DEFERRED REVENUE

6 Months Ended

Jun. 30, 2012

DEFERRED REVENUE

DEFERRED REVENUE

11. DEFERRED REVENUE

a) Cook Milestone Payment

In July 1997, the Predecessor Company entered into a license agreement with Cook Medical, Inc. (“Cook”) to utilize certain of Angiotech’s technologies in its Zilver® PTX® paclitaxel-eluting peripheral vascular stent (“Zilver PTX”) for the treatment of vascular disease in the leg (the “License Agreement”). Zilver PTX is currently approved for sale in the European Union (“E.U.”), certain other countries outside of the U.S., and is awaiting approval by the U.S. Food and Drug Administration (“FDA”) for sale in the U.S.

On February 3, 2012, the Successor Company received a $4.0 million sales milestone fee that was triggered upon Cook’s achievement of a certain targeted level of sales of Zilver PTX under the terms of the License Agreement.  Upon receipt, the $4.0 million sales milestone fee was recognized as deferred revenue given that: (i) the milestone was not determined to be substantive for the purposes of assessing revenue recognition under ASC No. 605 — Revenue Recognition: Milestone Method, and (ii) under the terms of the arrangement, the fee is subject to adjustment based on a 50% draw down applied to all future Zilver PTX royalties received from Cook. During the three and six months ended June 30, 2012, $0.1 million of the deferred revenue balance was recognized as revenue based on the draw down formula stipulated by the License Agreement. As at June 30, 2012, the remaining deferred revenue balance was $3.8 million. Approximately $0.8 million of this balance was classified as current and $3.0 million was classified as non-current.

b) Quill Consideration

On April 4, 2012, Angiotech concurrently entered into a series of agreements with Ethicon, LLC and Ethicon, Inc. (collectively “Ethicon”) in connection with the Company’s proprietary Quill technology and certain related manufacturing equipment and services. Significant terms of the respective agreements are described as follows:

i.Asset Sale and Purchase Agreement

Angiotech entered into an Asset Sale and Purchase Agreement dated April 4, 2012 (the “APA”) with Ethicon. Pursuant to the terms of the APA, Angiotech sold certain intellectual property related to its Quill technology, as well as certain related manufacturing equipment, to Ethicon.  Under the terms of the APA, on April 4, 2012 Ethicon made an initial cash payment of $20.4 million to Angiotech, and agreed to pay up to an additional $30.0 million in additional cash consideration, with any additional amounts that may be paid contingent upon the completion of certain activities, including the transfer of certain Quill-related know-how to Ethicon and the achievement of certain product development milestones.

ii.Co-Exclusive Patent and Know-How License Agreement

Concurrent with the APA, Angiotech also entered into a Co-Exclusive Patent and Know-How License Agreement dated April 4, 2012 (the “License Agreement”) with Ethicon. Under the License Agreement, Ethicon has granted Angiotech a worldwide, royalty free license to the intellectual property sold to Ethicon under the APA, which effectively grants the Company an unrestricted right to manufacture and distribute Quill wound closure products (without the Ethicon label) in any market and at the Company’s discretion.

iii.Manufacturing and Supply Agreement

The Company also entered into a Manufacturing and Supply Agreement dated April 4, 2012 (the “MSA”) with Ethicon, pursuant to which the Company will act as Ethicon’s exclusive manufacturer of knotless wound closure products that utilize the Quill technology for an undisclosed term. Under the terms of the MSA, Ethicon agreed to pay up to $12.0 million in cash consideration to Angiotech, with any amounts that may be paid contingent upon the completion of certain activities, specifically the achievement of certain product development milestones. The MSA requires Angiotech to fulfill monthly orders placed by Ethicon subject to certain terms and conditions.  In addition, under the terms of the MSA, Ethicon has a right of first negotiation with respect to the commercialization of any new products, as defined, in the field of knotless wound closure, which may be developed by the Company and are not otherwise covered by the MSA.

As many of the contingent payments embedded in the respective agreements are subject to the same or interrelated performance conditions; the APA, License Agreement and MSA were determined to be closely related for accounting purposes. As such, these agreements were collectively determined, for accounting purposes, to represent a multiple-element arrangement. This conclusion was based on the following factors: (a) the degree of continuing involvement required from Angiotech to complete the transfer of certain Quill know-how to Ethicon, and to achieve the product development milestones, and (b) the fact that Angiotech has retained the same unrestricted rights that it had on a pre-transaction basis to continue manufacturing and distributing its Quill wound closure products for its own purposes, in any market at its discretion.

In accordance with ASC No. 605, management evaluated this multiple-element arrangement to identify all key deliverables listed below:

·$0.4 million of cash received during the three months ended June 30, 2012, related to the sale of certain manufacturing equipment;

·$20.0 million of cash received up-front during the three months ended June 30, 2012 for the transfer of title of certain Quill related intellectual property to Ethicon;

·$27.0 million of future contingent consideration, comprised as follows: (i)  $5.0 million to be received upon completion of transfer to Ethicon of certain know-how; and (ii) $22.0 million due upon the achievement of certain product development milestones, primarily relating to the development of an initial set of product codes;

·$15.0 million of future contingent consideration due upon the achievement of certain product development milestones primarily relating to the development of an additional set of product codes.

The $0.4 million of cash received was recognized as revenue during the three months ended June 30, 2012 upon delivery of the manufacturing equipment to Ethicon in April 2012.

The Company has determined that each of the remaining deliverables under the collective agreements does not independently have standalone value to Ethicon without Angiotech’s continuing involvement and proprietary knowledge, which is required to complete certain product development tasks and the manufacture and supply of products utilizing the Quill technology. As such, the entire arrangement has been treated as one unit of accounting and the consideration is expected to be recognized as follows:

·As the earnings process associated with the $20.0 million of up-front consideration was deemed to be incomplete as at June 30, 2012, the $20.0 million up-front payment was recorded as deferred revenue. A portion or all of the $20.0 million of up-front consideration and $27.0million of future contingent consideration is expected to be ratably recognized into revenue upon completion of the activities associated with the various milestones over period of approximately three years.

·In accordance with ASC No. 605, Angiotech is evaluating whether the contractual gross margins to be earned under the MSA are representative of fair value. If the contractual gross margins are not determined to be representative of fair value, a portion of the $20.0 million of up-front consideration and/or future contingent consideration may need to be reallocated to the manufacturing and supply based on management’s best estimate of selling price.  This will ensure that gross margins recorded for accounting purposes on any product sold to Ethicon are reflected at their estimated fair values, which are commensurate with gross margins earned from similar third party sales.

·Due to the risk and uncertainty associated with the completion of activities relating to these future milestones, and the fact that various activities were still in process as at June 30, 2012, no amounts have been recorded in the financial statements as at June 30, 2012 in connection with the contingent consideration described above. The Company will only begin to recognize future contingent consideration as revenue over the remaining contract term once the relevant performance obligations have been completed and all revenue recognition criteria have been met.

·As at June 30, 2012, approximately $5.4 million of the $20.0 million of deferred revenue is expected to be recognized as revenue over the next year. This amount has therefore been classified as current.