5. Collaboration and License Agreements

The following tables provide amounts by year and by line item included in the Company’s consolidated statements of comprehensive (loss) income attributable to transactions arising from its collaborative arrangements, as defined in the Financial Accounting Standards Board’s Accounting Standards Codification Topic 808, Collaborative Arrangements. The Company does not have any insignificant collaborative arrangements.

	For the Three Months Ended March 31, 2015 (in thousands)
	2003 Sandoz Collaboration		2006 Sandoz Collaboration		Baxter Agreement		Total Collaborations
Collaboration revenues:
Product revenue	$	2,722	$	—	$	—	$	2,722

Research and development revenue:
Amortization of upfront payments	—		—		1,686		1,686
Research and development services and external costs	251		684		3,219		4,154
Total research and development revenue	$	251	$	684	$	4,905	$	5,840

Total collaboration revenues	$	2,973	$	684	$	4,905	$	8,562

Operating expenses:
Research and development expense (1)	$	31	$	148	$	608	$	787
General and administrative expense (1)	$	110	$	77	$	406	$	593
Total operating expenses	$	141	$	225	$	1,014	$	1,380

	For the Three Months Ended March 31, 2014 (in thousands)
	2003 Sandoz Collaboration		2006 Sandoz Collaboration		Baxter Agreement		Total Collaborations
Collaboration revenues:
Product revenue	$	4,812	$	—	$	—	$	4,812

Research and development revenue:
Amortization of upfront payments	—		239		803		1,042
Research and development services and external costs	323		190		4,418		4,931
Total research and development revenue	$	323	$	429	$	5,221	$	5,973

Total collaboration revenues	$	5,135	$	429	$	5,221	$	10,785

Operating expenses:
Research and development expense (1)	$	19	$	296	$	4,817	$	5,132
General and administrative expense (1)	$	9	$	143	$	30	$	182
Total operating expenses	$	28	$	439	$	4,847	$	5,314

(1)

The amounts represent external expenditures, including amortization of an intangible asset, and exclude salaries and benefits, share-based compensation, facilities, depreciation and laboratory supplies, as these costs are not directly charged to programs.

2003 Sandoz Collaboration

In 2003, the Company entered into a collaboration and license agreement, or the 2003 Sandoz Collaboration, with Sandoz N.V. and Sandoz Inc. to jointly develop, manufacture and commercialize Enoxaparin Sodium Injection, a generic version of Lovenox®, in the United States. Sandoz N.V. later assigned its rights in the 2003 Sandoz Collaboration to Sandoz AG, an affiliate of Novartis Pharma AG. The Company refers to Sandoz AG and Sandoz Inc. together as Sandoz.

Under the terms of the 2003 Sandoz Collaboration, the Company and Sandoz agreed to exclusively work with each other to develop and commercialize Enoxaparin Sodium Injection for any and all medical indications within the United States. In addition, the Company granted Sandoz an exclusive license under our intellectual property rights to develop and commercialize injectable enoxaparin for all medical indications within the United States. The Company identified two significant deliverables in this arrangement consisting of: (i) the license and (ii) development and related services. The Company determined that the license did not meet the criteria for separation as it did not have stand-alone value apart from the development services, which are proprietary to the Company. Therefore, the Company determined that a single unit of accounting exists with respect to the 2003 Sandoz Collaboration.

The Company is paid at cost for external costs incurred for commercial and related activities and is paid for full time equivalents, or FTEs, performing commercial and related services.

