Collaborations | 9. Collaborations Lorcaserin collaborations. Eisai. In July 2010, we granted Eisai exclusive commercialization rights for lorcaserin solely in the United States and its territories and possessions. In May 2012, we and Eisai entered into the first amended and restated agreement, which expanded Eisai’s exclusive commercialization rights to include most of North and South America. In November 2013, we and Eisai entered into the second amended and restated agreement, or Second Amended Agreement, which expanded Eisai’s exclusive commercialization rights for lorcaserin to all of the countries in the world, except for South Korea, Taiwan, Australia, New Zealand and Israel. On December 28, 2016, we and Eisai amended and restated the terms of the Second Amended Agreement by entering into the Eisai Agreement, which was determined to be a material modification of the Second Amended Agreement. Under the Eisai Agreement, we identified the following significant deliverables to Eisai which each qualify as a separate unit of accounting: • An exclusive royalty-bearing license or transfer of intellectual property, or License, to commercialize lorcaserin world-wide relating to certain patents, regulatory approvals, samples, records, know-how related to lorcaserin, trademarks and domain names related to the lorcaserin brand names. We also assigned to Eisai our rights under the commercial lorcaserin distribution agreements with Ildong for South Korea, CYB for Taiwan and Teva for Israel. This is collectively referred to as the License Deliverable. • Bulk inventory and precursor material for manufacturing lorcaserin, or Inventory Deliverable. • A manufacturing and supply commitment for two years commencing December 28, 2016, or Manufacturing and Supply Commitment Deliverable. The following table summarizes the revenues we recognized under our collaboration with Eisai for the periods presented, in thousands: Years ended December 31, 2016 2015 2014 Net product sales $ 19,196 $ 14,236 $ 15,983 Amortization of upfront payments 66,014 7,541 7,630 Milestone payments 12,000 — 500 Reimbursement of development expenses 1,295 1,538 10,037 Reimbursement of patent and trademark expenses 392 426 444 Subtotal other Eisai collaboration revenue 79,701 9,505 18,611 Total $ 98,897 $ 23,741 $ 34,594 Royalty payments. Pursuant to the Eisai Agreement, we are eligible to receive royalty payments from Eisai based on the global net sales of lorcaserin. The royalty rates are as follows: • 9.5% on annual net sales less than or equal to $175.0 million • 13.5% on annual net sales greater than $175.0 million but less than or equal to $500.0 million • 18.5% of annual net sales greater than $500.0 million We did not earn or recognize any revenue from these royalty payments in the year ended December 31, 2016. We expect to record revenues from those royalty payments in the period in which the net sales upon which the royalties are calculated occur as reported to us by Eisai. Upfront payments. Prior to the Eisai Agreement, we received from Eisai total upfront payments of $115.0 million under prior agreements. Revenues from these upfront payments were previously deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, these payments were recognized ratably as revenue over the periods in which we expected the services to be rendered. The Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the Second Amended Agreement. Therefore, on December 28, 2016, $58.5 million of deferred revenues from these upfront payments was allocated to the value of the License provided to Eisai and recognized as revenue in 2016. The remaining portion, $20.9 million, was deferred as of December 31, 2016. Milestone payments. In July 2016, the US Food and Drug Administration, or FDA, approved the New Drug Application for BELVIQ XR. We earned from Eisai a $10.0 million substantive milestone payment from this achievement. In October 2016, Eisai announced the commercial launch of BELVIQ XR in the United States. In July 2016, the Federal Commission for the Protection Against Sanitary Risk approved the Marketing Authorization Application in Mexico for our twice-daily formulation of lorcaserin for chronic weight management. The product will be sold under the brand name VENESPRI. We earned from Eisai a $1.0 million substantive milestone payment from this achievement. In December 2016, the Brazilian Health Surveillance Agency provided regulatory approval in Brazil for BELVIQ. We earned from Eisai a $1.0 million substantive milestone payment from this achievement. In addition to the $12.0 million in milestones mentioned above and the other $86.5 million in milestones previously achieved since we entered the original agreement in 2010, we are eligible to receive a substantive commercial milestone of $25.0 million upon the achievement of global net sales of lorcaserin for a calendar year first exceeding $250.0 million. Product purchase price and inventory purchase. We manufacture lorcaserin at our facility in Zofingen, Switzerland. Under the Eisai Agreement, we have agreed to manufacture and supply, and Eisai has agreed to purchase from us, all of Eisai’s requirements (or specified minimum quantities if such quantities are greater than Eisai’s requirements), subject to certain exceptions, for lorcaserin for development and commercial use for an initial two-year period. The initial period may be extended by Eisai for an additional six months upon payment of an extension fee