6.	License and Development Agreements:

The Company periodically enters into license and development agreements to develop and commercialize its products. The arrangements typically are multi-deliverable arrangements that are funded through upfront payments, milestone payments, royalties and other forms of payment to the Company. The Company’s most significant license and development agreements are as follows:

Meda License, Development and Supply Agreements

In August 2006 and September 2007, the Company entered into certain agreements with Meda AB (“Meda”), a Swedish company to develop and commercialize the Company’s ONSOLIS^® product, a drug treatment for breakthrough cancer pain delivered utilizing the Company’s BEMA^® technology. The agreements related to the United States, Mexico and Canada (“Meda U.S. Agreements”) and to certain countries in Europe (“Meda EU Agreements”). They carry license terms that commenced 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 2020.

The Company determined that, upon inception of both the U.S. and EU Meda arrangements, all deliverables were considered one combined unit of accounting. As such, all cash payments from Meda that were related to these deliverables were initially recorded as deferred revenue. 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 delivered 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 was recognized as revenue in fiscal year 2009.

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.

On March 12, 2012, we announced the postponement of the U.S. relaunch of ONSOLIS^® following the initiation of the class-wide Risk Evaluation and Mitigation Strategy (“REMS”) until the product formulation could be modified to address two appearance-related issues. Such appearance-related issues involved the formation of microscopic crystals and a fading of the color in the mucoadhesive layer, and as previously reported we have since worked with FDA to reformulate ONSOLIS^® to address these issues. In August 2015, we announced the FDA approval of the new formulation.

Efforts to extend the Company’s supply agreement with its ONSOLIS^® manufacturer, Aveva, which is now a subsidiary of Apotex, Inc., were unsuccessful and the agreement expired. However, the Company identified an alternate supplier and requested guidance from the FDA on the specific requirements for obtaining approval to supply product from this new vendor. Based on the Company’s current estimates, the Company will submit the necessary documentation to the FDA for qualification of the new manufacturer in the second half of 2017.

On January 27, 2015, the Company announced that it had entered into an assignment and revenue sharing agreement with Meda to return to the Company the marketing authorization for ONSOLIS^® in the U.S. and the right to seek marketing authorizations for ONSOLIS^® in Canada and Mexico. Following the return of the U.S. marketing authorization from Meda, the Company submitted a prior approval supplement for the new formulation to the FDA in March 2015, which was approved in August 2016. In connection with the return of the U.S. marketing authorization by Meda to the Company in January 2015, the remaining U.S.-related deferred revenue of $1.0 million was recorded as contract revenue during the year ended December 31, 2015. There was no remaining U.S.-related contract revenue to record during the year ended December 31, 2016. On February 27, 2016, the Company entered into an extension of the assignment and revenue sharing agreement to extend the period until December 31, 2016, which terminated on May 11, 2016 upon the signing of the Termination and Revenue Sharing Agreement (“the Agreement”).

On May 11, 2016, the Company and Collegium Pharmaceutical, Inc. (“Collegium”) executed a definitive License and Development Agreement (the “License Agreement”) under which the Company has granted to Collegium the exclusive rights to develop and commercialize ONSOLIS^® in the U.S. See “Collegium License and Development Agreement” below.

Collegium License and Development Agreement

On May 11, 2016, the Company and Collegium executed a License Agreement under which the Company granted Collegium the exclusive rights to develop and commercialize ONSOLIS^® in the U.S.

Under the terms of the License Agreement, Collegium will be responsible for the manufacturing, distribution, marketing and sales of ONSOLIS^® in the U.S. The Company is obligated to use commercially reasonable efforts to continue the transfer of manufacturing to the anticipated manufacturer for ONSOLIS^® and to submit a corresponding Prior Approval Supplement (the “Supplement”) to the FDA with respect to the current NDA for ONSOLIS^®. Following approval of the Supplement, the NDA and manufacturing responsibility for ONSOLIS^® (including the manufacturing relationship with the Company’s manufacturer, subject to the Company entering into an appropriate agreement with such manufacturer that is acceptable and assignable to Collegium) will be transferred to Collegium.

