Note 4 — Research and Development Arrangements

Amgen Inc. (“Amgen”)

We and Amgen continue activities related to novel small molecule therapeutics, including omecamtiv mecarbil, that activate cardiac muscle contractility for potential applications in the treatment of heart failure under the collaboration and option agreement between the Company and Amgen, as amended (the “Amgen Agreement”). We recognize research and development revenue for reimbursements from Amgen of both internal costs of certain full-time employee equivalents and other costs related to the Amgen Agreement.

In July 2018, we paid Amgen the final $6.3 million and completed the exercise of our option under the Amgen Agreement to co-invest $40.0 million in the Phase 3 development program of omecamtiv mecarbil in exchange for a total incremental royalty from Amgen of up to 4% on increasing worldwide sales of omecamtiv mecarbil outside Japan (the “Co-Invest Option”). We paid Amgen $18.8 million to fund the Co-Invest Option during the nine months ended September 30, 2018. Payments we made to fund the Co-Invest Option in 2016 and 2017 reduced research and development revenues in 2016 and 2017 by $1.3 million and $20.0 million, respectively.

Adoption of ASC 606

We determined that the Amgen Agreement was within the scope of ASC 606. As of January 1, 2018, all the performance obligations under the Amgen Agreement were complete. On January 1, 2018, we recognized a contract liability for $18.8 million with a corresponding increase in accumulated deficit for the Co-Invest Option. We paid Amgen $6.3 million and $18.8 million for the Co-Invest Option during the three and nine months ended September 30, 2018, respectively.

Revenue recognized related to the Amgen Agreement during the first nine months of 2017 consisted of $10.0 million for a development milestone related to the start of GALACTIC-HF in Japan and $1.3 million for research and development services, offset by our Co-Invest Option payments of $13.8 million.

Under the Amgen Agreement, we are eligible to receive over $300.0 million in additional development milestone payments based on various clinical milestones, including the initiation of certain clinical studies, the submission of an application for marketing authorization for a drug candidate to certain regulatory authorities and the receipt of such approvals. Additionally, we are eligible to receive up to $300.0 million in commercial milestone payments provided certain sales targets are met. Due to the nature of drug development, including the inherent risk of development and approval of drug candidates by regulatory authorities, we cannot estimate if and when these milestone payments could be achieved or become due and, accordingly, we consider the milestone payments to be constrained and exclude the milestone payments from the transaction price.

Astellas Pharma Inc. (“Astellas”)

Cytokinetics and Astellas continue activities focused on the research, development, and commercialization of skeletal muscle activators, including reldesemtiv, as novel drug candidates for diseases and medical conditions associated with muscle weakness under the Amended and Restated License and Collaboration Agreement dated December 22, 2014, as amended (the “Astellas Agreement”).

We have recognized research and development revenue from Astellas for reimbursements of internal costs of certain full-time employee equivalents, supporting collaborative research and development programs, and of other costs related to those programs.

In 2014, we and Astellas amended and restated the license and collaboration agreement (the “2014 Astellas Amendment”) and expanded the objective of the collaboration to include spinal muscular atrophy (“SMA”) and potentially other neuromuscular indications for reldesemtiv and other fast skeletal muscle troponin activators (“FSTAs”); in connection therewith, Astellas paid us a $30.0 million non-refundable upfront license fee and a $15.0 million milestone payment. We determined at that time that the license for the expanded SMA rights did not have stand-alone value and the license and research and development services were a single unit of accounting and recognized revenue for these payments using the proportional performance model. As of September 30, 2018, all our performance obligations under the 2014 Astellas Amendment were complete.

In 2016, we and Astellas amended the Astellas Agreement (the “2016 Astellas Amendment”) to expand the collaboration to include the development of reldesemtiv for the potential treatment of amyotrophic lateral sclerosis (“ALS”), as well as the possible development in ALS of other FSTAs previously licensed by us to Astellas, and Astellas paid us a $35.0 million non-refundable upfront amendment fee and an accelerated $15.0 million milestone payment for the initiation of the first Phase 2 clinical trial of reldesemtiv in ALS that was otherwise provided for in the Astellas Agreement, as if such milestone had been achieved upon the execution of the 2016 Astellas Amendment, and committed research and development consideration of $44.2 million, for total consideration of $94.2 million. We allocated the consideration to the license and to the research and development services, and recognized license revenue and research and development revenue using the proportional performance model.