of CHF 2.0 million. Eisai will pay us agreed upon prices to deliver finished drug product during this time. Additionally, Eisai has agreed to pay up to CHF 13.0 million in manufacturing support payments during the initial two-year period supply period, and pay up to CHF 6.0 million in manufacturing support payments during the six-month extension period, if the extension option is exercised by Eisai. On December 28, 2016, Eisai paid us $10.0 million to acquire our entire inventory of bulk lorcaserin and the precursor materials for manufacturing lorcaserin. This payment was included in the arrangement consideration allocated to the units of accounting under the Eisai Agreement. We expect this inventory will remain at our Zofingen, Switzerland facility for us to use to manufacture finished drug product in order to meet Eisai’s requirements during the initial two-year period and, if applicable, the six-month extension period. The inventory that is not expected to be used to manufacture finished drug product will be physically transferred to Eisai upon the earlier of Eisai’s request to transfer or the end of the manufacturing and supply commitment period. Under the Second Amended Agreement, we sold lorcaserin to Eisai for Eisai’s commercialization in the United States for a purchase price of 31.5% of Eisai’s aggregate annual net product sales (which are the gross invoiced sales less certain deductions described in the Second Amended Agreement), or the Product Purchase Price. The amount that Eisai paid us for lorcaserin product supply was based on Eisai’s estimated price at the time the order was shipped, which was Eisai’s estimate of the Eisai Product Purchase Price, and was subject to change on April 1 and October 1 of each year. The Eisai Product Purchase Price for the product Eisai sold under the Second Amended Agreement was lower than the estimated price that Eisai paid us for such product, primarily due to an increase in deductions from savings cards and returns, partially offset by a decrease in vouchers. At the end of Eisai’s fiscal year (March 31), the estimated price paid to us for product that Eisai sold to its distributors was compared to the Eisai Product Purchase Price of such product, and the difference was refunded back to Eisai for the overpayments. The $9.1 million classified as Payable to Eisai on our consolidated balance sheet at December 31, 2016, relates to product sold by Eisai to its distributors from April 1, 2015, through March 31, 2016. Under the Eisai Agreement, we will not refund to Eisai any net overpayment which would have been otherwise due to Eisai under the Second Amended Agreement for product we sold to Eisai under the Second Amended Agreement which Eisai did not sell to its distributors on or before March 31, 2016. For product which Eisai sold to its distributors from April 1, 2016, through December 28, 2016, we recognized the net overpayment which would have been otherwise due to Eisai under the Second Amended Agreement of $2.0 million as revenues and included this amount in net product sales for the year ended December 31, 2016. We previously deferred recognition of revenue and the related cost at the time we sold lorcaserin to Eisai because we did not have the ability to estimate the amount of product that could have been returned to us and thus recognized revenues and the related costs from net product sales when Eisai shipped BELVIQ to its distributors. Pursuant to a change in the terms of the Eisai Agreement, we determined that we now have the ability to reasonably estimate the amount of returns and thus will now recognize revenue and the related cost from product sales when we ship BELVIQ to Eisai. On December 28, 2016, we recognized revenues of $6.7 million and costs of $1.9 million on net product sales which had been previously deferred. Allocation of Eisai Agreement arrangement consideration to the units of accounting. The total arrangement consideration of $115.6 million primarily consists of (i) the December 28, 2016, balances of deferred revenues from the upfront payments received under the prior Eisai agreements and the distribution agreements with Ildong, CYB and Teva; (ii) the $10.0 million payment received from Eisai on December 28, 2016; and (iii) the product purchase payments and manufacturing support payments we expect to receive from Eisai for the initial two-year manufacturing and supply commitment period. All of the deliverables were determined to have standalone value and to meet the criteria to be accounted for as separate units of accounting. Factors considered in the determination included, among other things, for the license, the manufacturing experience and capabilities of Eisai and their sublicense rights, and for the remaining deliverables the fact that they are not proprietary and can be provided by other vendors. The total arrangement consideration was allocated to the units of accounting on the basis of their relative estimated selling prices as follows: • $64.0 million was allocated to the License Deliverable. As the License Deliverable was delivered on December 28, 2016, this amount was recognized as other Eisai collaboration revenue for the year ended December 31, 2016. • $30.8 million was allocated to the Inventory Deliverable. Title to this entire inventory passed to Eisai on December 28, 2016. However, none of this inventory was physically transferred from the manufacturing facility, and there is no fixed schedule for delivery