London EQUITY RESEARCH LAIDLAW New York San Francisco Company Report & COMPANY Boston Est. 1842 February 26, 2016

Ionis Pharmaceuticals (IONS - $ 33.57) Healthcare/Biotechnology

4Q15: 2016 Financial Guidance and Substantial Interest in the Ticker: IONS Progress of the Three Leading Programs Rating: Buy Yesterday, IONS reported 4Q15 financial results with net loss of ($71MM) vs. Price Target: $ 75.00 estimates of Laidlaw ($61MM) and the Street ($57MM). Loss/share was ($0.59) vs. ($0.51) and ($0.49) for Laidlaw and the Street, respectively. IONS ended 2015 with cash of $775MM, sufficient for operations into 2019, in our opinion. • 2016 financial guidance. For 2016, IONS guided a top-line income of $240MM, which includes ~$75MM amortized revenue. Key likely milestone Trading Data: payments include a $55MM from Bayer for the completion of a positive Last Price (02/25/2016) $ 33.57 IONIS-FXIRx in atrial fibrillation (AF) of end-stage renal disease (ESRD) 52–Week High (3/20/2015) $ 77.80 patient Phase II study; plus $25MM and $10MM from AZN for the initial 52–Week Low (2/11/2016) $ 30.93 advancements of the cardiovascular, metabolic and renal disease program and Market Cap. (MM) $ 4,106 Shares Out. (MM) 120 from JNJ, respectively. 2016 operational expenses would be relatively flat similar to that of 2015. IONS estimates to end 2016 with ~$600MM cash. • Three Phase III programs gained great attention. Given IONS is expected

to report topline pivotal trial results in 1H17 of the three leading programs, substantial interests are focused on their progress: For Volanesorsen, top-line results of the FAC study could be available in early (1Q) 2017 and patient recruitment of the FPL study could complete in 2H17/1H18 with top-line results possibly in 2018. Akcea is conducting pre-launch marketing efforts, which include identifying relevant patients of earlier stage, basing on symptomologies captured in electronic medical records, and referring them to lipid specialists for treatment. They also help to increase patients’ awareness in recognizing these specific disorders, and to establish better and simpler diagnoses. For Nusinersen, IONS plans to provide another clinical data update of the infant OLE study at the 2016 AAN meeting (April 15-21). During the same meeting, IONS also will provide pre-clinical and preliminary clinical updates of IONIS-DMPK-2.5Rx in myotonic dystrophy 1 and IONIS-HTTRx in Huntington disease. More matured clinical results of these two programs are expected in late 2016 and 2017. For IONIS-TTRRx, commencements of FAP Phase III study in Japan and Phase II/III study in FAC are scheduled in mid-2016. • Action. We are reiterating our Buy rating and $75 target price to reflect our bullish view on progress in IONS’s pipeline, especially Volanesorsen, Nusinersen and IONIS-TTRRx. Our valuation is based on our DCF and probability-adjusted-NPV-driven, sum-of-the-parts analyses. Earnings Estimates: (per share) Yale Jen, Ph.D. Managing Director / (Dec) 1Q 2Q 3Q 4Q FY P/E Senior Biotechnology Analyst FY-16E -0.46 -0.44 -0.39 -0.17 -1.46 NM (212) 953-4978 [email protected] FY-15A -0.14 0.30 -0.30 -0.59 -0.74 NM FY-14A -0.27 -0.10 -0.23 0.26 -0.33 NM FY-13A -0.02 -0.21 -0.21 -0.18 -0.55 NM

Source: Laidlaw & Company estimates FOR ANALYST CERTIFICATION AND DISCLOSURES, PLEASE SEE DISCLOSURES SECTION AT THE END OF THIS REPORT. This report has been prepared by Laidlaw & Co (UK), Ltd. Investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices and consensus estimates are sourced from a reliable market source

Laidlaw & Company February 26, 2016 Est. 1842

• IONIS-FXIRx in atrial fibrillation (AF) development could potentially be the next advanced value driver following the three leading programs. IONS is conducting a Phase II study evaluating IONIS-FXIRx in AF of ESRD patients (n~50) with top-line results expected possibly in 4Q16. It is a bridging study to evaluate whether IONIS-FXIRx demonstrates similar distribution and other effects in AF patients with normal kidney function vs. ESRD. If the outcome is positive, we estimate IONS’s partner, Bayer, could start a Phase III pivotal trial for the same indication possibly in 2017, while IONS will be entitled to receive a $55MM milestone payment. Bayer will be responsible for conducting future Phase III studies. As a reminder, IONIS-FXIRx’s major advantages are its potent anti- thrombotic activities and the lack of increased bleeding risk.