In July 2010, Sandoz began the commercial sale of Enoxaparin Sodium Injection. Under the 2003 Sandoz Collaboration, Sandoz is obligated to pay the Company a contractually defined profit share or a contractually defined royalty based on whether (i) there are no third-party competitors marketing an interchangeable generic version of Lovenox, or Lovenox-Equivalent Product (as defined in the 2003 Sandoz Collaboration), (ii) a Lovenox-Equivalent Product is being marketed by Sanofi-Aventis, which distributes the brand name Lovenox, or licensed by Sanofi-Aventis to another company to be sold as a generic drug, both known as authorized generics, or (iii) there are one or more third-party competitors which are not Sanofi-Aventis marketing a Lovenox-Equivalent Product. From July 2010 through September 2011, no third-party competitor was marketing a Lovenox-Equivalent Product; therefore, during that period, Sandoz paid the Company 45% of the contractual profits from the sale of Enoxaparin Sodium Injection. In September 2011, FDA approved the ANDA for the enoxaparin product of Amphastar Pharmaceuticals, Inc., or Amphastar. In October 2011, Sandoz confirmed that an authorized generic Lovenox-Equivalent Product was being marketed, which meant that Sandoz was obligated to pay the Company a royalty on its net sales of Enoxaparin Sodium Injection until the contractual profits from those net sales in a product year (July 1—June 30) reached a certain threshold. Upon achievement of the contractual profit threshold in December 2011, Sandoz was obligated to pay the Company a profit share for the remainder of the product year. In January 2012, following the grant by the Court of Appeals for the Federal Circuit, or CAFC, of a stay of the preliminary injunction previously issued by the United States District Court for the District of Massachusetts, Actavis Inc. (formerly Watson Pharmaceuticals, Inc.), or Actavis, announced that it and Amphastar launched their enoxaparin product. Consequently, in each product year, for net sales of enoxaparin up to a pre-defined sales threshold, Sandoz is obligated to pay the Company a royalty on net sales at a 10% rate, and for net sales above the sales threshold, at a 12% rate. See “Product revenue” in the tables above for product revenue earned by the Company on Sandoz’s net sales of Enoxaparin Sodium Injection.

The Company is no longer eligible to receive milestones under the 2003 Sandoz Collaboration because the remaining milestones were contingent upon there being no third-party competitors marketing an interchangeable generic version of a Lovenox-Equivalent Product.

The collaboration is governed by a joint steering committee and a joint project team, each consisting of an equal number of Sandoz and Company representatives. Most decisions must be made unanimously, with Sandoz collectively having one vote and the Company having one vote. Sandoz has the sole authority to determine the price at which it sells Enoxaparin Sodium Injection.

Certain development and legal expenses may reduce the amount of profit-share, royalty and milestone payments paid to the Company by Sandoz. Any product liability costs and certain other expenses arising from patent litigation may also reduce the amount of profit-share, royalty and milestone payments paid to the Company by Sandoz, but only up to 50% of these amounts due to the Company from Sandoz each quarter. The contractual share of these development and other expenses is subject to an annual adjustment at the end of each product year, and ends with the product year ending June 2015. Annual adjustments are recorded as a reduction in product revenue at the end of each product year which corresponds to the second quarter of the Company’s fiscal year.

The Company recognizes research and development revenue from FTE services and research and development revenue from external development costs upon completion of the performance requirements (i.e., as the services are performed and the reimbursable costs are incurred). Revenue from external development costs is recorded on a gross basis as the Company contracts directly with, manages the work of and is responsible for payments to third-party vendors for such development and related services. See “Research and development revenue” in the tables above for research and development revenue earned by the Company under the 2003 Sandoz Collaboration.

2006 Sandoz Collaboration

In 2006 and 2007, the Company entered into a series of agreements, including a Stock Purchase Agreement and an Investor Rights Agreement, with Novartis Pharma AG, and a collaboration and license agreement, as amended, or the Second Sandoz Collaboration Agreement, with Sandoz AG. Together, this series of agreements is referred to as the 2006 Sandoz Collaboration. Under the Second Sandoz Collaboration Agreement, the Company and Sandoz AG agreed to exclusively collaborate on the development and commercialization of Glatopa and M356 (40 mg), among other products. Further, under the Second Sandoz Collaboration Agreement, the Company and Sandoz AG expanded the geographic markets for Enoxaparin Sodium Injection covered by the 2003 Sandoz Collaboration to include the European Union. Under the Stock Purchase Agreement, the Company sold 4,708,679 shares of common stock to Novartis Pharma AG at a per share price of $15.93 (the closing price of the Company’s common stock on the NASDAQ Global Market was $13.05 on the date of the Stock Purchase Agreement) for an aggregate purchase price of $75.0 million, resulting in a paid premium of $13.6 million, which was recognized as revenue on a straight-line basis over the estimated development period. See “Amortization of upfront payments” in the tables above for research and development revenue earned by the Company relating to this paid premium. The equity premium was fully earned and amortized to revenue as of September 30, 2014.