given some will be delivered on a continuous basis as we perform under the manufacturing commitment while the rest will be physically transferred to Eisai upon request by Eisai or upon the end of the manufacturing and supply commitment period. Also, the risks of ownership for this inventory have not been fully passed to Eisai as we will continue to have financial responsibility for any loss, damage or destruction which occurs while in our possession. Therefore, none of the arrangement consideration allocated to this deliverable was recognized as revenue and none of the carrying value of this inventory was recognized as cost of product sales for the year ended December 31, 2016. • $20.8 million was allocated to the Manufacturing and Supply Commitment Deliverable. This deliverable will be provided over 2017 and 2018 as product is shipped to Eisai. Therefore, none of the arrangement consideration allocated to this deliverable was recognized as revenue for the year ended December 31, 2016. The consolidated balance sheet at December 31, 2016, includes deferred revenues of $30.8 million (primarily comprised of the deferred portion of the previously received upfront payments and the $10.0 million payment received from Eisai on December 28, 2016), and inventory of $4.4 million, which is the carrying value of the product under the Inventory Deliverable. These balances are expected to be recognized in subsequent periods as this inventory is used in the manufacture and supply of lorcaserin to Eisai over the commitment period. The estimated selling price represents the price at which we would contract if the deliverable was sold regularly on a standalone basis. The estimated selling price for each unit of accounting was determined as follows: • The estimated selling price for the License Deliverable was determined using an income approach that estimates the net present value of royalties Eisai is expected to earn under the Eisai Agreement as compared to the Second Amended Agreement, net of the development costs we are no longer obligated to spend. This model includes several assumptions, including the potential market for lorcaserin in each relevant jurisdiction, probabilities of obtaining regulatory approval in additional jurisdictions, the impact of competition, the potential impact of Eisai’s ongoing development and regulatory activities related to lorcaserin, and the appropriate discount rate. • The estimated selling price for the Inventory Deliverable was determined by considering the historical cost of the precursor materials, adjusted for any changes in market condition and supplier relationships. We believe that the Eisai Agreement pricing represents pricing that would be charged if it were sold on a standalone basis. • The estimated selling price for the Manufacturing and Supply Commitment Deliverable was determined to be the aggregate product purchase payments we expect to receive from Eisai for the initial two-year manufacturing and supply commitment period. As noted above, we believe that the Eisai Agreement pricing represents pricing that would be charged if it were sold on a standalone basis. Development payments. As part of the US approval of BELVIQ, the FDA, is requiring the evaluation of the effect of long-term treatment with BELVIQ on the incidence of major adverse cardiovascular events, or MACE, in overweight and obese patients with cardiovascular disease or multiple cardiovascular risk factors (which is the FDA-required portion of the cardiovascular outcomes trial), as well as the conduct of postmarketing studies to assess the safety and efficacy of BELVIQ for weight management in obese pediatric and adolescent patients. Under the Second Amended Agreement, Eisai and we were responsible for 90% and 10%, respectively, of the cost for the FDA-required portion of the cardiovascular outcomes trial, or CVOT, 50% and 50%, respectively, of the non-FDA portion of the studies and we were also obligated to share the cost of FDA-required studies in obese pediatric patients and for additional clinical studies in other territories. Under the Eisai Agreement, Eisai is solely responsible for all costs and expenses in connection with further development of lorcaserin from and after July 1, 2016, and we were relieved of any obligations under the Second Amended Agreement to pay our share of future development costs of lorcaserin. Accordingly, on December 28, 2016, we recorded a reduction of research and development expenses which would have been otherwise due to Eisai under the Second Amended Agreement of $3.7 million for the period from July 1, 2016, through December 28, 2016. For the years ended December 31, 2016, 2015, and 2014, we recognized expenses of $7.3 million (net of the aforementioned $3.7 million reduction), $16.2 million and $35.3 million, respectively, for external clinical study fees related to lorcaserin and internal non-commercial manufacturing costs primarily related to lorcaserin. Certain other terms. Eisai and we will each bear 50% of all future expenses and losses arising from any potential product liability claims during a specified period after the date of the Eisai Agreement. Thereafter, we and Eisai will each bear 50% of all expenses and losses arising from any alleged defective manufacturing of lorcaserin by Arena GmbH under the Eisai Agreement, and Eisai will be solely responsible for any expenses and losses associated with other product liability claims. We may terminate the