NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 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 drugs to treat patients with rare and serious diseases. On July 19, 2017, we completed our initial public offering, or IPO. As of March 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 condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP.

The condensed consolidated financial statements include the accounts of Akcea Therapeutics, Inc. and our wholly owned subsidiaries ("we," "our," and "us"). 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 interim periods ended March 31, 2019 and 2018. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these financial statements, and notes thereto, should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 condensed consolidated financial statements are issued. We have incurred losses since our inception and have funded our cash flow deficits primarily through the issuance of capital stock and the proceeds from licensing and collaboration agreements. As of March 31, 2019, we had an accumulated deficit of $494.9 million. During the three months ended March 31, 2019, we generated income of $27.2 million and provided $78.6 million of cash from operations. We expect to generate 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 $321.8 million as of March 31, 2019, cash expected to be generated from sales of TEGSEDI, which has been approved in the U.S., the EU and Canada, and cash expected to be generated from sales of WAYLIVRA, which has received conditional approval in the EU, will be sufficient to fund our operations through at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q. 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 drugs even if we would otherwise prefer to develop and commercialize the drugs ourselves.

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 and prior to our IPO, the valuation of common stock. 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 as a component of accumulated other comprehensive income (loss) within the condensed consolidated statements of comprehensive income (loss).

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Revenue Recognition

Collaboration and License Revenue

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, which amended the guidance for accounting for revenue from contracts with customers. 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 drug 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 drug or the options for additional goods or services that may be requested in the future under our collaboration agreement 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 drug 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 March 31, 2019, we have three revenue agents: our strategic collaboration, option and license agreement, or collaboration agreement, with Novartis Pharma AG, or Novartis, which we entered into in January 2017, our collaboration and license agreement with PTC Therapeutics International Limited, or PTC Therapeutics, which we entered into in August 2018, and commercial product revenue related to TEGESDI sales subsequent to product launch in the fourth quarter of 2018. For a complete discussion of the accounting related to our revenue streams, see Note 6, Strategic Collaboration with Novartis, Note 8, Collaboration and License Agreement with PTC Therapeutics , and the section below entitled Product Revenue, Net.

Product Revenue, Net

Subsequent to regulatory approval in Europe on July 11, 2018 and FDA approval in the U.S. on October 5, 2018, in the fourth quarter of 2018, we began to sell TEGSEDI in the U.S. and Europe.  In the U.S., the product is distributed through an exclusive distribution agreement with a third-party logistics (3PL) company 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.  In Europe, the product is currently distributed through a non-exclusive distribution model with a 3PL that takes title to the product and currently is  our sole customer in Europe.  Our customer then distributes TEGSEDI to hospitals and pharmacies in Europe.  

Revenue from product sales are recognized when the customer obtains control of our product, which occurs upon transfer of title to the customer.  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 in 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.  Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. 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

Revenues from product sales are 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. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than the customer). 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

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revenue net of these reserves reflect our best estimates 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 a djust 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 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.

Government rebates: We are subject to discount obligations under government programs, including Medicaid programs and Medicare in the United States and 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 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.

Trade discounts and allowances: We provide customary invoice discounts on TEGSEDI sales to our U.S. customer for prompt payment that are recorded as a reduction of revenue in the period the related product revenue is recognized.  In addition, we receive and pay for various distribution services from our U.S. customer and wholesalers in the U.S. distribution channel.  For services that are either not distinct from the sale of our product or for which we cannot reasonably estimate the fair value, such fees are classified as a reduction of product revenue.

Product Returns: Our U.S. customer has return rights and the wholesalers 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 in the period the related product revenue is recognized. Based on the distribution model for TEGSEDI, contractual inventory limits with our customer and wholesalers and the price of TEGSEDI, we believe there will be minimal returns. Our customer only takes title to the product once it receives an order from a hospital or pharmacy and therefore does not maintain any inventory of TEGSEDI. Therefore, there is limited return risk and the Company has not recorded any return estimate in the transaction price for TEGSEDI sold in Europe.