Under the Second Sandoz Collaboration Agreement, costs, including development costs and the costs of clinical studies, are borne by the Company and Sandoz AG in varying proportions depending on the type of expense and the related product. For Glatopa and M356 (40 mg), the Company is generally responsible for all of the development costs in the United States. For Glatopa and M356 (40 mg) outside of the United States and for Enoxaparin Sodium Injection in the European Union, the Company shares development costs in proportion to its profit sharing interest. All commercialization responsibilities are borne by Sandoz AG worldwide as they are incurred for all products. The Company and Sandoz AG will share profits in varying proportions, depending on the product. Upon commercialization, the Company will earn a 50% contractual profit share on worldwide net sales of Glatopa and M356 (40 mg). Profits on net sales of Glatopa and M356 (40 mg) will be calculated by deducting from net sales the costs of goods sold and an allowance for selling, general and administrative costs, which is a contractual percentage of net sales. The Company is reimbursed at cost for any full-time equivalent employee expenses as well as any external costs incurred in the development of products to the extent development costs are born by Sandoz AG. Sandoz AG is responsible for funding all of the legal expenses incurred under the Second Sandoz Collaboration Agreement; however a portion of certain legal expenses, including any patent infringement damages, will be offset against the profit-sharing amounts in proportion to the Company’s profit sharing interest.

The Company earned a $10.0 million regulatory milestone payment upon Glatopa receiving sole FDA approval in April 2015. The Company is eligible to receive up to $153.0 million in additional milestone payments upon the achievement of certain regulatory, commercial and sales-based milestones for Glatopa in the United States and Enoxaparin Sodium Injection in the European Union. The Glatopa milestone payments include a $10.0 million milestone payment upon first commercial sale of Glatopa in the United States and up to $120.0 million in additional milestone payments upon the achievement of certain U.S. commercial and sales-based milestones for Glatopa. The Company is eligible to receive up to $23.0 million in sales-based and commercial milestones for Enoxaparin Sodium Injection in the European Union. None of these payments, once received, is refundable and there are no general rights of return in the arrangement. Sandoz AG has agreed to indemnify the Company for various claims, and a certain portion of such costs may be offset against certain future payments received by the Company. As of March 31, 2015, the Company had not earned and therefore had not recognized any milestone payments under this arrangement.

The term of the Second Sandoz Collaboration Agreement extends throughout the development and commercialization of the products until the last sale of the products, unless earlier terminated by either party pursuant to the provisions of the Second Sandoz Collaboration Agreement. The Second Sandoz Collaboration Agreement may be terminated if either party breaches the Second Sandoz Collaboration Agreement or files for bankruptcy. In addition, either the Company or Sandoz AG may terminate the Second Sandoz Collaboration Agreement as it relates to the remaining products, on a product-by-product basis, if clinical trials are required.

The Company recognizes research and development revenue from FTE services and research and development revenue from external development costs upon completion of the performance requirements (i.e., as the services are performed and the reimbursable costs are incurred). Revenue from external development costs is recorded on a gross basis as the Company contracts directly with, manages the work of and is responsible for payments to third-party vendors for such development and related services, except with respect to any amounts due Sandoz for shared development costs, which are recorded on a net basis. See “Research and development services and external costs” in the tables above for research and development revenue earned by the Company from FTE services and external development costs under the 2006 Sandoz Collaboration.

Baxter Agreement

In December 2011, the Company entered into a global collaboration and license agreement with Baxter International Inc., Baxter Healthcare Corporation and Baxter Healthcare SA (collectively, “Baxter”) to develop and commercialize biosimilars. The Company refers to this agreement as the Baxter Agreement. The Baxter Agreement became effective in February 2012.

Under the Baxter Agreement, the Company and Baxter agreed to collaborate, on a world-wide basis, on the development and commercialization of two biosimilars, M923, a biosimilar of HUMIRA® (adalimumab), and M834, a biosimilar of ORENCIA® (abatacept). In addition, Baxter had the right to select four additional originator biologics to target for biosimilar development under the collaboration. In July 2012, Baxter selected an additional product: M511, a biosimilar of AVASTIN® (bevacizumab). In December 2013, Baxter terminated its option to license M511 under the Baxter Agreement following an internal portfolio review. In February 2015, Baxter’s right to select additional programs expired without being exercised. Also in February 2015, Baxter terminated in part the Baxter Agreement as it relates specifically to M834. The Company retains all worldwide development and commercialization rights for M834. The Baxter Agreement remains in effect and unchanged with respect to M923.