Transaction Agreement with respect to the United States, the European Union, China and Japan, (collectively, the Major Markets) if Eisai permanently ceases development and commercialization of lorcaserin products in such Major Market, or in its entirety if Eisai permanently ceases development and commercialization of lorcaserin products. We may also terminate the Transaction Agreement if Eisai challenges any patent currently controlled by us related to lorcaserin, if Eisai is debarred under the United States Federal Food, Drug, and Cosmetic Act, or if Eisai is in material breach of the standstill provisions. Eisai may terminate the Transaction Agreement if, as a result of its change of control, it would be in breach of certain competition restrictions. In the event the Transaction Agreement is terminated by us due to Eisai’s failure to develop and commercialize lorcaserin products, Eisai’s challenging of any of the licensed patents or Eisai’s debarment or material breach of the standstill provisions, or by Eisai after a change of control that would result in Eisai being in breach of certain competition restrictions, Eisai will grant us an exclusive, royalty-free license to certain patent rights and know-how necessary or useful for the development and commercialization of lorcaserin products, re-assign the assets purchased by Eisai under the Eisai Agreement, and provide certain other transition assistance. Ildong Pharmaceutical Co., Ltd. In November 2012, we and Ildong entered into the Marketing and Supply Agreement, or Ildong Agreement. Under this agreement, we granted Ildong exclusive rights to commercialize BELVIQ in South Korea for weight loss or weight management in obese and overweight patients. We also provided certain services and manufacture and sold BELVIQ to Ildong. As noted above, the Ildong Agreement was assigned to Eisai pursuant to the Eisai Agreement on December 28, 2016. In connection with entering into the Ildong Agreement, we received from Ildong an upfront payment of $5.0 million, less withholding taxes. Revenues from this upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, this payment was recognized ratably as revenue over the period in which we expected the services to be rendered. The assignment of the Ildong Agreement pursuant to the Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the Ildong Agreement. Therefore, on December 28, 2016, the $3.5 million of deferred revenues from this upfront payment was allocated to the value of the License provided to Eisai and recognized as revenue in 2016. In February 2015, we earned a substantive milestone payment of $3.0 million upon the approval of BELVIQ for marketing in South Korea for weight management. We received the payment, less withholding taxes, in March 2015. On December 15, 2016, we earned a substantive milestone payment of $0.3 million upon the parties agreeing to include BELVIQ XR as an additional product under the Ildong Agreement. We recognized the milestone revenue in December 2016 and received the payment, less withholding taxes, in February 2017. We will pay 50% of this milestone to Eisai pursuant to the Eisai Agreement. Under the Ildong Agreement, we manufactured BELVIQ at our facility in Zofingen, Switzerland, and sold BELVIQ to Ildong for a purchase price starting at the higher of the defined minimum amount or 35% of Ildong’s annual net product sales (which are the gross invoiced sales less certain deductions described in the Ildong Agreement), or the Ildong Product Purchase Price. The Ildong Product Purchase Price increased on a tiered basis up to the higher of the defined minimum amount or 45% on the portion of annual net product sales exceeding $15.0 million. Since the inception of commercial sales of BELVIQ in South Korea in 2015, the Ildong Product Purchase Price equaled the defined minimum amount (which exceeded the amounts calculated using the applicable percentages for the applicable tiers of Ildong’s annual net product sales). We previously deferred recognition of revenue and the related cost at the time we sold BELVIQ to Ildong because we did not have the ability to estimate the amount of product that could have been returned to us and thus recognized revenues and the related costs from net product sales when Ildong shipped BELVIQ to its distributors. In December 2016, we determined that we now have the ability to reasonably estimate returns under the Ildong Agreement. Accordingly, we recognized revenues of $2.0 million and costs of $0.7 million in December 2016 on net product sales which had been previously deferred. For the years ended December 31, 2016, 2015, and 2014, we recognized revenues of $11.4 million, $8.9 million and $0.4 million, respectively, under the Ildong agreement. CY Biotech Company Limited. In July 2013, we entered into the CYB Agreement. Under this agreement, we granted CYB exclusive rights to commercialize BELVIQ in Taiwan for weight loss or weight management in obese and overweight patients, subject to regulatory approval of BELVIQ by the Taiwan Food and Drug Administration, or TFDA. The CYB Agreement provided for us to perform certain services and to manufacture and sell BELVIQ to CYB. As noted above, the CYB Agreement was assigned to Eisai pursuant to the Eisai Agreement on December 28, 2016. In connection with entering into the CYB agreement, we received from CYB an upfront payment of $2.0 million, less withholding taxes. Revenues from this upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, this