Meda License, Development and Supply Agreements

12 Months Ended

Dec. 31, 2012

Meda License, Development and Supply Agreements [Abstract]

Meda License, Development and Supply Agreements

5. Meda License, Development and Supply Agreements:

In August 2006 and September 2007, the Company entered into the Meda Agreements with Meda to develop and commercialize the ONSOLIS^® product, a drug treatment for breakthrough cancer pain delivered through a patented transmucosal drug delivery technology, BEMA^® (applied to the inner cheek mucosa). The aforementioned agreements relate to the United States, Mexico and Canada (such agreements, the “Meda U.S. Agreements”) and to certain countries in Europe (such agreements, the “Meda EU Agreements”). They carry license terms that 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 2017. The Company’s rights and obligations under these agreements and related contractual cash flows from Meda are as follows:

	Cash flows received and revenue deferred
Contractual Rights and Obligations	December 31, 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	$	13,000,000		$	8,000,000
Research and Development Services for:
•   BREAKYL™ product through governmental approval in a E.U. country	$	4,548,720		$	4,548,720
Total Europe and Rest of World Milestones	$	17,548,720		$	12,548,720
Total All Milestones	$	78,890,290		$	73,890,290
Release of Milestones upon and subsequent to first sale	$	(77,416,811	)	$	(59,735,570	)
Remaining Deferred Revenue	$	1,473,479		$	14,154,720

The Company has 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 are 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 stand-alone 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, $59.7 million of the aggregate milestones and services revenue were recognized. The first commercial sale in a European country occurred in October 2012. As a result, $17.5 million was recognized, which includes $5.0 million in milestones received during the year ended December 31, 2012. At December 31, 2012, there was remaining deferred revenue of $1.5 million which is related to the Meda research and development services. The Company has estimated the amount of time (based on expected man-days) and associated dollars (based on comparable services provided by outside third parties), as further noted below. As time progresses, the Company will continue to estimate the time required for ongoing obligations, and adjust the remaining deferral accordingly on a quarterly basis.

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 of the ONSOLIS ^® product and (3) the combined requirements related to the remaining other service-related obligations due Meda to include participation in committees and certain other specified services. The remaining portion of the upfront payments of approximately $1.4 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.

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 the ONSOLIS ^® product. 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 $1.1, $2.7 and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Company has incurred cost of product royalties of approximately $1.9, $1.8 and $0.8 million for the years ended December 31, 2012, 2011 and 2010, respectively, related to this royalty revenue.

On March 12, 2012, the Company announced the postponement of the U.S. relaunch of ONSOLIS ^® until the product formulation could be modified to address two appearance issues raised by FDA following an inspection of the Aveva manufacturing facility where ONSOLIS^® is produced. The FDA requested that the Company identify, characterize and address the formation of microscopic crystals and a slight fading of the color during the 24-month shelf life of the product. While these changes do not affect the product’s underlying integrity or safety, the FDA believes that the fading of the color in particular may potentially confuse patients, necessitating a modification of the product and product specifications before additional product can be manufactured and distributed. Therefore, the U.S. re-launch and additional manufacturing of ONSOLIS^® has been postponed until such product appearance issues have been resolved. On December 18, 2012, the crystal and fading issues for ONSOLIS^® were successfully presented to the FDA. The outcome of the meeting was favorable, and the Company plans to produce the revised formulation for ONSOLIS^® to provide FDA with supporting 6 month stability data, while concurrently offering to bridge the supply demands of ONSOLIS^® in the market place with the current ONSOLIS ^® formulation.

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). A final milestone payment related to the EU of $2.5 million was paid at the time of commercial launch, which occurred in October 2012. BREAKYL™ is commercialized in the EU by Meda.

On September 13, 2012, the Company executed a Manufacturing, Supply, and License Agreement, effective April 26, 2012, with LTS, under which LTS will manufacture and supply the Company its BREAKYL™ product for distribution outside of the U.S. and Canada. The Company is required to supply BREAKYL™ product to Meda, Kunwha, and TTY pursuant to its obligations under certain license and supply agreements under which Meda, Kunwha, and TTY develop and commercialize the BREAKYL™ product. In conjunction with the agreement, LTS has waived all royalties on products that they produce. This does not preclude royalties that the Company owes to LTS if the Company produces BREAKYL™ with another company.