Other incentives:   In the U.S., other incentives include co-payment assistance 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-pay 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. The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized.

During the three months ended March 31, 2019, we recorded TEGSEDI product revenue, net, of $6.8 million. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2019 (in thousands):

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Leases

Topic 842 Adoption

In February 2016, the FASB issued amended accounting guidance related to lease accounting. This guidance supersedes the lease requirements we previously followed in Accounting Standards Codification, or ASC, Topic 840, Leases , or Topic 840, and created a new lease accounting standard, 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 its 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 balance sheet on that date to record our right-of-use operating lease assets and operating 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. The adoption did not have a significant impact on our financial statements. Results for the three months ended March 31, 2019 are presented under Topic 842. Results for the three months ended March 31, 2018 are presented in accordance with our historic accounting under Topic 840.

The impact of the adoption of Topic 842 on the accompanying Consolidated Balance Sheet as of January 1, 2019 was as follows (in thousands):

Leases

We determine if an arrangement contains a lease at inception. We currently have operating leases. We recognize a right-of-use operating lease asset and associated short and long-term operating lease liability for operating leases greater than one year on our condensed consolidated balance sheet. We calculate our right-of-use operating lease asset and operating 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, based on the information available at the date we adopted Topic 842, 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 right-of-use operating lease 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 and non-components, such as common area maintenance expenses, in the period we incur the expense.

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. The new standard is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. When we adopt the new standard, we will make any adjustments to beginning balances through a cumulative-effect adjustment to accumulated deficit on that date. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our condensed consolidated financial statements and disclosures.

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In August 2018, the FASB issued clarifying guidance on how to account for implementation costs related to hosted 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 impl ementation costs incurred after the date of adoption. The updated guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently a ssessing the effects this updated guidance could have on our condensed consolidated financial statements and timing of potential adoption.

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.  The guidance is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. 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 of 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):  

1) When a participant is considered a customer in a collaborative arrangement, all of the associated accounting under Topic 606 should be applied

● We will apply all of the associated accounting under Topic 606 when we determine a participant in a collaborative arrangement is a customer

2) Adds “unit of account” concept to collaboration accounting guidance to align with Topic 606. The “unit of account” concept is used to determine if revenue is recognized or if a contra expense is recognized from consideration received under a collaboration

● We will use the “unit of account” concept when we receive consideration under a collaboration to determine when we recognize revenue or a contra expense

3) The clarifying guidance precludes us from recognizing revenue under Topic 606 when we determine a transaction with a collaborative partner is not a customer and is not directly related to the sales to third parties

● When we conclude a collaboration partner is not a customer and is not directly related to the sales to third parties, we will not recognize revenue for the transaction   

The updated guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this guidance on January 1, 2020. We are currently assessing the effects it will have on our condensed consolidated financial statements and disclosures.

Investments

As of March 31, 2019 and December 31, 2018, we primarily invested our excess cash in 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.

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

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We recorded unrealized gains (losses) related to the securities listed above as of March 31, 2019 and December 31, 2018. We believe that the decline in value of some of our 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.

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

Total depreciation expense amounted to $0.2 million and $27 thousand for the three months ended March 31, 2019 and 2018, respectively. As part of the operating lease for our new corporate headquarters, the landlord has provided a tenant improvement allowance of $3.6 million which is included in our leasehold improvements.

The following table presents intangible assets (in thousands):

The Company recorded $1.4 million and $30 thousand, respectively, in amortization expense related to intangible assets during the three months ended March 31, 2019 and 2018.  Estimated future amortization expense for intangible assets as of March 31, 2019 is as follows (in thousands):

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The weighted average remaining amortizable life of our patents was 12.39 years at March 31, 2019.

For additional detail of Akcea's license agreements with Ionis see Note 7, License Agreements and Services Agreement with Ionis .

