needs. We considered the manufacturing capabilities of PTC Therapeutics and the fact that manufacturing services are not proprietary and can be provided by other vendors, to conclude that the licenses have stand-alone functionality and are distinct.  Further, the customer options for manufacturing of product are priced similar to other manufacturing options with similar customers and therefore not considered a material right.

F-28

---

 

We determined the transaction price for the PTC License Agreement to be $12.0 million comprised of the upfront payment received. None of the regulatory milestones were included in the transaction price determined in August 2018, as all payments were fully constrained. As there were no remaining unsatisfied performance obligations as of September 30, 2018, the $12.0 million upfront payment was recognized as license revenue upon contract execution in the third quarter of 2018. The option to purchase supply from us is subject to the terms of a supply agreement we entered into with PTC Therapeutics in April 2019. In May 2019, we received $6.0 million of consideration from PTC Therapeutics as a result of regulatory approval of WAYLIVRA in Europe and in October 2019, we received $4.0 million of consideration from PTC Therapeutics as a result of TEGSEDI approval in Brazil. Since the constraints on the regulatory approvals were resolved, we updated the transaction price to include the additional milestone consideration that was deemed probable, and accordingly, we recognized the $6.0 million and $4.0 million as licensing revenue during the second and fourth quarter of 2019, respectively. As part of our evaluation of the constraint as of December 31, 2019, we considered numerous factors, including that regulatory approvals are not within our control and accordingly the remaining milestone is fully constrained and excluded from the arrangement consideration until such regulatory approval is received. We will continue to 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. Any consideration related to sales-based royalties will be recognized when the related sales occur.

 

In October 2019, we entered into a license agreement, or the Pfizer License Agreement, with Pfizer for the development and commercialization of AKCEA-ANGPTL3-L_Rx. Under the terms of the Pfizer License Agreement, we granted Pfizer an exclusive license, with the right to grant certain sublicenses and to develop, manufacture, commercialize and otherwise exploit AKCEA-ANGPTL3-L_Rx worldwide. We are responsible for completing a Phase 2 study and providing quantities of API for AKCEA-ANGPTL3-L_Rx. We have the right to exercise an option, to participate in commercialization activities with Pfizer in the U.S. and certain additional markets.

Accounting Analysis

We received a $250.0 million upfront payment in the fourth quarter of 2019. We issued 6,873,344 shares of our common stock to Ionis as payment of the $125.0 million sublicense fee due under our Cardiometabolic License Agreement with Ionis.

At commencement of the Pfizer License Agreement, we identified the following three distinct performance obligations:

 

 

We considered the manufacturing capabilities of Pfizer and the fact that manufacturing services are not proprietary and can be provided by another third party to conclude that the license has stand-alone functionality and is distinct. Further, the development activities and the supply of API are distinct because Pfizer or another third party could provide these items without our assistance.

We determined the transaction price for the Pfizer License Agreement to be $250.0 million comprised of the upfront payment we received. None of the development or regulatory milestone payments under this agreement were included in the upfront transaction price as all future payments were 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, Pfizer’s 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 Pfizer License Agreement, we allocated the $250 million transaction price based on relative stand-alone selling prices of each of our performance obligations as follows:

 

 

F-29

---

 

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

 

 

 

We will earn the next milestone payment of $75 million upon Pfizer’s initiation of a Phase 2b or Phase 3 study. In addition, we are eligible to receive up to $1.3 billion in milestone payments, including up to $205.0 million for the achievement of development milestones, up to $250.0 million for the achievement of regulatory milestones and up to $850.0 million for the achievement of commercialization milestones. We are also eligible to receive tiered, double digit royalties in the mid-teens to low twenty percent range on net sales of AKCEA-ANGPTL3-L_Rx and Pfizer will reduce these royalties upon the expiration of certain patents or if a generic competitor negatively impacts the product in a specific country. The royalty payments are subject to certain other reductions in certain circumstances as set forth in the Pfizer License Agreement. We pay 50% of milestone payments and royalties under this agreement to Ionis as a sublicense fee. The Pfizer License Agreement continues until the expiration of the last-to-expire royalty term with respect to all AKCEA-ANGPTL3-L_Rx products worldwide.

