Revenue from contracts with customers

On January 1, 2018, we adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 were presented under Topic 606, while prior period amounts were not adjusted and reported under the accounting standards in effect for the prior periods. We recorded the following cumulative effect as of January 1, 2018, itemized here (in thousands) and further described below:



Collaboration and license agreement revenues	$	10,281
Royalty revenues	22,230
Cost of royalty revenues	(5,955		)
Accumulated deficit – (debit) credit	$	26,556

Impact to net product sales

Topic 606 does not generally change the practice under which we recognize product revenue from sales of ADCETRIS.

Impact to collaboration and license agreement revenues

The achievement of development milestones under our collaborations will be recorded during the period their achievement becomes probable, which may result in earlier recognition as compared to previous accounting principles. Each of our current ADC collaborations contain a single performance obligation under Topic 606.

The Takeda ADCETRIS collaboration is the only ongoing collaboration that was significantly impacted by the adoption of Topic 606. The Takeda ADCETRIS collaboration provides for the global co-development of ADCETRIS and the commercialization of ADCETRIS by Takeda in its territory. Under this collaboration, we have retained commercial rights for ADCETRIS in the U.S. and its territories and in Canada, and Takeda has commercial rights in the rest of the world and pays us a royalty. Our performance obligations under the collaboration include providing intellectual property licenses, performing technology transfer, providing research and development services for co-funded activities, allowing access to data, submitting regulatory filings and other information for co-funded activities, and providing manufacturing support including supply of ADCETRIS drug components, finished ADCETRIS product, and know-how. We determined that our performance obligations under the collaboration as evaluated at contract inception were not distinct and represented a single performance obligation, and that the obligations for goods and services provided would be completed over the performance period of the agreement. Any payments received by us from Takeda, including the upfront payment, progress-dependent development and regulatory milestone payments, reimbursement for drug product supplied, and net development cost reimbursement payments, are recognized as revenue upon transfer of control of the goods or services over the ten-year development period (December 2009 through November 2019) of the collaboration, within collaboration and license agreement revenues. Updates to the Takeda ADCETRIS collaboration transaction price for variable consideration, such as approval of the co-development annual budget and binding production forecast, are considered at each reporting period as to whether they are not subject to significant future reversal. Shipments of drug supply that occurred after the expiration of the drug supply agreement in September 2018 were recorded as a separate performance obligation.

Impact to royalty revenues

Commercial sales-based milestones and sales royalties, primarily earned under the Takeda ADCETRIS collaboration, are recorded in the period of the related sales by Takeda, based on estimates if actual information is not yet available, rather than recording them as reported by the customer one quarter in arrears under previous accounting guidance. Takeda also bears a portion of third-party royalty costs owed on its sales of ADCETRIS which is included in royalty revenues.

Disaggregation of total revenues

We have one marketed product, ADCETRIS. Substantially all of our product revenues are recorded in the U.S. Substantially all of our royalty revenues are from our collaboration with Takeda. Collaboration and license agreement revenues by collaborator are summarized as follows (in thousands):



	Three months ended September 30, 2018		Nine months ended September 30, 2018
Takeda	$	18,805	$	41,122
AbbVie	300		13,000
Genmab	—		7,000
GSK	—		6,000
Other	681		9,402
Collaboration and license agreement revenues	$	19,786	$	76,524

Contract balances and performance obligations

Contract assets consist of unbilled receivables related to the Takeda ADCETRIS collaboration and were $12.7 million and $1.0 million as of January 1, 2018 and September 30, 2018, respectively. These were recorded in prepaid expenses and other current assets on the consolidated balance sheet. The decrease from January 1, 2018 to September 30, 2018 was primarily due to reimbursement for drug product supplied against the 2018 production forecast during the nine months ended September 30, 2018.

Contract liabilities consist of deferred revenue primarily related to our remaining performance obligations under the Takeda ADCETRIS collaboration and are presented as line items on the consolidated balance sheet. Deferred revenue will be recognized as the remaining performance obligations are satisfied through November 2019.

We recognized collaboration and license agreement revenues of $26.0 million during the nine months ended September 30, 2018 that were included in the deferred revenue balance as of January 1, 2018. For the three and nine months ended September 30, 2018, collaboration and license agreement revenues from Takeda also included substantially all of a $10.0 million regulatory milestone.

Impacts to September 30, 2018 condensed consolidated financial statements (in thousands)



	As reported			Adjustments			Balances without the adoption of Topic 606
Condensed Consolidated Balance Sheet data:
Accounts receivable, net	$	152,520		$	(16,730	)	$	135,790
Prepaid expenses and other current assets	26,180			(990		)	25,190
Current portion of deferred revenue	36,495			(99		)	36,396
Deferred revenue, less current portion	6,004			(16		)	5,988
Accumulated deficit	(1,204,783		)	(17,605		)	(1,222,388		)
Condensed Consolidated Statements of Comprehensive Loss data:
Three months ended September 30, 2018
Collaboration and license agreement revenues	$	19,786		$	7,448		$	27,234
Royalty revenues	22,662			(1,747		)	20,915
Total revenues	169,424			5,701			175,125
Cost of royalty revenues	5,320			826			6,146
Net loss	(67,446		)	4,875			(62,571		)
Nine months ended September 30, 2018
Collaboration and license agreement revenues	$	76,524		$	9,407		$	85,931
Royalty revenues	58,887			179			59,066
Total revenues	480,187			9,586			489,773
Cost of royalty revenues	16,845			634			17,479
Net loss	(102,888		)	8,952			(93,936		)