Financial terms of the License Agreement include:

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a $2.5 million upfront non-refundable payment, payable to the Company within 30 days of execution of the License Agreement (received June 2016);

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reimbursement to the Company for a pre-determined amount of the remaining expenses associated with the ongoing transfer of the manufacturing of ONSOLIS^®;

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$4 million payable to the Company upon first commercial sale of ONSOLIS^® in the U.S;

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$3 million payable to the Company related to ONSOLIS^® patent milestone;

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up to $17 million in potential payments to the Company based on achievement of certain performance and sales milestones; and

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upper-teen percent royalties payable by Collegium to the Company based on various annual U.S. net sales thresholds, subject to customary adjustments and the royalty sharing arrangements described below.

The License Agreement also contains customary termination provisions that include a right by either party to terminate upon the other party’s uncured material breach, insolvency or bankruptcy, as well as in the event a certain commercial milestone is not met.

ONSOLIS^® was originally licensed to, and launched in the U.S. by, Meda. In January 2015, the Company entered into an assignment and revenue sharing agreement (the “ARS Agreement”) with Meda pursuant to which Meda transferred the marketing authorizations for ONSOLIS^® in the United States back to the Company. Under the ARS Agreement, financial terms were established that enable Meda to share a significant portion of the proceeds of milestone and royalty payments received by the Company from any new North American partnership for ONSOLIS^® that may be executed by the Company. The execution of the License Agreement between the Company and Collegium also required the execution of a definitive termination agreement between the Company and Meda embodying those royalty-sharing terms, returning ONSOLIS^®-related assets and rights in the U.S., Canada, and Mexico to the Company, and including certain other provisions. In addition, the Company’s royalty obligations to CDC IV, LLC (“CDC”) and its assignees will remain in effect. CDC provided funding for the development of ONSOLIS^® in the past.

Endo License and Development Agreement

In January 2012, the Company entered into a License and Development Agreement with Endo Pharmaceuticals, Inc. (“Endo”) pursuant to which the Company granted Endo an exclusive commercial world-wide license to develop, manufacture, market and sell the Company’s BELBUCA^® product and to complete U.S. development of such product candidate for purposes of seeking FDA approval (the “Endo Agreement”). BELBUCA^® is for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate.

Pursuant to the Endo Agreement, Endo had obtained all rights necessary to complete the clinical and commercial development of BELBUCA^® and to sell the product worldwide. Although Endo had obtained all such necessary rights, the Company had agreed under the Endo Agreement to be responsible for the completion of certain clinical trials regarding BELBUCA^® (and to provide clinical trial materials for such trials) necessary to submit a New Drug Application (“NDA”) to the FDA in order to obtain approval of BELBUCA^® in the U.S. Such NDA was submitted to the FDA in December 2014, was accepted by the FDA February 2015 and was approved by the FDA in October 2015. The Company was responsible for development activities through the filing of the NDA in the U.S., while Endo was responsible for the development following the NDA submission as well as the manufacturing, distribution, marketing and sales of BELBUCA^® on a worldwide basis. In addition, Endo was responsible for all filings required in order to obtain regulatory approval of BELBUCA^®.

Pursuant to the Endo Agreement, the Company has received the following payments:

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$30 million non-refundable upfront license fee (earned in January 2012);

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$15 million for enhancement of intellectual property rights (earned in May 2012);

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$20 million for full enrollment in two clinical trials ($10 million earned in January 2014 and $10 million earned in June 2014);

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$10 million upon FDA acceptance of filing NDA (earned in February 2015);

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$50 million upon regulatory approval, earned in October 2015 and received in November 2015. Of the $50 million received in November 2015, $20 million related to a patent extension and was recorded as deferred revenue because all or a portion of such $20 million was contingently refundable to Endo if a third party generic product was introduced in the U.S. during the patent extension period from 2020 to 2027. However, due to the Company and Endo entering into a Termination Agreement on December 7, 2016 which terminated the BELBUCA^® license to Endo effective January 6, 2017, the deferred $20 million will be recognized as revenue in January 2017. (See note 15).

The Company has assessed its arrangement with Endo and the Company’s deliverables thereunder at inception to determine: (i) the separate units of accounting for revenue recognition purposes, (ii) which payments should be allocated to which of those units of accounting and (iii) the appropriate revenue recognition pattern or trigger for each of those payments. The assessment requires subjective analysis and requires management to make judgments, estimates and assumptions about whether deliverables within multiple-element arrangements are separable and, if so, to determine the amount of arrangement consideration to be allocated to each unit of accounting.

