Note 8 - Related Party Transactions

9 Months Ended

Sep. 30, 2013

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

8.      Related Party Transactions

R-Tech Ueno, Ltd.

In addition to the 2009 R-Tech Agreement and the 2011 R-Tech Agreement described in Note 5 above, the Company is a party to other development and exclusive supply agreements with R-Tech covering various compounds and territories. In the third quarter of 2013, the Company negotiated a reduction in the price of products for Europe, Middle East and Africa. The Company’s founders, Drs. Ryuji Ueno and Sachiko Kuno, directly or indirectly, own a majority of the stock of R-Tech.

The Company recorded the following expenses under the 2009 R-Tech Agreement and the 2011 R-Tech Agreement for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2013		2012		2013		2012
Clinical supplies	$	35	$	331	$	255	$	1,618
Other research and development services		75		147		181		451
Commercial supplies		3,173		298		7,906		443
	$	3,283	$	776	$	8,342	$	2,512

The following table summarizes the amounts included in deferred revenue resulting from the deferral of upfront payments relating to the exclusive supply agreements with R-Tech as of September 30, 2013 and December 31, 2012:

(In thousands)	September 30, 2013		December 31, 2012
Deferred revenue, current	$	373	$	479
Deferred revenue, non-current		5,128		5,386
	$	5,501	$	5,865

The Company recognized approximately $105,000 and $112,000 of revenue relating to the 2009 R-Tech Agreement and the 2011 R-Tech Agreement for the three months ended September 30, 2013 and 2012, respectively, and approximately $373,000 and $321,000 for the nine months ended September 30, 2013 and 2012, respectively. Such revenue was recorded as contract and collaboration revenue in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Beginning October 2012, R-Tech is relocating its manufacturing facility for unoprostone isopropyl and will not be able to manufacture and supply unoprostone isopropyl for up to 18 months. R-Tech has designated another facility in Japan for the production of unoprostone isopropyl. However, FDA approval is required before the facility can manufacture unoprostone isopropyl for the United States market, and such facility has been inspected by the FDA in the fourth quarter of 2013. The Company is awaiting the decision by the FDA. In order to mitigate this risk, the Company placed an order of $5.6 million of unoprostone isopropyl to cover this supply period based on the Company’s forecasts for the launch of RESCULA in the United States. R-Tech delivered $5.6 million of that order to the Company in the first and second quarters of 2013. This inventory was substantially written-off as discussed in Note 2 above.

In addition, R-Tech has a 30-year lease with Ueno Fine Chemicals Industry, LTD., or Ueno Fine Chemical, for the land upon which R-Tech’s manufacturing facility that produces lubiprostone is located. There are approximately 20 years remaining on the lease and R-Tech’s manufacturing facility is on the campus of Ueno Fine Chemical. R-Tech and Ueno Fine Chemical are in litigation in Japan over the terms of the lease including whether or not the lease should be terminated. However, based on information from R-Tech, the Company does not believe that the dispute will adversely affect the supply of lubiprostone.

Numab AG

In September 2011, the Company entered into a Loan Guarantee and Development Agreement, or the Numab Agreement, with Numab. Numab is considered a related party as a result of an ownership interest by one of the Company’s former executive officers. Under the terms of the Numab Agreement, the Company would provide Numab with up to CHF 5.0 million as collateral and would serve as guarantor for a loan to Numab from a third party, Zurcher Kantonalbank. Following the payment of the first success fee for its work on the first nominated target during the first quarter of 2013, this amount was reduced to CHF 2.2 million, or approximately $2.4 million as of September 30, 2013.

As of September 30, 2013, the collateral of CHF 2.2 million has been deposited by the Company and Numab has utilized CHF 2.0 million of its loan facility. During 2012, the Company considered it probable that the success criteria for the first target would be met and made full provision for the success fee. This fee was paid during the first quarter of 2013. In the first quarter of 2013, the Company decided to no longer pursue the further development of the target. In October 2013, Numab and the Company entered into a termination arrangement which will result in continued development by Numab. After successful development by Numab and an agreement with a third party investor, Numab and the Company will enter into a license agreement on commercially reasonable terms. In reviewing the amount outstanding under the loan, and in light of Numab being a start-up company, the Company recorded an additional liability of $153,000 during the third quarter of 2013 in collateral callable to meet a potential loan default by Numab. As of September 30, 2013, the Company has a recorded liability of $512,000 in collateral callable to meet a potential loan default by Numab.