Astellas’ Option on Tirasemtiv

In 2016, Astellas paid us a $15.0 million non-refundable option fee for the option for a global collaboration for the development and commercialization of tirasemtiv, our first-generation fast skeletal muscle troponin activator (the “Option on Tirasemtiv”).

While Astellas holds the Option on Tirasemtiv, we are responsible for and have final decision-making authority on the development of tirasemtiv at our expense. We concluded in 2016 that (i) we had no obligation to Astellas related to any development services pursuant to the Option on Tirasemtiv, (ii) the Option on Tirasemtiv was a substantive option and not a deliverable under the 2016 Astellas Amendment, and (iii) the $15.0 million payment was deferred revenue until the Option on Tirasemtiv is exercised or expires unexercised. The $15.0 million payment was included as deferred revenue in our non-current liabilities at December 31, 2017 (prior to adopting ASC 606).

Adoption of ASC 606

On January 1, 2018, in adopting ASC 606, we concluded: (i) that the original agreement with Astellas in 2013 was outside the scope of ASC 606, since all performance obligations thereunder were completed prior to entering into the 2014 Astellas Amendment and the 2014 Astellas Amendment was not an amendment of the original agreement, (ii) the 2014 Astellas Amendment is a separate agreement within the scope of ASC 606 with no effect on the ongoing accounting for the related license and research and development service deliverables and (iii) the 2016 Astellas Amendment is a separate agreement within the scope of ASC 606. In adopting ASC 606 we determined:

•

Our performance obligations were the delivery of the license and performance of research and development services;

•

The transaction price included the $50.0 million in non-refundable fees, $35.6 million in committed research and development fees and the $15.0 million Astellas paid us for the Option on Tirasemtiv;

•

The consideration allocated to the license resulted in a contract asset of $19.4 million included in other current assets, with a corresponding decrease to accumulated deficit on January 1, 2018, and to be realized using the proportional performance model; and

•

Research services we perform under the Astellas Agreement in 2018 and beyond are a separate contract.

The transaction price above was allocated to the license (approximately $83 million) and to the services (approximately $18 million) based on their respective stand-alone prices.

Of the revenue we recognized in 2018, $4.4 million was included in the contract liability at the end of 2017. This revenue includes the cumulative effect of changes made during the period in the estimated costs of research and development services to be incurred to satisfy the related deliverable.

Revenue from Astellas included (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Research and development revenues	$	8,526	$	2,112	$	16,791	$	8,810
License revenues		1,915		318		5,133		6,707
Total Revenue from Astellas	$	10,441	$	2,430	$	21,924	$	15,517

As of September 30, 2018, we have completed all our deliverables for the 2014 Astellas Amendment and have recognized as revenue all the consideration under that agreement. As of September 30, 2018, approximately $9.5 million of the transaction price for the 2016 Astellas Amendment allocated to research and development services remains unrecognized. We had accounts receivable from Astellas of $9.2 million at September 30, 2018 and no accounts receivable at December 31, 2017.

Under the Astellas Agreement, additional research and early and late state development milestone payments for research and clinical milestones, including the initiation of certain clinical studies, the submission of an application for marketing authorization for a drug candidate to certain regulatory authorities and the commercial launch of collaboration products could total over $600.0 million and includes up to $95.0 million relating to reldesemtiv in non-neuromuscular indications, and over $100.0 million related to reldesemtiv in each of SMA, ALS and other neuromuscular indications. Additionally, $200.0 million in commercial milestones could be received under the Astellas Agreement provided certain sales targets are met. We are eligible to receive up to $2.0 million in research milestone payments under the collaboration for each future potential drug candidate. Due to the nature of drug development, including the inherent risk of development and approval of drug candidates by regulatory authorities, it is not possible to estimate if and when these milestone payments could be achieved or become due, and accordingly, are constrained and not included in the transaction price.