Table 1: Estimated and reported 4Q15 results

4Q15 Estimates and Reported Results ($ MM) Laidlaw Estimate Actual Consensus

Total revenue $46.7 $51.6 $49.3

Total op. profit (loss) ($52.6) ($62.9) ($60.1) R&D $90.3 $101.3 SG&A $9.0 $13.2

EPS ($0.51) ($0.59) ($0.48)

Net income (loss) ($61.4) ($71.4) ($57.0)

Source: Bloomberg, SEC filings and Laidlaw and Co.

Yale Jen, Ph.D. Ionis Pharmaceuticals Page 2 of 8 [email protected]

Laidlaw & Company February 26, 2016 Est. 1842

Anticipated milestones in 2016 and beyond

Product Indication Event Timing Importance

Familiar chylomicronemia Initiate pediatric clinical study 3Q16 *** syndrome (FCS) Report of Phase III study top-line results 1Q17 IONIS-APOCIIIRx **** (Volanesorsen) Familiar partial lipodystrophy Completion of patient recuritment of Phase III study 2H17 *** (FPL) Report of Phase III study top-line results 2018 ****

Phase II clinical data update at AAN meeting April 15-21, 2016 ***

Spinal muscular atrophy (infant) Completion of patient recuritment of Phase III study 2Q16 *** IONIS-SMN Rx Report of Phase III study top-line results 1H17 **** (Nusinersen)

Spinal muscular atrophy Phase II clinical data update at AAN meeting April 15-21, 2016 *** (children) Report of Phase III study top-line results 1H17 ****

Commence Phase III study in Japan Mid-16 ***

Update Phase III OLE results Mid-16 ***

Report of Phase II/III study top-line results 1H17 **** Familiar amyloidosis polyneuropathy (FAP) Filing of NDA 2H17 ***

IONIS-TTRRx Report of interim analysis of ALN-TTRIV Apollo 2017/2018 *** Phase III study by ALNY

Potential approval 2018 ****

Familiar amyloidosis Potential to start Phase II/III (CARDIO-TTR) study 2Q16 *** cardiomyopathy (FAC)/wt-TTR Additional clinical data updates (Benson) 2Q16 ***

Report Phase II in atrial fibrillation of end-stage 4Q16 **** kidney disease patient study data IONIS-FXIRx Clotting disorders Potential to start Phase III study 2017 *** Severely high triglyceride Start Phase I study 3Q16 *** (SHTG) IONIS-APOCIII-LRx High triglycerides with T2D Start Phase I study 2H16 ***

Report pre-clinicaly data at AAN meeting April 15-21, 2016 *** IONIS-DMPK-2.5Rx Myotonic dystrophy 1 Report Phase I/II proof-of-concept study data 4Q16 ****

Possibly to start Phase II study 2016 *** IONIS-PKKRx Hereditary angioedema Potentially report Phase II study top-line results 2017 ****

IONIS-FGFR4Rx Obesity Possibly report Phase II study 3Q16 ***

IONIS-DGAT2Rx NASH Report I study results Mid-16 ***

Report Phase I/II study preliminary results April 15-21, 2016 *** IONIS-HTTRx Huntington disease Report Phase I/II study top-line results 2017 ****

IONIS-GCGRRx Diabetes Report Phase II study results 4Q16 ***

IONIS-ANGPTL3-LRx Mixed dyslipidemia Report Phase I/IIa study results 4Q16 ***

IONIS-TMPRSS6-LRx β-Thalassemia Start Phase I study 4Q16 *** Very high Lp(a) with recurring Start Phase I/IIa study 3Q16 *** CVD IONIS-APO(a)-LRx Calcific aortic valve stenosis Start Phase I/IIa study 3Q16 *** with high Lp(a)

IONIS-BIIB4 - 6Rx Neurodegenerative disease Start Phase I study 2016 **

IONIS-GHR-LRx Acromegaly Start Phase I study 3Q16 **

IONIS-AGT-LRx Treatment-resistant hypertension Start Phase I study 3Q16 **

Autosomal dominant retinitis IONIS-RHO-2.5Rx Start Phase I/II study 3Q16 ** pigmentosa