At the inception of the Endo arrangement, the Company determined that the Endo Agreement was a multi-deliverable arrangement with three deliverables: (1) the license rights related to BELBUCA^®, (2) services related to obtaining enhanced intellectual property rights through the issuance of a particular patent and (3) clinical development services. The Company concluded that the license delivered to Endo at the inception of the Endo Agreement had stand-alone value. It was also determined that there was a fourth deliverable, the provision of clinical trial material (“CTM”). The CTM amounts involved are, however, immaterial and delivered in essentially the same time frame as the clinical development services. Accordingly, the Company did not separately account for the CTM deliverable, but considered it part of the clinical development services deliverable.

The initial non-refundable $30 million license fee was allocated to each of the three deliverables based upon their relative selling prices using best estimates. The analysis of the best estimate of the selling price of the deliverables was based on the income approach, the Company’s negotiations with Endo and other factors, and was further based on management’s estimates and assumptions which included consideration of how a market participant would use the license, estimated market opportunity and market share, the Company’s estimates of what contract research organizations would charge for clinical development services, the costs of clinical trial materials and other factors. Also considered were entity specific assumptions regarding the results of clinical trials, the likelihood of FDA approval of the subject product and the likelihood of commercialization based in part on the Company’s prior agreements with the BEMA^® technology.

Based on this analysis, $15.6 million of the up-front license fee was allocated to the license and $14.4 million to clinical development services (which is inclusive of the cost of CTM). Although the intellectual property component was considered a separate deliverable, no distinct amount of the up-front payment was assigned to this deliverable because the Company determined the deliverable to be perfunctory. The amount allocated to the license was recognized as revenue in fiscal year 2012. The portion of the upfront license fee allocated to the clinical development services deliverable of $14.4 million was recognized as those services were performed. The Company estimated that such clinical development services would extend into the first half of 2015. Such services were completed by March 2015 and resulted in the recognition in the accompanying consolidated statements of operations of $0.0 million, $0.4 million and $2.5 million as contract revenue in fiscal years, 2016, 2015 and 2014, respectively,

The Company was reimbursed by Endo for certain of the research and development costs when these costs went beyond set thresholds as outlined in the Endo Agreement. Endo reimbursed the Company for this spending at cost and the Company received no mark-up or profit. The gross amount of these reimbursed research and development costs were reported as research and development reimbursement revenue in the accompanying consolidated statements of operations. The Company acted as a principal, had discretion to choose suppliers, bore the credit risk and could perform part of the services required in the transactions. Therefore, these reimbursements were treated as revenue to the Company. The actual expenses creating the reimbursements were reflected as research and development expense.

Beginning in March 2014, total reimbursable contractor costs exceeded a set threshold, at which point all such expenses are to be borne at a rate of 50% by Endo and 50% by the Company. Endo had continued to reimburse the Company for 100% of such costs, and 50% thereof was to be taken by Endo as a credit against potential future milestones associated with achievement of certain regulatory events. As of December 31, 2014, the Company had recorded approximately $6.0 million of such cumulative payment in deferred revenue current in the accompanying consolidated balance sheet. This credit amount was deducted from the $50 million regulatory approval milestone earned by the Company in October 2015. During the years ended December 31, 2015 and 2014, the Company recognized $0.9 million and $12.7 million, respectively, of reimbursable expenses related to the Endo Agreement, which is recorded as research and development reimbursement revenue on the accompanying consolidated statement of operations. There was no research and development reimbursement revenue during the year ended December 31, 2016.

On December 23, 2014, the Company and Endo announced the submission of a NDA for BELBUCA^® to the FDA, which was accepted February 23, 2015. On October 26, 2015, the Company and Endo announced that the FDA approved BELBUCA^® (on October 23, 2015). FDA approval of BELBUCA^® triggered a milestone payment to the Company from Endo of $50 million pursuant to the Endo Agreement, less approximately $6.0 million of the aforementioned cumulative pre-payments received and recorded in deferred revenue, current in the accompanying consolidated balance sheet. The Company received payment of such milestone in November 2015 and deferred $20 million of the $50 million payment because all or a portion of the $20 million was contingently refundable to Endo at year ended December 31, 2016. The remaining $30 million of the $50 million payment was recognized as revenue during the year ended December 31, 2015.

On February 22, 2016, the Company and Endo announced the commercial availability of BELBUCA^® buccal film. BELBUCA^®, formerly distributed and promoted by Endo, is now available nationwide.