Under the Baxter Agreement, each party has granted the other an exclusive license under its intellectual property rights to develop and commercialize M923 for all therapeutic indications. The Company has agreed to provide development and related services on a commercially reasonable basis through the filing of an IND or equivalent application in the European Union for M923. Development and related services include high-resolution analytics, characterization, and product and process development. Baxter is responsible for clinical development, manufacturing and commercialization activities and will exclusively distribute and market M923. The Company has the right to participate in a joint steering committee, consisting of an equal number of members from the Company and Baxter, to oversee and manage the development and commercialization of M923 under the collaboration. Costs, including development costs, payments to third parties for intellectual property licenses, and expenses for legal proceedings, including the patent exchange process pursuant to the Biologics Price Competition and Innovation Act of 2009, will be borne by the parties in varying proportions, depending on the type of expense and the stage of development. The Company will generally be responsible for research and process development costs prior to filing an IND or equivalent application in the European Union, and the cost of in-human clinical trials, manufacturing in accordance with current good manufacturing practices and commercialization will be borne by Baxter.

Baxter has a right of first negotiation with respect to collaborating with the Company on the development of any biosimilar product candidate that could compete with M923 based on the same mechanism of action. This right is effective until December 2017, subject to certain restrictions as outlined in the Baxter Agreement.

Under the terms of the Baxter Agreement, the Company received an initial cash payment of $33.0 million, a $7.0 million license payment for achieving pre-defined “minimum development criteria” for M834, and $12.0 million in technical and development milestone payments in connection with the UK Medicines and Healthcare Products Regulatory Agency’s acceptance of Baxter’s clinical trial application to initiate a pharmacokinetic clinical trial for M923. The Company is eligible to receive from Baxter, in aggregate, up to $50.0 million in regulatory milestone payments for M923, on a sliding scale, where, based on the product’s regulatory application, there is a significant reduction in the scope of the clinical trial program required for regulatory approval.

In addition, if M923 is successfully developed and launched, Baxter will be required to pay to the Company royalties on net sales of licensed products worldwide, with a base royalty rate in the high single digits with the potential for significant tiered increases based on the number of competitors, the interchangeability of the product, and the sales tier for the product. The maximum royalty with all potential increases would be slightly more than double the base royalty.

The term of the collaboration shall continue throughout the development and commercialization of M923 on a country-by-country basis until there is no remaining payment obligation with respect to the product in the relevant territory, unless earlier terminated by either party pursuant to the terms of the Baxter Agreement.

The Baxter Agreement may be terminated by:

		either party for breach by or bankruptcy of the other party;

		Baxter for its convenience; or

		the Company in the event Baxter does not exercise commercially reasonable efforts to commercialize M923 in the United States or other specified countries, provided that the Company also has certain rights to directly commercialize M923, as opposed to terminating the Baxter Agreement, in event of such a breach by Baxter.

In accordance with FASB’s ASU No. 2009-13: Multiple-Deliverable Revenue Arrangements (Topic 615), the Company identified all of the deliverables at the inception of the Baxter Agreement. The deliverables were determined to include (i) the development and product licenses to the two initial biosimilars (M923 and M834) and the four additional biosimilars, (ii) the research and development services related to the two initial biosimilars and the four additional biosimilars and (iii) the Company’s participation in a joint steering committee. The Company has determined that each of the license deliverables do not have stand-alone value apart from the related research and development services deliverables as there are no other vendors selling similar, competing products on a stand-alone basis, Baxter does not have the contractual right to resell the license, and Baxter is unable to use the license for its intended purpose without the Company’s performance of research and development services. As such, the Company determined that separate units of accounting exist for each of the six licenses together with the related research and development services, as well as the joint steering committee with respect to this arrangement. The estimated selling prices for these units of accounting were determined based on similar license arrangements and the nature of the research and development services to be performed for Baxter and market rates for similar services. At the inception of the Baxter Agreement, the arrangement consideration of $61.0 million, which included the $33.0 million upfront payment and aggregate option payments for the four additional biosimilars of $28.0 million, was allocated to the units of accounting based on the relative selling price method. Of the $61.0 million, $10.3 million was allocated to the M923 product license together with the related research and development services, $10.3 million to each of the four additional product licenses with the related research and development services, $9.4 million was allocated to the M834 product license together with the related research and development services due to that product’s stage of development at the time the license was delivered, and $114,000 was allocated to the joint steering committee unit of accounting.