In January 2017, we initiated a strategic collaboration with Novartis for the development and commercialization of AKCEA-APO(a)-L _Rx and AKCEA-APOCIII-L _Rx . Under the Novartis collaboration, Novartis has an exclusive option to further develop and commercialize these drugs. We are responsible for completing a Phase 2 program, conducting an end-of-Phase 2 meeting with the United States Food and Drug Administration, or FDA, and providing initial quantities of the active pharmaceutical ingredient, or API, for each drug. If Novartis exercises its option for one of these drugs, Novartis will be responsible for all further global development, regulatory and co-commercialization activities and costs for such drug. We received a $75.0 million upfront payment in the first quarter of 2017, of which we retained $60.0 million and we paid Ionis $15.0 million as a sublicense fee under our Cardiometabolic 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 are distinct because Novartis or another third party could provide these items without our assistance.

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

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

None of the options or development or regulatory milestone payments under this agreement were included in the upfront transaction price determined in January 2017 as all payments are fully constrained. As part of our evaluation of the constraint, we considered numerous factors, including the fact that achievement of the milestones is outside of our control and contingent upon the success of our clinical trials, Novartis’ efforts, and the receipt of regulatory approval. We will re-evaluate the transaction price, including estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

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

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

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

On February 22, 2019, Novartis exercised its option to license AKCEA-APO(a)-L _Rx . We identified a separate performance obligation upon Novartis license of AKCEA-APO(a)-L _Rx because the license is distinct from our other performance obligations and recognized a license fee of $150.0 million in the first quarter of 2019 because Novartis had full use of the license without any continuing involvement from us. Additionally, we did not have any further performance obligations related to the license after Novartis exercised its option to license AKCEA-APO(a)-L _Rx . Novartis is responsible for conducting and funding all future development, regulatory and commercialization activities for AKCEA-APO(a)-L _Rx , including a global pivotal cardiovascular outcomes study, for which planning and initiation activities are underway. In the first quarter of 2019, we issued 2,837,373 shares of our common stock to Ionis as payment of the $75.0 million sublicense fee due to Ionis related to the option exercised by Novartis. For AKCEA-APO(a)-L _Rx , w e are also eligible to receive up to $675.0 million in milestone payments, including $25.0 million for the achievement of a development milestone, up to $290.0 million for the achievement of regulatory milestones and up to $360.0 million for the achievement of commercialization milestones. In connection with Novartis’ exercise of its option to exclusively license AKCEA-APO(a)-L _Rx , Akcea and Novartis established a more definitive co-commercialization framework under which we would negotiate the co-commercialization of AKCEA-APO(a)-L _Rx between us and Novartis in selected markets. Included in this framework is an option by which Novartis could solely commercialize AKCEA-APO(a)-L _Rx in exchange for Novartis paying us increased commercial milestone payments based on sales of AKCEA-APO(a)-L _Rx.

If Novartis exercises its option for AKCEA-APOCIII-L _Rx , Novartis will pay us a license fee equal to $150.0 million. Half of this amount, or $75.0 million, we will owe to Ionis as a sublicense fee. If Novartis exercises its option to license AKCEA-APOCIII-L _Rx , we are eligible to receive up to $530.0 million in milestone payments, including $25.0 million for the achievement of a development milestone, up to $240.0 million for the achievement of regulatory milestones and up to $265.0 million for the achievement of commercialization milestones. If Novartis licenses AKCEA-APOCIII-L _Rx , we may co-commercialize AKCEA-APOCIII-L _Rx through our specialized sales force in selected markets, under terms and conditions that we plan to negotiate with Novartis in the future.

