Collaboration Revenue

6 Months Ended

Jun. 30, 2022

Collaboration Revenue

Collaboration Revenue

9. Collaboration Revenue

In July 2021, we entered into a collaboration agreement (the 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, we analogize 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 consolidated statements of operations.

Under the terms of the Orion Collaboration Agreement, we granted Orion an exclusive, royalty-bearing, sublicensable license to certain of our intellectual property rights with respect to commercializing biopharmaceutical products incorporating our 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 (Field), initially in the indications of CDD, TSC and RSE. We 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, we received a €25.0 million ($29.6 million) upfront payment from Orion in July 2021. In connection with the upfront fee, we 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 May 2022, the final study report was received, which confirmed that no genotoxicity was found, as measured by formation of micronuclei in the bone marrow or comet morphology in the liver. In the event that the results of the study were positive, based on the criteria set forth in the study’s protocol, Orion would have had the right to terminate the Orion Collaboration Agreement within ninety (90) days after its receipt of the final study report, and we would have been required to refund Orion seventy-five percent (75%) of the upfront fee. We are eligible to receive up to an additional €97 million in research and development reimbursement and cash milestone payments based on 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, we have 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, we 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 (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 (Supply of Licensed Product). We determined that these three commitments represent distinct performance obligations for purposes of recognizing revenue or reducing expense, which we will recognize such revenue or expense, as applicable, as we fulfill these performance obligations.

At contract inception, we 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 had not yet been resolved. During the six months ended June 30, 2022, the refundable portion of the upfront payment was determined to be included in the transaction price as the final genotoxicity study on the M2 metabolite of ganaxolone was received as described above. The achievement of the future potential milestones is not within our control and is subject to certain research and development success and therefore carry significant uncertainty. We 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, we 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 us to Orion upon entering into the Orion Collaboration Agreement. We recorded $12.7 million of the $21.2 million refundable portion of the upfront payment as collaboration revenue in the six months ended June 30, 2022, and $9.4 million was recorded as a long-term liability as of June 30, 2022.

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.

As of the agreement date in July 2021, we allocated the transaction price to the performance obligations as described below and recorded the $9.0 million transaction price associated with the License as revenue. During 2021, we amortized $0.1 million of the transaction price associated with the Development and Regulatory Services as a reduction of research and development costs. These reductions to transaction price resulted in a total contract liability of $6.6 million at December 31, 2021. In accordance with ASC 210-20, the contract liability of $6.6 million was offset by a

contract asset of $7.2 million related to the reimbursement of research and development costs, resulting in a net contract asset of $0.6 million at December 31, 2021.

Transaction Price and Net Contract Asset at December 31, 2021:

			Cumulative Collaboration
	Transaction		Revenue Recognized		Contract
	Price		as of December 31, 2021		Liability
License	$	8,987	$	8,987	$	-
Development and Regulatory Services		2,787		106		2,681
Supply of Licensed Product		3,943		-		3,943
	$	15,717	$	9,093		6,624
Less Total Contract Asset						7,181
Net Contract Asset					$	557

During the six months ended June 30, 2022, the refundable portion of the upfront payment was determined to be included in the transaction price as the final genotoxicity study on the M2 metabolite of ganaxolone was received as described above. As such, the refundable portion of the upfront payment of €18.8 million ($21.2 million) was allocated to the purchase price as shown below, resulting in a total purchase price of $37.9 million. Of the $21.2 million refundable portion of the upfront payment, we recorded $12.7 million of collaboration revenue in the six months ended June 30, 2022. During the six months ended June 30, 2022, we amortized $0.6 million of the transaction price associated with the Development and Regulatory Services as a reduction of research and development costs. These reductions to the transaction price resulted in a total contract liability of $15.5 million at June 30, 2022. In accordance with ASC 210-20, the contract liability of $15.5 million is offset by a contract asset of $6.1 million related to the reimbursement of research and development costs, resulting in a net contract liability of $9.4 million at June 30, 2022.

Transaction Price and Net Contract Liability at June 30, 2022:

			Cumulative Collaboration
	Transaction Price		Revenue Recognized		Contract
	As of June 30, 2022		as of June 30, 2022		Liability
License	$	21,660	$	21,660	$	-
Development and Regulatory Services		6,717		672		6,045
Supply of Licensed Product		9,503		-		9,503
	$	37,880	$	22,332		15,548
Less Total Contract Asset						6,105
Net Contract Liability					$	9,443

In 2021, we 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 are being amortized as Development and Regulatory Services and Supply of Licensed Product obligations are met.

We reevaluate 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.