Meda License, Development and Supply Agreements

9 Months Ended

Sep. 30, 2012

Meda License, Development and Supply Agreements [Abstract]

Meda License, Development and Supply Agreements

3. Meda License, Development and Supply Agreements:

In August 2006 and September 2007, the Company entered into license, development and supply agreements (collectively referred to as the “Meda Agreements”) with Meda to develop and commercialize ONSOLIS^® (the Company’s sole FDA-approved product) in, respectively, the United States, Mexico and Canada (the “Meda U.S. Licensing Agreements”) and in certain countries in Europe (the “Meda EU Licensing Agreements”). These agreements were subsequently amended to cover all territories worldwide other than South Korea and Taiwan. These arrangements have license terms which commence on the date of first commercial sale in each respective territory and end on the earlier of the entrance of a generic product to the market or upon expiration of the patents, which begin to expire in January 2020. Meda may terminate the Meda U.S. Licensing Agreements at any time after a specified notice to the Company and may terminate the Meda EU Licensing Agreements only upon breach of a material provision of the contract. The Company’s rights and obligations under these arrangements and related contractual cash flows from Meda are as follows:

	Cash flows received and revenue deferred
Contractual Rights and Obligations	September 30, 2012			December 31, 2011
North America
License rights to ONSOLIS ® (BEMA® Fentanyl) and milestone payments	$	59,800,000		$	59,800,000
Research and Development Services for:
•     Non-cancer subsequent indication of product and further development of initial product	$	1,541,570		$	1,541,570
Total North America Agreement Milestones	$	61,341,570		$	61,341,570
Europe and Rest of World
License rights to BREAKYL™ (BEMA ® Fentanyl) and milestone payments	$	10,500,000		$	8,000,000
Research and Development Services for:
•     BREAKYL™ product through governmental approval in an E.U. country	$	4,548,720		$	4,548,720
Total Europe and Rest of World Milestones	$	15,048,720		$	12,548,720
Total All Milestones	$	76,390,290		$	73,890,290
Release of Milestones upon and subsequent to first North American sale	$	(59,884,370	)	$	(59,735,570	)
Remaining Deferred Revenue	$	16,505,920		$	14,154,720

The Company has, in accordance with GAAP, assessed these arrangements and their deliverables to determine if such deliverables are considered separate units of accounting at the inception or upon delivery of the items required in the arrangements. The assessment requires subjective analysis and requires management to make estimates and assumptions about whether deliverables within multiple-element arrangements are separable and, if so, to determine the fair value to be allocated to each unit of accounting.

The Company determined that, upon inception of both the U.S. and EU Meda arrangements, all deliverables were to be considered one combined unit of accounting since the fair value of the undelivered license was not determinable and the research and development

efforts provided do not have standalone value apart from the license. As such, all cash payments from Meda that were related to these deliverables were recorded as deferred revenue. All cash payments from Meda for upfront and milestone payments and research and development services provided are nonrefundable. Upon commencement of the license term (date of first commercial sale in each territory), the license and certain deliverables associated with research and development services were deliverable to Meda. The first commercial sale in the U.S. occurred in October 2009. As a result, $59.8 million of the aggregate milestones and services revenue have been recognized. Upon first commercial sale in a European country, an estimated $17.6 million will be recognized, which includes an additional $2.5 million milestone received upon launch in Europe, which occurred October 2012. At September 30, 2012, there was remaining deferred revenue of $16.5 million, of which $15.0 million is related to the EU Meda arrangement milestones and EU Meda research and development services.

In connection with delivery of the license to Meda, the Company has determined that each of the undelivered obligations have stand-alone value to Meda as these post-commercialization services encompass additional clinical trials on different patient groups but do not require further product development and these services and product supply obligations can be provided by third-party providers available to Meda. Further, the Company obtained third-party evidence of fair value for the non-cancer and other research and development services and other service obligations, based on hourly rates billed by unrelated third-party providers for similar services contracted by the Company. The Company also obtained third-party evidence of fair value of the product supply deliverable based on the outsourced contract manufacturing cost charged the Company from the third-party supplier of the product. The arrangements do not contain any general rights of return. Therefore, the remaining deliverables to the arrangements will be accounted for as three separate units of accounting to include: (1) product supply, (2) research and development services for the non-cancer indication and further research and development of the first indication ONSOLIS^® and (3) the combined requirements related to the remaining other service-related obligations due to Meda to include participation in committees and certain other specified services. The estimated portion of the upfront payments of approximately $1.5 million (under the Meda U.S. Agreements) and $0.1 million (under the Meda EU Agreements) attributed to these other service-related obligations will be recognized as revenue as services are provided through expiration of the license terms.

In accordance with GAAP, the Company has determined that it is acting as a principal under the Meda Agreements and, as such, will record product supply revenue, research and development services revenue and other services revenue amounts on a gross basis in the Company’s consolidated financial statements.

The Company earns royalties based on a percentage of net sales revenue of ONSOLIS^®. Product royalty revenues are computed on a quarterly basis when revenues are fixed or determinable, collectability is reasonably assured and all other revenue recognition criteria are met. The Company has earned product royalty revenues of approximately $0 and $2.7 million for the nine months ended September 30, 2012 and 2011, respectively. The Company has incurred cost of product royalties of approximately $1.1 million and $1.4 million for the nine months ended September 30, 2012 and 2011, respectively, related to this royalty revenue. The cost of product royalties for the nine months ended September 30, 2012 is related to minimum quarterly payments owed to CDC, regardless of ONSOLIS^® royalty levels (see note 5).

Subsequent to the Company’s announcement on March 12, 2012 regarding the postponement of the U.S. relaunch of the Company’s FDA-approved ONSOLIS^®, the Company has been working on various formulation adjustments to resolve (i) certain color fading and (ii) crystal formation issues observed with this product, although neither had any impact on product performance. The positive reformulation efforts led to the results being submitted to FDA in October 2012 with a request for a Type A meeting to review the Company’s findings and what the Company believes to be a pathway forward. This meeting, scheduled for mid-December, will provide the Company with an opportunity: (1) for FDA to review with the Company the data the Company generated from the reformulation work to hopefully resolve the concerns FDA had regarding the two issues noted above; (2) to determine the content of the formal submission package that FDA will require for their formal review; and (3) to establish the formal submission classification and its associated review time. This Type A meeting and its outcome will enable the Company to better predict with greater certainty the potential timing of the U.S. relaunch of ONSOLIS^®.

On May 21, 2012, the Company announced receipt of a pre-launch milestone payment of $2.5 million from Meda in conjunction with the first country registration and pricing approval for BREAKYL™ (tradename for ONSOLIS^® in the EU). This $2.5 million milestone payment has been recorded as deferred revenue and will be recorded as contract revenue at the time of commercial launch in the EU. A final milestone payment related to the EU of $2.5 million was paid at the time of commercial launch, which launch occurred in October 2012. BREAKYL™ will be commercialized in the EU by Meda.