We will earn the next milestone payment of $25.0 million under this collaboration if Novartis reaches a specific level of enrollment related to the Phase 3 study for either drug. We are also eligible to receive tiered royalties in the mid-teens to low twenty percent range on net sales of AKCEA-APO(a)-L _Rx and AKCEA-APOCIII-L _Rx . Novartis will reduce these royalties upon the expiration of certain patents or if a generic competitor negatively impacts the product in a specific country. We will pay 50% of license fees, milestone payments and royalties under this agreement to Ionis as a sublicense fee.

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During the three months ended March 31, 2019 and 2018 , we earned revenue of $ 157.1 million and $ 17.1 million, respectively, from our strategic collaboration with Novartis, representing 100% of our research and development and license r evenue . During the three months ended March 31, 2019 and 2018 we recognized $ 5.5 million and $ 17.1 million, respectively, of revenue from amounts that were in our beginning deferred revenue balance. Our consolidated balance sheet at March 31, 2019 and December 31, 2018 included deferred revenue of $ 23.3 million and $ 28.8 million, respective ly , 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 development, commercialization and license agreement, or 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 under its manufacturing technology to manufacture the Lipid Drugs in our own facility or at a contract manufacturer. As a part of this agreement both companies agreed not to work with any other parties to develop or commercialize other RNA-targeting drugs that are designed to inhibit any of the Lipid Drug targets so long as we are developing or commercializing the Lipid Drugs.

We and Ionis share development responsibilities for the Lipid Drugs, other than drugs licensed to Novartis. 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 drugs, 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 drugs. We also pay Ionis for the API and drug product we use in our nonclinical and clinical studies for all of our drugs. 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 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 drugs licensed to Novartis, 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 the drugs licensed to Novartis under the collaboration agreement, 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 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. For additional detail regarding our strategic collaboration with Novartis, see Note 6, Strategic Collaboration with Novartis.

TTR Development, Commercialization, Collaboration and License Agreement

On April 17, 2018, our stockholders, other than Ionis and its affiliates, approved the development, commercialization, collaboration and license agreement, or TTR License Agreement, and a stock purchase agreement, or Ionis SPA, with Ionis, our majority shareholder which was entered into on March 14, 2018. In addition, in connection with these agreements, we entered into an

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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 which required the approval of the agreements by 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:

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, or 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.

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 certain manufacturing and clinical research agreements. 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 will amortize 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, during the three months ended March 31, 2019 we purchased $13.5 million of clinical TEGSEDI material held by Ionis. Prospectively we will be 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

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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 1 1 , 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 loss per share as discussed in Note 11, Basic and Diluted Net Income (Loss) Per Share .

In addition, on July 11, 2018, we received marketing authorization, or MA, approval for TEGSEDI from the European Commission, or EC, for the treatment of stage 1 or stage 2 polyneuropathy in adult patients with hereditary transthyretin amyloidosis, or hATTR amyloidosis, in the European Union, or EU. As a result of the MA approval in the EU, 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. As a result of the marketing authorization in the EU, we capitalized this regulatory approval milestone payment as a licensed intangible asset on our condensed consolidated balance sheets as the amount is expected to be recoverable through future cash flows.

In addition, 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 United States. As a result of the regulatory approval in the United States, 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. As a result of the FDA approval in the U.S., we capitalized this regulatory approval milestone payment as a licensed intangible asset on our condensed consolidated balance sheets 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 assets 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 $1.4 million for the three months ended March 31, 2019. We did not record any amortization expense for the TTR milestone payments for the three months ended March 31, 2018.

Profit Share

Under the TTR License Agreement, w e 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 United States, 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.

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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 statement of operations, including revenues, cost of sales and sale s and marketing expenses. The Ionis share of commercialization costs for TEGSEDI is separately presented within operating expenses in our statement of operations under the caption “ Net loss share from commercial activities under agreement with Ionis Pharma ceuticals, 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 r el ated to development activities under the TTR License Agreement is presented within research and development expense in our statement of operations.

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

A summary of the development expenses related to the TTR Agreement is as follows:

We did not record any commercial or research and development expense related to the TTR License Agreement during the three months ended March 31, 2018

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:

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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.