During the year ended December 31, 2019, we recorded revenue of $248.7 million from our license agreement with Pfizer. Our consolidated balance sheet at December 31, 2019 includes deferred revenue of $1.3 million related to our development services obligation.

 

Series A Convertible Preferred Stock

In December 2015, we issued and sold to Ionis an aggregate of 28,884,540 shares of Series A convertible preferred stock for a total purchase price of $100.0 million plus the grant of the rights and licenses we received under the Cardiometabolic License Agreement with Ionis. The $100.0 million of proceeds we received was recorded in Series A convertible preferred stock on our consolidated balance sheet. We had 28,884,540 shares of Series A convertible preferred stock authorized, issued and outstanding as of December 31, 2016, of which all was held by Ionis.

Conversion

Shares of our Series A convertible preferred stock were convertible 1:1 into common stock, subject to certain adjustments for reorganizations, reclassifications, stock splits, stock dividends and dilutive issuances. All shares of Series A convertible preferred stock automatically converted into common stock upon completion of the IPO in July 2017. As of December 31, 2019 and 2018, we had no shares of Series A convertible preferred stock issued or outstanding. Our IPO is discussed in Note 13, Initial Public Offering.

Preferred Stock

In July 2017, our board of directors approved an amendment and restatement of our certificate of incorporation to, among other things, change the authorized shares of our preferred stock to 10,000,000 shares with a par value of $0.001, all of which are undesignated.  Our board of directors may establish the rights, preference and privileges of the preferred stock from time to time. The amended and restated certificate of incorporation was approved by our stockholders and became effective upon the completion of our IPO and the filing of the amended and restated certificate of incorporation with the State of Delaware in July 2017. As of December 31, 2019 and 2018, there were no shares of Preferred Stock outstanding.

F-30

---

 

Common Stock

We had 125,000,000 shares of common stock authorized at December 31, 2019 and 2018, of which 100,993,173 and 89,345,978 shares were issued and outstanding as of December 31, 2019 and 2018, respectively.

In May 2017, our board of directors approved an amendment to our certificate of incorporation to (1) effect a reverse stock split on outstanding shares of our common stock and preferred stock on a one-for-2.555 basis, (2) change the authorized shares of our preferred stock to 40,000,000 and (3) modify the threshold for automatic conversion of our preferred stock into shares of our common stock in connection with an IPO to eliminate the price per share threshold and only require that we raise at least $50.0 million in gross proceeds (collectively, the "Charter Amendment"). The par values of the common stock and preferred stock were not adjusted as a result of the reverse stock split. The amendment to our certificate of incorporation was approved by our stockholder and became effective upon the filing with the State of Delaware in June 2017. All issued and outstanding common stock and preferred stock and related share and per share amounts contained in these consolidated financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Stock Plans

2015 Equity Incentive Plan

In December 2015, our board of directors and stockholder adopted and approved our 2015 Equity Incentive Plan, or 2015 EIP. In May 2017 and June 2017, our board of directors and stockholder, respectively, approved an amendment to the 2015 EIP in order to, among other things, increase the number of shares of common stock reserved for issuance thereunder to 8,500,000 shares of common stock in conjunction with the IPO.

As of December 31, 2019, the aggregate number of shares of common stock that may be issued pursuant to stock awards under the 2015 EIP was 18,500,000 shares. The 2015 EIP also provides for the grant of non-statutory stock options, or NSOs, incentive stock options, or ISOs, stock appreciation rights, restricted stock awards and restricted stock unit awards. At December 31, 2019, a total of 8,866,474 options were outstanding, of which 3,094,602 were exercisable, 701,252 restricted stock unit awards were outstanding, and 4,541,985 shares were available for future grant under the 2015 EIP.

2017 Employee Stock Purchase Plan

In May 2017 and June 2017, our board of directors and stockholder, respectively, approved our ESPP, which became effective upon the completion of our IPO, and the reservation for issuance thereunder of 500,000 shares of common stock. In addition, the number of shares of common stock that may be issued under the ESPP will automatically increase commencing on January 1, 2018 and ending on (and including) January 1, 2027 in an amount equal to the lesser of (i) 1% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, and (ii) 500,000 shares of common stock. On January 1, 2019, 500,000 shares of common stock were added to the ESPP. Under the ESPP, participating employees can elect to have a portion of their base pay withheld during a consecutive payment period for the purchase of shares of our common stock. At the conclusion of each offering period, participating employees can purchase shares of our common stock at 85% of the lesser of the closing price at the beginning or at the end of the period.