IONIS-GSK4Rx Ocular disease Potentially report Phase I study results 2H16 ***

Initiate Phase II study 2Q16 *** IONIS-HBVRx HBV Potentially report Phase II study top-line results 2H16 ****

IONIS-HBV-LRx Initiate Phase I study 1Q16 ***

Potentially report PD1 (MEDI4736) combination IONIS-STAT3-2.5Rx DLBCL 4Q16 *** Phase II study results

RG-101 HCV Report combo Phase II study results 2016 ***

IONIS-AR-2.5Rx Prostate cancer Report Phase I/II study results 4Q16 ***

R&D day July 13, 2016 *** **** / ***** Major catalyst event that could impact share price very significantly while *** event is more informative

Source: Laidlaw & Company estimates and company presentation.

Yale Jen, Ph.D. Ionis Pharmaceuticals Page 3 of 8 [email protected]

Laidlaw & Company February 26, 2016 Est. 1842

Major risks

Clinical risks of study failure could have significant impacts on IONS share value. Although many ongoing studies have provided encouraging clinical outcomes following prior studies; risks remain that some current trials might not meet study endpoints in order to advance forward. As such, the value of any such clinical asset could be significantly impaired and therefore IONS shareholder value could diminish. Such a negative impact could be more pronounced if the clinical program is in very advanced development stages or with high investor expectations. Regulatory risks are part of the clinical risks as even if a drug met its endpoints for pivotal studies. The regulatory agency might not grant approval and therefore, the drug cannot be commercialized.

Commercial risk even if a therapeutic is approved, sales could be substantially below expectations. Even it is approved; the commercial sales of any drug could fall below expectations, resulting in diminishing IONS shareholder value. Factors that could impact on the commercial outlook of a drug could include execution of marketing and sales; competition from other drugs; potential change of the treatment paradigm; and unrealistic expectations or projections.

Continued consummations of partnerships could be important. Given that partnerships are a critical part of IONS product development and commercialization strategy; failure to consummate future product development or product commercialization partnerships could put share value at risk. The alternative approach could require that the company raise capital from financial markets to support its operation if the company cannot generate profits from product revenues.

Future capital raises could potentially dilute value of current shareholders. If it is not profitable, the company may need to raise capital from financial markets to support its operations; even if the company already has partners to provide milestone and other types of payments and/or product revenue. As such, the company might not always be able to raise capital from financial markets at favorable terms. Share dilution under this scenario could reduce the value of the investment to current shareholders of the company

Although antisense drugs have been approved, this modality might not be broadly accepted and therefore limit its commercial potential. Although two antisense drugs are already approved and commercialized in the U.S. and other part of the world; this treatment modality remains with limited exposure to the medical world. As such, it is possible that going forward, antisense or other RNA-based medication could have limited use due to market acceptance. Such a scenario could reduce the market potential of antisense drugs and have negative impact on ISIS shareholder value.

Yale Jen, Ph.D. Ionis Pharmaceuticals Page 4 of 8 [email protected]

Ionis Pharmaceuticals Figure 1: Income Statement February 26, 2016

Ionis Pharmaceuticals – Income Statement ($'MM) 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 1Q15 2Q15 3Q15 4Q15 1Q16E 2Q16E 3Q16E 4Q16E Revenue

IONIS-TTRRx revenue - - - - 0.0 29.3 72.3 174.4 259.9

IONIS-APOCIIIRx (Volanesorsen) revenue - - - - 0.0 3.6 66.2 157.5 225.9

IONIS-SMNRx (Nusinersen) revenue - - - - 0.0 10.6 68.6 132.1 212.0 Pipeline products - Prob. Adj - - - - 5.8 31.4 81.5

