4. License and Collaboration Agreements

Sanofi

On September 30, 2009, the Company entered into a license and collaboration agreement with Sanofi for the development and commercialization of a drug candidate being developed by the Company under the name MM-121. The agreement became effective on November 10, 2009 and Sanofi paid the Company a nonrefundable, noncreditable upfront license fee of $60.0 million. From the effective date of the agreement through June 30, 2014, the Company has received total milestone payments of $25.0 million pursuant to the agreement. Under the agreement, Sanofi is responsible for all MM-121 development and manufacturing costs. Sanofi reimburses the Company for direct costs incurred in both development and manufacturing and compensates the Company for its internal development efforts based on a full time equivalent rate.

On June 17, 2014, the Company and Sanofi agreed to terminate the license and collaboration agreement effective December 17, 2014, although the Company has the right to accelerate such termination date. In connection with the agreement to terminate the collaboration, among other things, Sanofi transferred ownership of the investigational new drug application for MM-121 back to the Company in July 2014, and the Company waived Sanofi’s obligation to reimburse Merrimack for MM-121 development costs incurred after the effective termination date. Effective upon the termination of the license and collaboration agreement, the Company will not be entitled to receive any additional fees, milestone payments or reimbursements from the collaboration.

The Company recognizes cost reimbursements for MM-121 development services within the period they are incurred and billable. Billable expenses are identified during each specified budget period. For the three and six months ended June 30, 2014, this specified budget period was prospectively determined to end December 17, 2014, although the specified allowable budget expense was not changed. In the event that total development services expense incurred and expected to be incurred during the same period exceed the total contractually allowed billable amount for development services during that period, the Company recognizes only a percentage of the development services incurred as revenue during that period. This percentage is calculated as total development services expense incurred during the specified budget period divided by the sum of total development services expense incurred plus estimated development services expense to be incurred during the specified period, multiplied by the total contractually allowed billable amount for development services during the specified period, less development services revenue previously recognized within the specified period.

At the inception of the collaboration, the Company determined that the license, the right to future technology, back-up compounds, participation on steering committees and manufacturing services performance obligations comprising the license and collaboration agreement represented a single unit of accounting. As the Company cannot reasonably estimate its level of effort over the collaboration, the Company recognizes revenue from the upfront payment, milestone payment and manufacturing services payments using the contingency-adjusted performance model over the expected development period, which was initially estimated at 12 years from the effective date of the agreement.

As a result of the Company and Sanofi agreeing to terminate the license and collaboration arrangement, the development period was revised to end as of December 17, 2014. Accordingly, the balance of the deferred revenue remaining on April 1, 2014 is being recognized prospectively on a straight-line basis over the remaining development period, estimated to end on December 17, 2014, in accordance with current generally accepted principles on revenue recognition.

During the three and six months ended June 30, 2014 and 2013, the Company recognized revenue based on the following components of the Sanofi agreement:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2014		2013		2014		2013
Upfront payment	$	13,268	$	1,250	$	14,518	$	2,500
Milestone payments		5,529		521		6,049		1,042
Development services		3,040		14,682		13,740		26,272
Manufacturing services and other		5,978		1,999		6,542		2,740

Total	$	27,815	$	18,452	$	40,849	$	32,554

The Company performs development services for which revenue is recognized under the Sanofi agreement in accordance with the specified budget period. Additionally, for the six months ended June 30, 2014, there is approximately $5.8 million of increased revenue related to the Company receiving budget approval for expenses incurred prior to December 31, 2013.

As of June 30, 2014 and December 31, 2013, the Company maintained the following assets and liabilities related to the Sanofi agreement:


(in thousands)	June 30, 2014		December 31, 2013

Accounts receivable, billed	$	3,390	$	2,357
Accounts receivable, unbilled		2,938		3,417
Deferred revenue		46,283		73,392

PharmaEngine, Inc.

On May 5, 2011, the Company entered into an assignment, sublicense and collaboration agreement with PharmaEngine, Inc. (“PharmaEngine”) under which the Company reacquired rights in Europe and certain countries in Asia to a drug being developed under the name MM-398. In exchange, the Company agreed to pay PharmaEngine a nonrefundable, noncreditable upfront payment of $10.0 million and will be required to make up to an aggregate of $80.0 million in development and regulatory milestone payments and $130.0 million in sales milestone payments upon the achievement of specified development, regulatory and annual net sales milestones. During the first quarter of 2012, the Company paid a milestone of $5.0 million under the collaboration agreement with PharmaEngine in connection with dosing the first patient in a Phase 3 clinical trial of MM-398 in pancreatic cancer. PharmaEngine is also entitled to tiered royalties on net sales of MM-398 in Europe and certain countries in Asia. The Company is responsible for all future development costs of MM-398 except those required specifically for regulatory approval in Taiwan.

During the three months ended June 30, 2014 and 2013, the Company recognized research and development expenses of $0.1 million and $0.2 million, respectively, and during the six months ended June 30, 2014 and 2013, the Company recognized research and development expenses of $0.2 million and $0.5 million, respectively, related to the agreement with PharmaEngine.

Actavis

On November 25, 2013, the Company and Actavis entered into a development, license and supply agreement pursuant to which the Company will develop, manufacture and exclusively supply the bulk form of doxorubicin HCl liposome injection (the “Initial Product”) to Actavis. Under the agreement, Actavis is responsible for all costs related to finished product processing and global commercialization. Pursuant to the agreement, the Company has also agreed to develop additional products for Actavis in the future, the identities of which will be mutually agreed upon. The Company is eligible to receive up to $15.5 million under the agreement, of which $2.7 million has been received through June 30, 2014, with the remainder relating to development funding and development, regulatory and commercial milestone payments related to the Initial Product. The Company will also receive a double digit share of net profits on global sales of the Initial Product and any additional products. The Company will manufacture and supply the Initial Product to Actavis in bulk form at an agreed upon unit price.

The agreement will expire with respect to the Initial Product and any additional products developed in the future ten years after Actavis’ first sale of the applicable product, unless terminated earlier, and will automatically renew for additional two year periods thereafter unless either party provides notice of non-renewal. Either party may terminate the agreement in the event of an uncured material breach or bankruptcy filing by the other party. Actavis may also terminate the agreement for convenience in specified circumstances upon 90 days’ prior written notice.

The Company applied revenue recognition guidance to determine whether the performance obligations under this collaboration, including the license, participation on steering committees, development services, and manufacturing and supply services could be accounted for separately or as a single unit of accounting. The Company determined that these obligations represent a single unit of accounting and will recognize revenue as product is supplied to Actavis. Therefore, the Company has deferred total billed and billable milestones and development expenses of $3.0 million as of June 30, 2014 and $2.1 million as of December 31 2013 related to the agreement.