As of December 31, 2019, the aggregate number of shares of common stock reserved under the ESPP was 1,500,000 and we had 1,428,725 shares available for future issuance under the ESPP. During the year ended December 31, 2019, 39,724 shares were issued under our ESPP. At December 31, 2019, accrued liabilities included $0.4 million of ESPP contributions for which the related shares are issued in the first quarter of 2020.

F-31

---

 

Stock Option Activity

The following table summarizes the stock option activity for the year ended December 31, 2019 (in thousands, except per share and contractual life data) for the 2015 EIP:

 

 

 

The weighted-average estimated fair value of options granted were $27.04, $18.29 and $10.40 for the years ended December 31, 2019, 2018 and 2017, respectively. For the years ended December 31, 2019, 2018 and 2017, there were 3,540,593 stock options, 834,800 stock options and no stock options exercised, respectively. As of December 31, 2019, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options was $45.9 million. 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 non-vested stock options over a weighted average amortization period of 1.45 years.

Restricted Stock Unit Activity

 

The following table summarizes restricted stock unit, or RSU, activity for year ended December 31, 2019 (in thousands, except per share data):

 

 

For years ended December 31, 2019, 2018 and 2017, the weighted-average grant date fair value of RSUs granted was $21.95, $27.80 and $23.04 per RSU, respectively. As of December 31, 2019, total unrecognized compensation cost related to RSUs was $12.5 million. We will adjust the total unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of 2.47 years.

F-32

---

 

Stock-based Compensation Expense and Valuation Information

The following table summarizes the breakdown of stock-based compensation expense by line item within the statement of operations for the years ended December 31, 2019, 2018 and 2017 (in thousands):

 

 

Determining Fair Value

Valuation. We measure stock-based compensation expense for equity-classified awards related to stock options and stock purchase rights under the ESPP at the grant date based on the estimated fair value of the award and we recognize the expense over the vesting period.

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 actual and projected exercise patterns. We recognize compensation expense for stock options granted and stock purchase rights under the ESPP using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), an entity recognizes compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.

In valuing our options, we make a number of assumptions, including the risk-free interest rate, expected dividend yield, expected volatility, expected term, rate of forfeitures and fair value of common stock. We considered the following factors in applying these assumptions:

Risk-Free Interest Rate. We determine the risk-free interest rate assumption based on the yields of U.S. Treasury securities with maturities that correspond to the term of the award.

Expected Dividend Yield. We assume a dividend yield of zero as we have not paid dividends in the past and do not expect to pay dividends on our common stock for the foreseeable future.

Expected Volatility. We do not have sufficient history to estimate the volatility of our common stock. We calculate expected volatility based on a blend of our historical volatility and reported data from selected publicly traded peer companies for which historical information is available. We plan to continue to use this blend to calculate our volatility until the historical volatility of our common stock is sufficient to measure expected volatility for future option grants.

Expected Term. The expected term estimates represent the period of time that we expect the options to be outstanding. As we do not have historical information, we use the simplified method for estimating the expected term. Under the simplified method we calculate the expected term as the average time-to-vesting and the contractual life of the options. As we gain additional historical information, we will transition to calculating our expected term based on our exercise patterns.

Rate of Forfeiture. We reduce stock-based compensation expense for estimated forfeitures. We estimate forfeitures at the time  of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to the fourth quarter of 2019, we had estimated forfeitures based on Ionis’ historical rates as we did not have sufficient historical forfeiture information regarding our forfeiture activities. Beginning in the fourth quarter of 2019, we estimate forfeitures based on our historical experience as we determined that we have sufficient Akcea history for such an estimate.

Fair Value of Common Stock. Prior to our IPO our board of directors estimated the fair value of our common stock considering, among other things, contemporaneous valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Subsequent to the IPO, we use the market closing price for our common stock on the date of grant as reported on Nasdaq to determine the fair value of our common stock on the date of grant.