As of March 31, 2019, Ionis owed us $7.21 million. As of December 31, 2018, we owed Ionis $18.9 million.

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

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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. PTC Therapeutics will pay us $6.0 million as a result of WAYLIVRA approval by the European Commission, or EC. In addition, we are eligible to receive up to $8.0 million for the achievement of regulatory milestones 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 recognized 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 will be split 60% to Ionis and 40% to Akcea. All WAYLIVRA milestone payments and royalties that we are eligible to receive from PTC will be 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. The option to purchase supply from us is subject to the terms of a supply agreement we entered with PTC in April 2019. 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 is expected to be priced similar to other manufacturing options with similar customers and is therefore not considered a material right. 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. None of the regulatory milestones have been included in the upfront transaction price determined in August 2018, as all milestones were fully constrained. As part of our evaluation of the constraint as of March 31, 2019, we considered numerous factors, including that regulatory approvals are not within our control and accordingly the related milestones are fully constrained and excluded from the arrangement consideration until such regulatory approvals are received. Any consideration related to sales-based royalties will be recognized when the related sales occur .

Stock Plans

2015 Equity Incentive Plan

As of March 31, 2019, the aggregate number of shares of common stock that may be issued pursuant to stock awards under the 2015 Plan was 18,500,000 shares. The 2015 Plan also provides for the grant of nonstatutory stock options, or NSOs, incentive stock options, or ISOs, stock appreciation rights, restricted stock awards and restricted stock unit awards. At March 31, 2019, a total of 13,337,602 options were outstanding, of which 4,680,540 were exercisable, 36,455 restricted stock unit awards were outstanding, and 3,854,948 shares were available for future grant under the 2015 Plan.

2017 Employee Stock Purchase Plan

On January 1, 2019, 500,000 shares of common stock were added to the 2017 Employee Stock Purchase, or 2017 ESPP. In accordance with the provisions of our 2017 ESPP, the number of shares of our common stock reserved for issuance under the 2017 ESPP automatically increased on January 1 of each calendar year. As of March 31, 2019, the aggregate number of shares of common stock reserved under the 2017 ESPP was 1,500,000 and we had 1,450,709 shares available for future issuance under the 2017 ESPP. During the three months ended March 31, 2019, 17,740 shares were issued under our 2017 ESPP. At March 31, 2019, accrued liabilities included $0.3 million of 2017 ESPP contributions for which the related shares will be issued on July 1, 2019.

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As of March 31, 2019, total unrecognized estimated non-cash stock-based compensation expense related to non-vested stock options was $3.1 million.

In connection with the TTR License Agreement completed on April 17, 2018 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 of income (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 income (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 income (loss) per share under the two-class method, we have allocated the net income (loss) between 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 income (losses) applicable to common stock owned by Ionis and common stock owned by others by the weighted-average of common shares outstanding during the requisite period.

The following table summarizes the distributable income (losses) for the three months ended March 31, 2019 and 2018 (in thousands):

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

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

For the three months ended March 31, 2018, 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 three months ended March 31, 2019, we had net income available to Akcea common shareholders. 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 (loss) per share for the three months ended March 31, 2019:

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The following table summarizes the calculation of diluted income (loss) per share for the three months ended March 31, 2019 (in thousands, except per share amounts):

Operating Lease

Corporate Headquarters 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 ending after 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 did 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 its 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 condensed consolidated balance sheets.

Ionis Sublease

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.

Cambridge Lease

We leased office space in a building in Cambridge, Massachusetts under an operating lease that commenced in April 2015 and was subsequently amended and expanded in February 2016 and March 2017.  The lease was scheduled to expire in April 2020.  We have subsequently terminated the lease effective April 2019.

When we determined our lease term for our operating lease right-of-use assets and lease liabilities for these leases we did not include extension option as we are not reasonably certain we will exercise the option.

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