Liability Related to the Sale of Future Royalties

On March 22, 2019, the Company and Curis Royalty entered into the Oberland Purchase Agreement pursuant to which the Company sold to the Purchasers a portion of its rights to receive royalties from Genentech on potential net sales of Erivedge.

As upfront consideration for the purchase of the royalty rights, at closing the Purchasers paid to Curis Royalty $65.0 million less certain transaction expenses. Curis Royalty will also be entitled to receive up to approximately $70.7 million in milestone payments based on sales of Erivedge as follows: (i) $17.2 million if the Purchasers and Curis Royalty receive aggregate royalty payments pursuant to the Oberland Purchase Agreement in excess of $18.0 million during the calendar year 2021, subject to certain exceptions and (ii) $53.5 million if the Purchasers receive payments pursuant to the Oberland Purchase Agreement in excess of $117.0 million on or prior to December 31, 2026.

Concurrently with the closing of the Oberland Purchase Agreement, Curis Royalty used a portion of the proceeds to terminate and repay its prior loan with HealthCare Royalty. In connection with such termination, Curis Royalty paid approximately $37.2 million to satisfy its remaining loan obligations to HealthCare Royalty, including approximately $33.8 million in principal balance on the loan and $3.4 million in accrued and unpaid interest and prepayment fees. Curis Royalty also used a portion of the proceeds to pay transaction costs of approximately $0.3 million, resulting in net proceeds of approximately $27.5 million.

The Oberland Purchase Agreement provides that after the occurrence of an event of default as defined under the security agreement by Curis Royalty, the Purchasers shall have the option, for a period of 180 days, to require Curis Royalty to repurchase a portion of certain royalty and royalty related payments, excluding a portion of non U.S. royalties retained by Curis Royalty, referred to as the Purchased Receivables, at a price, referred to as the Put/Call Price, equal to a percentage, beginning at a low triple digit percentage and increasing over time up to a low mid triple digit percentage of the sum of the upfront purchase price and any portion of the milestone payments paid in a lump sum by the Purchasers, if any, minus certain payments previously received by the Purchasers with respect to the Purchased Receivables. Additionally, Curis Royalty shall have the option at any time to repurchase the Purchased Receivables at the Put/Call Price as of the date of such repurchase.

As a result of its obligation to pay future royalties to Oberland, the Company recorded the proceeds from this transaction as a liability on its Condensed Consolidated Balance Sheet that will be accounted for using the interest method over the estimated life of the Oberland Purchase Agreement. As a result, the Company imputes interest on the transaction and recorded imputed interest expense at the estimated interest rate. Its estimate of the interest rate under the agreement is based on the amount of royalty payments expected to be received by Oberland over the life of the arrangement. The Company periodically assesses the expected royalty payments to Curis Royalty from Genentech using a combination of historical results and forecasts from market data sources. To the extent such payments are greater or less than its initial estimates or the timing of such payments is materially different than its original estimates, the Company will adjust the amortization of the liability.

The Company determined the fair value of the liability related to the sale of future royalties at the time of the Oberland Purchase Agreement to be $65.0 million, with a current effective annual imputed interest rate of 8.2%. The Company incurred $0.6 million of transaction costs in connection with the agreement. These transaction costs will be amortized to imputed interest expense over the estimated term of the Oberland Purchase Agreement.

The following table shows the activity with respect to the liability related to the sale of future royalties during the three months ended March 31, 2020.



Carrying value of liability related to the sale of future royalties at January 1, 2020	$	62,477
Amortization of capitalized issuance costs	15
Imputed interest expense recognized for the three months ended March 31, 2020	1,283
Less: payments to Oberland Capital, LLC	(2,786		)
Carrying value of liability related to the sale of future royalties at March 31, 2020	$	60,989

The following table shows the activity with respect to the liability related to the sale of future royalties from the inception of the Oberland Purchase Agreement through December 31, 2019



Liability related to the sale of future royalties at March 22, 2019	$	65,000
Capitalized issuance costs	(584		)
Imputed interest expense recognized for the three months ended December 31, 2019	4,055
Less: payments to Oberland Capital, LLC	(5,994		)
Carrying value of liability related to the sale of future royalties at December 31, 2019	$	62,477