R&D revenue under collaborative agreements 96.4 144.2 202.5 61.9 119.7 48.9 50.9 281.4 48.4 49.2 56.0 85.1 238.7 248.2 253.2 248.1 238.2 Licensing and royalty revenue 5.6 3.1 11.6 0.7 0.8 2.0 0.7 2.3 0.7 0.7 1.0 0.8 3.2 3.3 3.3 3.3 3.3 Total revenue 102.0 147.3 214.2 62.6 120.4 49.1 51.6 283.7 49.1 49.9 57.0 85.9 241.9 295.0 469.3 746.8 1,020.8 Research and development 158.5 184.0 241.8 64.4 68.0 88.5 101.3 322.3 86.1 84.4 86.1 87.8 344.5 368.6 387.0 402.5 418.6 General and administrative 12.5 14.9 20.1 7.5 7.8 8.8 13.2 37.2 10.5 10.7 10.7 10.8 42.7 46.6 50.8 55.4 59.8 Total Operating Expenses 171.0 199.0 261.9 71.9 75.8 97.3 114.5 359.5 96.7 95.1 96.8 98.7 387.2 415.2 437.8 457.8 478.4 Operating Incomes (losses) (68.9) (51.7) (47.7) (9.3) 44.6 (48.1) (62.9) (75.8) (47.6) (45.2) (39.8) (12.8) (145.3) (120.2) 31.6 288.9 542.5 Equity in net loss of Regulus Therapeutics Inc. (1.4) 0.0 Investment income 1.8 2.1 2.7 0.8 0.9 1.2 1.4 4.3 1.4 1.3 1.3 1.3 5.3 5.8 6.4 7.1 7.8 Interest expense (21.2) (19.4) (22.2) (9.0) (9.1) (9.2) (9.4) (36.7) (9.4) (9.4) (9.4) (9.4) (37.6) (41.4) (45.5) (50.0) (50.0) Gain on investments, net 1.5 2.4 1.8 - 0.0 0.2 (0.1) 0.1 0.2 0.2 0.2 0.2 0.8 (20.0) 24.0 (27.0) (27.0) Gain on investment in Regulus Therapeutics Inc. 18.4 0.0 19.4 20.2 20.2 0.0 Total Other Income, net (5.7) (14.9) (6.7) (8.2) (8.2) 12.4 (8.1) (12.1) (7.8) (7.9) (7.9) (7.9) (31.5) (55.5) (15.1) (70.0) (69.3) Income before tax (74.6) (66.6) (54.4) (17.5) 36.4 (35.8) (71.1) (87.9) (55.4) (53.1) (47.7) (20.7) (176.8) (175.7) 16.5 218.9 473.2 Tax 9.1 5.9 15.4 0.8 (0.8) 0.0 (0.4) (0.4) 0.0 0.0 0.0 0.0 0.0 0.0 (6.1) (81.0) (175.1) Net Income (Loss) GAAP (65.5) (60.6) (39.0) (16.7) 35.6 (35.8) (71.4) (88.3) (55.4) (53.1) (47.7) (20.7) (176.8) (175.7) 10.4 137.9 298.1 Net Income (Loss) Applicable to Common Shareholders (65.5) (60.6) (39.0) (16.7) 35.6 (35.8) (71.4) (88.3) (55.4) (53.1) (47.7) (20.7) (176.8) (175.7) 10.4 137.9 298.1 of 8 Page 5 of Net Earnings (Losses) Per Share—Basic and Diluted ($0.65) ($0.55) ($0.33) ($0.14) $0.30 ($0.30) ($0.59) ($0.74) ($0.46) ($0.44) ($0.39) ($0.17) ($1.46) ($1.42) $0.08 $1.08 $2.30 Shares outstanding—basic and diluted 100.6 110.5 117.7 118.9 119.3 120.0 120.2 119.7 120.7 121.1 121.6 122.0 121.3 123.3 125.3 127.3 129.3 100.6 110.5 118.8 118.9 127.8 120.0 120.2 119.7 120.7 121.1 121.6 122.0 121.3 123.3 125.3 127.3 129.3

Margin Analysis (% of Sales/Revenue) Costs of goods 0% 0% 0% 0% 0% R&D 155% 125% 113% 103% 56% 180% 196% 114% 175% 169% 151% 102% 142% 125% 82% 54% 41% MG&A 12% 10% 9% 12% 6% 18% 26% 13% 21% 21% 19% 13% 18% 16% 11% 7% 6% Operating Income (loss) -68% -35% -22% -15% 37% -98% -122% -27% -97% -90% -70% -15% -60% -41% 7% 39% 53% Net Income -64% -41% -18% -27% 30% -73% -139% -31% -113% -106% -84% -24% -73% -60% 2% 18% 29%

