License and Collaboration Revenue

9 Months Ended

Sep. 30, 2021

License and Collaboration Revenue

License and Collaboration Revenue

10. License and Collaboration Revenue

In July 2021, the Company entered into a collaboration agreement (Orion Collaboration Agreement”) with Orion Corporation (Orion). The Orion Collaboration Agreement falls under the scope of ASC Topic 808, Collaborative Arrangements (ASC 808) as both parties are active participants in the arrangement that are exposed to significant risks and rewards. While this arrangement is in the scope of ASC 808, the Company analogizes to ASC 606 for some aspects of this arrangement, including for the delivery of a good or service (i.e., a unit of account). Revenue recognized by analogizing to ASC 606 is recorded as collaboration revenue on the condensed statements of operations.

Under the terms of the Orion Collaboration Agreement, the Company granted Orion an exclusive, royalty-bearing, sublicensable license to certain of the Company’s intellectual property rights with respect to commercializing biopharmaceutical products incorporating the Company’s product candidate ganaxolone (Licensed Products) in the European Economic Area, the United Kingdom and Switzerland (collectively, the Territory) for the diagnosis, prevention and treatment of certain human diseases, disorders or conditions (the Field), initially in the indications of CDKL5 deficiency disorder (CDD), tuberous sclerosis complex (TSC) and refractory status epilepticus (“RSE”). The Company will be responsible for the continued development of Licensed Products and regulatory interactions related thereto, including conducting and sponsoring all clinical trials, provided that Orion may conduct certain post-approval studies in the Territory. Orion will be responsible, at Orion’s sole cost and expense, for the commercialization of any Licensed Product in the Field in the Territory.

Under the terms of the Orion Collaboration Agreement, the Company received a €25.0 million ($29.6 million) upfront payment from Orion in July 2021. In connection with the upfront fee, the Company agreed to provide Orion with the results of a planned genotoxicity study on the M2 metabolite of ganaxolone, a “Combined Micronucleus & Comet study in vivo.” In the event that the results of such study are positive, based on the criteria set forth in the study’s protocol, Orion will have the right to terminate the Collaboration Agreement within ninety (90) days after its receipt of the final report of such study, in which case we must refund Orion seventy-five percent (75%) of the upfront fee. In the event of such termination and refund, Orion shall have no further rights pursuant to the oral and IV dose formulations of ganaxolone and the Collaboration Agreement shall terminate and be of no further force or effect.

The Company will also be reimbursed for up to €7.0 million for research and development costs incurred. The Company is eligible to receive up to €90.0 million upon the achievement of specific clinical and commercial achievements, as well as tiered royalty payments based on net sales ranging from the low double-digits to high teens for the oral programs and the low double-digits to low 20s for the IV program. Also, as part of the overall arrangement, the Company has agreed to supply the Licensed Products to Orion at an agreed upon price.

The Orion Collaboration Agreement shall remain effective until the date of expiration of the last to expire Royalty Term, which is defined as the period beginning on the date of the first commercial sale Licensed Product in such country and ending on the latest to occur of (a) the tenth (10th) anniversary of the first commercial sale of Licensed Product in such country, (b) the expiration of the last-to-expire licensed patent covering the manufacture, use or sale of such Licensed Product in such country, and (c) the expiration of regulatory exclusivity period, if any, for such Licensed Product in such country. The Orion Collaboration Agreement has a term of at least ten (10) years since a commercial sale has yet to occur. The Orion Collaboration Agreement allows for termination in certain specific events, such as material breach, in the event Orion challenges the validity, enforceability or scope of the licensed patent rights, termination for forecast failure, insolvency and force majeure, none of which are probable at contract inception.

In accordance with the guidance, the Company identified the following commitments under the arrangement: (i) exclusive rights to develop, use, sell, have sold, offer for sale and import any product comprised of Licensed Product (the License) (ii) development and regulatory activities (Development and Regulatory Activities), and (iii) requirement to supply Orion with the Licensed Product at an agreed upon price (the Supply of Licensed Product). The Company determined that these three commitments represent distinct performance obligations for purposes of recognizing revenue or reducing expense, which it will recognize such revenue or expense, as applicable, as it fulfills these performance obligations.

The Company determined that the non-refundable portion of the upfront payment plus the research and development reimbursement constitutes the transaction price as of the outset of the Orion Collaboration Agreement. The refundable portion of the upfront payment and the future potential regulatory and development milestone payments were fully constrained at contract inception as the risk of significant revenue reversal related to these amounts has not yet been resolved. The achievement of the future potential milestones is not within the Company’s control and is subject to certain research and development success and therefore carry significant uncertainty. The Company will reevaluate the likelihood of achieving these milestones at the end of each reporting period and adjust the transaction price in the period the risk is resolved. In addition, the Company will recognize any consideration related to sales-based milestones and royalties when the subsequent sales occur since those payments relate primarily to the License, which was delivered by the Company to Orion upon entering into the Orion Collaboration Agreement. The €18.8 million ($21.8 million) refundable portion of the upfront payment is recorded as a Refund liability as of September 30, 2021.

The transaction price was allocated to the three performance obligations based on the estimated stand-alone selling prices at contract inception. The stand-alone selling price of the License was based on a discounted cash flow approach and considered several factors including, but not limited to, discount rate, development timeline, regulatory risks, estimated market demand and future revenue potential using an adjusted market approach. The stand-alone selling price of the Development and Regulatory Activities and the Supply of Licensed Product was estimated using the

expected cost-plus margin approach. The Company allocated the transaction price to the performance obligations as of September 30, 2021 as follows (in thousands):

			Cumulative
	Transaction		Collaboration		Contract
	Price		Recognized		Liability
License	$	8,987	$	8,987	$	-
Development and Regulatory Services		2,787		41		2,746
Supply of License Product		3,943		-		3,943
	$	15,717	$	9,028		6,689
Less current portion of contract liability						(910)
Total long-term contract liability					$	5,779

In accordance with ASC 210-20, the above contract liability of $6.7 million is offset by a contract asset of $7.8 million related to the reimbursement of research and development costs, resulting in a net Contract asset of $1.1 million.

License is recognized as revenue. Development and regulatory services are recognized as a reduction of research and development costs.

The Company incurred $2.0 million of incremental costs in obtaining the Orion Collaboration Agreement. These contract acquisition costs were allocated consistent with the transaction price, resulting in $1.1 million of expense recorded to General and administrative expense commensurate with the recognition of the License performance obligation and $0.9 million recorded as capitalized contract costs, included in Other current assets and Other assets, which will be amortized as Development and Regulatory Services and Supply of License Product obligations are met. Cost of collaboration revenue of $1.5 million represents a one-time fee paid to Purdue Neuroscience Company related to our license agreement and was paid in conjunction with the €25.0 million upfront fees received from Orion.

The Company reevaluates the transaction price and the total estimated costs expected to be incurred to satisfy the performance obligations and adjusts the deferred revenue at the end of each reporting period. Such changes will result in a change to the amount of collaboration revenue recognized and deferred revenue.