At the inception of the Baxter Agreement, the Company delivered development and product licenses for M923 and M834 and commenced revenue recognition of the arrangement consideration allocated to those products. In addition, the Company began revenue recognition for the arrangement consideration allocated to the joint steering committee unit of accounting. The Company records this revenue on a straight-line basis over the applicable performance period, which begins upon delivery of the development and product license and ends upon FDA approval of the product. The Company currently estimates that the performance period for M923 and for the joint steering committee is approximately six years.

As a result of Baxter’s termination of its option to license M511 in December 2013, the expected consideration to be received under the arrangement was reduced by $7.0 million (the potential option payment for M511) as the number of deliverables decreased from seven deliverables to six deliverables. The Company determined that the change in expected consideration to be received under the arrangement represented a change in estimate and, as a result, the Company reallocated the revised expected consideration of $54.0 million to the remaining deliverables under the agreement using the original best estimate of selling price. Of the $54.0 million, $11.0 million was allocated to the M923 product license together with the related research and development services, $11.0 million to each of the three additional product licenses with the related research and development services, $10.0 million was allocated to the M834 product license together with the related research and development services due to that product’s stage of development at the time the license was delivered, and $122,000 was allocated to the joint steering committee unit of accounting.

In October 2014, the Company achieved pre-defined “minimum development criteria” for M834 and earned a $7.0 million license payment. The license payment was accounted for as part of the upfront fees and the expected consideration to be received under the arrangement increased from $54.0 million to $61.0 million. The Company reallocated the revised expected consideration of $61.0 million to the remaining deliverables under the agreement using the original best estimate of selling price. Of the $61.0 million, $12.4 million was allocated to the M923 product license together with the related research and development services, $12.4 million was allocated to each of the three additional product licenses with the related research and development services, $11.3 million was allocated to the M834 product license together with the related research and development services due to that product’s stage of development at the time the license was delivered, and $137,000 was allocated to the joint steering committee unit of accounting.

Baxter’s termination of M834 and the lapsing of Baxter’s right to select additional products in February 2015 reduced the number of deliverables from six to two and decreased the total consideration from $61.0 million to $40.0 million. The Company determined that the change in total consideration received and total deliverables under the arrangement represented a change in estimate and, as a result, the Company reallocated the revised total consideration of $40.0 million to the remaining deliverables under the agreement using the original best estimate of selling price. The remaining deliverables are the combined unit of account for the M923 license and the related research and development services and the Company’s participation on the joint steering committee. Of the $40.0 million, $39.6 million was allocated to the M923 product license together with the related research and development services and $0.4 million was allocated to the joint steering committee unit of accounting. The Company recognized the resulting change in revenue as a result of the decrease in deliverables and expected consideration on a prospective basis beginning in the first quarter of 2015. As of March 31, 2015, $29.3 million of revenue was deferred under this agreement, of which $9.8 million was included in current liabilities and $19.5 million was included in non-current liabilities in the consolidated balance sheet.

The Company recognizes research and development revenue from FTE services and research and development revenue from external development costs upon completion of the performance requirements (i.e., as the services are performed and the reimbursable costs are incurred). Revenue from external development costs is recorded on a gross basis as the Company contracts directly with, manages the work of and is responsible for payments to third-party vendors for such development and related services. Beginning in the second quarter of 2013, the Company commenced billing to Baxter external development costs for reimbursable activities related to M923. Beginning in the second half of 2013, the Company commenced billing to Baxter FTE fees related to M923. See tables above for research and development revenue earned by the Company under the Baxter Agreement.

The Company has concluded that the M923 technical development milestones and the IND milestones pursuant to the Baxter Agreement are substantive. The Company evaluated factors such as the scientific and regulatory risks that must be overcome to achieve these milestones, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Revenues from the non-refundable, technical development and IND milestones were recognized upon successful accomplishment of the milestones as research and development revenue.

The regulatory milestones, along with any associated royalty or profit sharing payments, will be considered contingent fees that will be recorded as earned in future periods.