Financial Indicator Growth Analysis (YoY%) R&D revenue under collaborative agreements 0% 50% 40% 217% 111% 12% -38% 39% -22% -59% 14% 67% -15% 4% 2% -2% -4% Licensing and royalty revenue 95% -45% 277% -92% 72% 666% -71% -80% 1% -9% -51% 18% 37% 2% 1% 0% 0% Total Revenue 3% 44% 45% 122% 111% 11% -39% 32% -22% -59% 16% 67% -15% 22% 59% 59% 37% R&D 1% 16% 31% 21% 15% 45% 49% 33% 34% 24% -3% -13% 7% 7% 5% 4% 4% SG&A -2% 19% 35% 70% 74% 96% 93% 85% 41% 37% 22% -18% 15% 9% 9% 9% 8% Operating Loss -3% -25% -8% -69% -771% 124% -724% 59% 410% -201% -17% -80% 92% -17% -126% 815% 88% Total Other Income, net -59% 163% -55% 110% 80% -427% -246% 82% -5% -4% -164% -3% 159% 76% -73% 364% -1% Pretax Income -11% -18% -48% -425% 42% -554% 62% 216% -246% 33% -71% 101% -1% -109% 1228% 116% Net Income -23% -7% -36% -47% -395% 34% -330% 126% 231% -249% 33% -71% 100% -1% -106% 1228% 116% EPS -23% -16% -40% -47% -391% 32% -326% 123% 226% -247% 32% -72% 98% -2% -106% 1208% 113%

Yale Jen, Ph.D. 212-953-4978 [email protected] Source: Roth Capital Partners Research and NovaBay's SEC filings Laidlaw & Company Source: Bloomberg LP; Company reports; Laidlaw & Company estimates. Yale Jen,Yale Ph.D.

Est. 1842Est.

Laidlaw & Company February 26, 2016 Est. 1842

DISCLOSURES: ANALYST CERTIFICATION The analyst responsible for the content of this report hereby certifies that the views expressed regarding the company or companies and their securities accurately represent his personal views and that no direct or indirect compensation is to be received by the analyst for any specific recommendation or views contained in this report. Neither the author of this report nor any member of his immediate family or household maintains a position in the securities mentioned in this report.

EQUITY DISCLOSURES For the purpose of ratings distributions, regulatory rules require the firm to assign ratings to one of three rating categories (i.e. Strong Buy/Buy-Overweight, Hold, or Underweight/Sell) regardless of a firm's own rating categories. Although the firm’s ratings of Buy/Overweight, Hold, or Underweight/Sell most closely correspond to Buy, Hold and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis against the analyst sector universe of stocks. An analyst's coverage sector is comprised of companies that are engaged in similar business or share similar operating characteristics as the subject company. The analysis sector universe is a sub-sector to the analyst's coverage sector, and is compiled to assist the analyst in determining relative valuations of subject companies. The composition of an analyst's sector universe is subject to change over time as various factors, including changing market conditions occur. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12-months relative to the analyst's sector universe.

Additional information available upon request.

# Laidlaw & Co (UK) Ltd. has not provided any investment banking services for the company (ies) mentioned in this report over the last 12 months.

RATINGS INFORMATION Rating and Price Target Change History

3 Year Rating Change History

3 Year Price Change History

Source: Laidlaw & Company Created by: Blue-Compass.net 3 Year Rating Change History

3 Year Price Change History

Source: Laidlaw & Company Created by: Blue-Compass.net Note: Company changed its ticker symbol to IONS from ISIS on 12/22/2105.

Laidlaw & Company Rating System* % of Companies for which Laidlaw & Company % of Companies has performed services for in the last 12 months Under Coverage With This Rating Investment Banking Brokerage Strong Buy Expected to significantly outperform the sector over 12 0.00% 0.00% 0.00% (SB) months.

Buy (B) Expected to outperform the sector average over 12 months. 65.71% 25.71% 2.86%

Ionis Pharmaceuticals Page 6 of 8 Yale Jen, Ph.D. [email protected]

Laidlaw & Company February 26, 2016 Est. 1842

Expected returns to be in line with the sector average over 12 Hold (H) months. 0.00% 0.00% 0.00%

Returns expected to significantly underperform the sector Sell (S) average over 12 months. 0.00% 0.00% 0.00%

ADDITIONAL COMPANIES MENTIONED Bayer AG (BAYN – Not Rated) AstraZeneca PLC (AZN – Not Rated) Johnson & Johnson (JNJ – Not Rated)

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Ionis Pharmaceuticals Page 7 of 8 Yale Jen, Ph.D. [email protected]

Laidlaw & Company February 26, 2016 Est. 1842

NOTES:

Ionis Pharmaceuticals Page 8 of 8 Yale Jen, Ph.D. [email protected]