payment was recognized ratably as revenue over the period in which we expected the services to be rendered. The assignment of the CYB Agreement pursuant to the Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the CYB Agreement. Therefore, on December 28, 2016, the $1.7 million of deferred revenues from this upfront payment was allocated to the value of the License provided to Eisai and recognized as revenue in 2016. For the years ended December 31, 2016, 2015, and 2014, we recognized revenues of $1.8 million, $0.2 million, and $0.2 million, respectively, under this agreement. Abic Marketing Limited (Teva). In July 2014, we entered into the Teva Agreement. Under this agreement, we granted Teva exclusive rights to commercialize BELVIQ in Israel for weight loss or weight management in obese and overweight patients, subject to regulatory approval of BELVIQ by the Israeli Ministry of Health, or MOH. The Teva Agreement provided for us to perform certain services and to manufacture and sell BELVIQ to Teva. As noted above, the Teva Agreement was assigned to Eisai pursuant to the Eisai Agreement on December 28, 2016. We received from Teva an upfront payment of $0.5 million and a milestone payment of $0.3 million earned upon its application for regulatory approval of BELVIQ in Israel. Revenues from the upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, this payment was recognized ratably as revenue over the period in which we expected the services to be rendered. The assignment of the Teva Agreement pursuant to the Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the Teva Agreement. Therefore, on December 28, 2016, the $0.4 million of deferred revenues from this upfront payment was allocated to the value of the License provided to Eisai and recognized as revenue in 2016. For the years ended December 31, 2016, 2015, and 2014, we recognized revenues of $0.4 million, $0.1 million and $0.3 million, respectively, under the Teva Agreement. Other collaborations Nelotanserin - Axovant Sciences Ltd. In May 2015, we entered into the Axovant Agreement. In October 2015, Roivant Sciences, Ltd., or Roivant, assigned the exclusive rights to develop and commercialize nelotanserin to its subsidiary, Axovant. Under this agreement, Axovant has exclusive worldwide rights to develop and commercialize nelotanserin, subject to regulatory approval. We also provide certain services and will manufacture and sell nelotanserin to Axovant. We received an upfront payment of $4.0 million, which was recorded as deferred revenues and is being recognized as revenue ratably over approximately five years, which is the period in which we expect to provide services under the arrangement. We will receive payments from sales of nelotanserin under the Axovant Agreement and are eligible to receive purchase price adjustment payments based on Axovant’s annual net product sales. We are eligible to receive up to an aggregate of $41.5 million in success milestones in case of full development and regulatory success of nelotanserin. Of these payments, two development milestones totaling $4.0 million are substantive and four regulatory milestones totaling $37.5 million are substantive. For the years ended December 31, 2016, and 2015, we recognized revenues of $2.1 million and $1.1 million, respectively, under this agreement. Orphan GPCR - Boehringer Ingelheim International GmbH. In December 2015, we and Boehringer Ingelheim entered into an exclusive agreement, or Boehringer Ingelheim Agreement, to conduct joint research to identify drug candidates targeting an undisclosed G protein-coupled receptor, or GPCR, that belongs to the group of orphan central nervous system, or CNS, receptors. Under this agreement, we granted Boehringer Ingelheim exclusive rights to our internally discovered, novel compounds and intellectual property for an orphan CNS receptor. We will jointly conduct research with Boehringer Ingelheim to identify additional drug candidates that are suitable for continued research and development as therapeutic compounds for various disease indications, with the initial focus expected to be psychiatric diseases such as schizophrenia. The agreement grants Boehringer Ingelheim exclusive worldwide rights to develop, manufacture and commercialize products resulting from the collaboration. In part consideration of the rights to our intellectual property necessary or useful to conduct the joint research under the Boehringer Ingelheim Agreement, we received from Boehringer Ingelheim an upfront payment of $7.5 million in January 2016, less $1.2 million of withholding taxes which was refunded to us in October 2016. Revenues from this upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing participation in the joint research, and are being recognized ratably as revenues over the period in which we expect the services to be rendered, which is approximately two years. We are also eligible to receive up to an aggregate of $251.0 million in success milestones in case of full commercial success of multiple drug products. Of these payments, three development milestones totaling $7.0 million are substantive, three development milestones totaling $30.0 million are non-substantive, nine regulatory milestones totaling $84.0 million are non-substantive and four commercial milestones totaling $130.0 million are non-substantive. For the year ended December 31, 2016, we recognized revenues of $5.1 million under this agreement. |