F-33

---

 

For the years ended December 31, 2019, 2018 and 2017, we used the following weighted-average assumptions in our Black-Scholes calculations for stock option grants under our 2015 EIP and ESPP:

Employee Stock Options:

 

 

Board of Director Stock Options:

 

 

 

 

ESPP:

 

 

 

Income (loss) before income taxes is comprised of (in thousands):

 

 

The provision (benefit) for income taxes is comprised of (in thousands):

 

 

 

F-34

---

 

Our expense (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory rate to income (loss) before taxes.  The sources and tax effects of the differences are as follows (in thousands):

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

Significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows (in thousands):

 

 

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act created a new requirement on GILTI earned by foreign subsidiaries for tax years beginning on or after January 1, 2018. The GILTI provisions require foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s assets to be included in our U.S. income tax return. Under U.S. GAAP, we are permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into our measurement of deferred taxes. We have made an accounting policy election to treat taxes due on GILTI inclusion as a current period expense.

 

F-35

---

 

Prior to the completion of our IPO we filed our tax returns on a consolidated and combined basis with Ionis for federal and state income tax purposes, respectively. For financial statement purposes when we are required to file on a consolidated or combined basis, we calculate our income tax amounts, including net operating losses and tax credit carryforwards, using a separate return methodology which determines income taxes as if we were a separate taxpayer from Ionis.  Effective July 19, 2017, the date of our IPO, we are no longer included in the consolidated federal income tax return with Ionis.

We are still required to file most of our state tax returns on a consolidated or combined basis with Ionis. Therefore, for financial statement purposes we calculated our state income tax amounts using the separate return method. We have excluded from the deferred tax table above state net operating loss carryforwards (and the associated valuation allowance) that have been generated by Akcea on a separate company basis and utilized by Ionis in consolidated state tax return filings as the amounts represent hypothetical deferred tax assets which are not legally eligible to be utilized on tax returns by Akcea in future years.

At December 31, 2019, we had federal and state tax net operating loss carry forwards on a separate basis of $99.5 million and $1.4 million, respectively. The federal net operating losses can be carried forward indefinitely. The state tax net operating loss carry forwards will begin to expire in 2031. We also have federal research and development tax credit carry forwards of $33.6 million that will begin to expire in 2034.

Utilization of the net operating loss carry forwards and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

We record a valuation allowance to reduce the balance of our net deferred tax assets to the amount we believe is more-likely-than-not to be realized. Due to our historical financial statement losses, we have a full valuation allowance recorded against our net deferred tax assets. We regularly assess the future realization of our net deferred tax assets and will reduce the valuation allowance in any such period in which we determine that all, or a portion, of our deferred tax assets are more-likely-than-not to be realized.

Our valuation allowance decreased by $2.1 million from December 31, 2018 to December 31, 2019. The decease relates primarily to the utilization of net operating loss carryforwards in 2019 offset by an increase related to certain costs, which are capitalized and amortized for tax purposes.

We analyze our filing positions in all the U.S. federal, state and foreign jurisdictions where we are required to file income tax returns to determine if we have any uncertain tax positions on any income tax returns. We recognize the impact of an uncertain tax position on an income tax return at the largest amount that the relevant taxing authority is more-likely-than not to sustain upon audit. We do not recognize a tax benefit if the position has a less than 50 percent likelihood of being sustained upon examination.

The following table summarizes our gross unrecognized tax benefits (in thousands):

 

 

Due to our valuation allowance, there are no unrecognized tax benefits at December 31, 2019 that would impact our effective tax rate, if recognized.

We do not foresee any material changes to our gross unrecognized tax benefits within the next twelve months.

We recognize interest and/or penalties related to income tax matters in income tax expense. We did not recognize any accrued interest and penalties related to gross unrecognized tax benefits during the years ended December 31, 2019, 2018 or 2017.

We are subject to taxation in the United States and various state and foreign jurisdictions. The tax years for 2015 through 2019 are subject to examination by the U.S. federal, state and foreign tax authorities.

F-36

---

 

We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries as we consider those earnings to be permanently reinvested. The amount of unrecognized deferred tax liabilities associated with these earnings is immaterial.

On July 19, 2017, we completed our IPO. Total net proceeds were $182.3 million, including the following:

In addition, both of the following occurred in connection with the completion of our IPO on July 19, 2017:

We have an employee 401(k) salary deferral plan covering all employees. Employees may make contributions by withholding a percentage of their salary up to the IRS annual limit of $19,000 and $25,000 in 2019 for employees under 50 years old and employees 50 years old or over, respectively. We made approximately $2.1 million, $1.6 million and $0.3 million in matching contributions for the years ended December 31, 2019, 2018 and 2017, respectively.

We issued 28,884,540 shares of Series A convertible preferred stock in December 2015. The Series A convertible preferred stock converted into common stock in conjunction with the IPO in July 2017. As a result, there were 66,541,629 shares of common stock issued and outstanding and there were no longer any outstanding shares of Series A convertible preferred stock. We determined that the Series A convertible preferred stock was in substance common stock during the period that it was outstanding because the Series A convertible preferred stock was the lowest form of subordinated equity outstanding during that period and this class of stock would have been required to absorb the losses of the Company. Accordingly, we are using the two-class method for computing EPS.

In connection with the TTR License Agreement with Ionis, we made distributions to Ionis representing the consideration to be paid in cash provided to Ionis in excess of the carrying value of the related assets acquired. These distributions are treated as dividends to Ionis; therefore, we have applied the two-class method loss per share to reflect the allocation of these distributions to the participating Ionis common shares.

The two-class method is an earnings allocation formula that determines loss per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. For the purposes of calculating loss per share under the two-class method, we have allocated the net loss between the Series A convertible preferred stock, common stock owned by Ionis and common stock owned by others.

Basic income (loss) per share for each class of stock is computed by dividing total distributable losses applicable to Series A convertible preferred stock, common stock owned by Ionis and common stock owned by others, including the 6% cumulative dividend contractually due to Series A convertible preferred shareholders, by the weighted-average of preferred and common shares outstanding during the requisite period. The cumulative preferred stock dividend was not paid upon completion of the IPO because the IPO was not a liquidation event or a change in control. Prior to the IPO, the 6% cumulative Series A convertible preferred stock dividend was considered as required under the two-class method regardless of whether those dividends were actually distributed.

F-37

---

 

The following table summarizes the distributable income (losses) for the years ended December 31, 2019, 2018 and 2017:

 

 

The following table summarizes the reconciliation of weighted-average shares outstanding used in the calculation of basic income (loss) per share for the years ended December 31, 2019, 2018 and 2017:

 

 

The following table summarizes the calculation of basic income (loss) per share for the years ended December 31, 2019, 2018 and 2017 (in thousands, except share and per share amounts):

 

 

F-38

---

 

For the years ended December 31, 2018 and 2017, 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:

For the year ended December 31, 2019, we had net income. As a result, we computed diluted net income per share using the weighted-average number of common shares owned by Ionis, weighted-average number of common shares owned by others and dilutive common equivalent shares outstanding during the period.

The following table summarizes the reconciliation of weighted-average shares outstanding and diluted common equivalent shares used in the calculation of diluted income per share for the year ended December 31, 2019:

 

 

The following table summarizes the calculation of diluted income per share for the year ended December 31, 2019 (in thousands, except per share amounts):

 

 

F-39

---

 

Operating Lease

Operating Lease

On April 5, 2018, we entered into an operating lease agreement for 30,175 square feet of office space located in Boston, Massachusetts for our corporate headquarters. The lease commencement date was August 15, 2018 and we took occupancy in September 2018. We are leasing this space under a non-cancelable operating lease with an initial term of 123 months and an option to extend the lease for an additional five-year term. We did not include the extension option in our right-of-use asset and lease liability calculation as we do not consider it reasonably certain that we would exercise the option. Under the lease agreement, we received a three-month free rent period, which commenced on August 15, 2018, and a tenant improvement allowance up to $3.8 million. We provided the lessor with a letter of credit to secure our obligations under the lease in the initial amount of $2.4 million, to be reduced to $1.8 million on the third anniversary of the rent commencement date and to $1.2 million on the fifth anniversary of the rent commencement date if we meet certain conditions set forth in the lease at each such time. The letter of credit amount is included in deposits and other assets on the accompanying consolidated balance sheet.

On November 12, 2018, we entered into an operating lease agreement with Ionis to sublease 4,723 square feet of office space located in Carlsbad, California.  The commencement date was March 2018 and the term of the lease is 64 months with a four-month free rent period. There is no extension option for this lease.

On May 8, 2019, we entered into an operating lease agreement for office space located in Dublin, Ireland. The lease commenced in May 2019 and the initial term of the lease is 18 months with an extension option. We have included a 12-month extension period in our right-of-use asset and lease liability calculation as we consider it reasonably certain that we will exercise the option to extend the lease for an additional 12 months. 

Operating lease expense for the years ended December 31, 2019, 2018 and 2017 was $2.1 million, $2.4 million and $0.7 million, respectively. We recognize rent expense on a straight-line basis over the lease term for the lease of our office spaces. Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019 was $2.4 million and was included in net cash used in operating activities in our consolidated statement of cash flows.

Other information related to our operating lease is as follows (dollar amounts in thousands):

 

 

Annual maturities of our operating lease liabilities as of December 31, 2019 are as follows (in thousands):

 

F-40

---

 

Purchase Commitments

Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including, fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Such obligations are related principally to inventory purchase orders based on our current manufacturing needs and require significant lead times to be fulfilled by our vendors.  Purchase commitments exclude agreements that are cancelable without penalty. As of December 31, 2019, our purchase commitments for the following 12 months were $4.3 million.

 

On September 6, 2018, we enacted a plan to reorganize our workforce to better align with the immediate needs of our business, or the Reorganization Plan, following the August 27, 2018 announcement of the FDA’s issuance of a Complete Response Letter for our New Drug Application for WAYLIVRA. In connection with the Reorganization Plan, we reduced our workforce by approximately 12%. The Reorganization Plan was approved by our board of directors on September 2, 2018 and affected employees were informed on September 6, 2018. The Reorganization Plan impacted U.S. employees primarily from the WAYLIVRA field team and functions focused principally on WAYLIVRA.

For the year ended December 31, 2018, we recorded $1.7 million of restructuring-related costs in operating expense including employee severance, benefits and related costs, net of adjustments for employees who forfeited part of their benefits. In addition, we also recorded $0.4 million of non-cash stock option modifications expenses related to the Reorganization Plan for the year ended December 31, 2018. We did not incur any additional significant costs associated with this reorganization in 2019 and we have no remaining liability associated with the Reorganization Plan as of December 31, 2019.

The following table summarizes the restructuring costs by category for the periods indicated (in thousands):

 

 

The following table summarizes the restructuring reserve included in accrued compensation for the periods indicated (in thousands):

 

 

 

From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. Periodically, we evaluate the status of each legal matter and assess our potential financial exposure. If the potential loss from any legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimable. The outcome of any proceeding is not determinable in advance. As a result, the assessment of a potential liability and the amount of accruals recorded are based only on the information available to us at the time. As additional information becomes available, we reassess the potential liability related to the legal proceeding and may revise our estimates.

 

F-41

---

 

On November 11, 2019, a purported Company stockholder filed an action in the Delaware Court of Chancery captioned City of Cambridge Retirement System v. Crooke, et al., C.A. No. 2019-0905, or the Delaware Action. The plaintiff in the Delaware Action asserts claims against (i) current and former members of our board of directors; and (ii) Ionis Pharmaceuticals, Inc., hereinafter or collectively, the Defendants. The plaintiff asserts derivative claims on behalf of Akcea, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of our stockholders. The plaintiff in the Delaware action asserts that the Defendants breached their fiduciary duties in connection with the licensing transaction that we and Ionis entered into regarding inotersen and AKCEA-TTR-L_Rx. The plaintiff also asserts an unjust enrichment claim against Ionis. We and the Defendants have moved to dismiss the plaintiff’s complaint. We believe that the claims asserted in the Delaware Action are without merit. This litigation could result in substantial costs and a diversion of management’s resources and attention, which could harm our business and the value of our common stock.

 

The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years ended December 31, 2019 and 2018 are as follows (in thousands, except per share data):

 

F-42

---

 

 

 

 

F-43