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Collaboration Agreements
9 Months Ended
Sep. 30, 2017
Deferred Revenue Disclosure [Abstract]  
Collaboration Agreements
Collaboration Agreements
The Company evaluates the statement of operations classification of payments between the participants in each of its collaboration agreements at inception based on the nature of the arrangement, the nature of its business operations and the contractual terms of the arrangement. The Company has determined that amounts to be received from collaborators in connection with the collaboration agreements entered into through September 30, 2017 are related to revenue generating activities.
The Company uses a contingency-adjusted proportional performance model to recognize revenue over the Company’s performance period for each collaboration agreement that includes upfront and/or milestone-based payments. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is a factor of and limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively.
The Company recognizes revenue from collaboration agreements that do not include upfront and/or milestone-based payments when earned. Amounts due to collaboration partners are recognized when the related activities have occurred and are classified in the statement of operations, generally as research and development expense, based on the nature of the related activities.
Celgene Corporation
In March 2014, the Company entered into a collaboration agreement with Celgene Corporation (“Celgene”) to develop, seek regulatory approval for, and commercialize a companion diagnostic assay for use in screening patients with Diffuse Large B-Cell Lymphoma. The Company is eligible to receive payments totaling up to $45.0 million, of which $5.8 million was received as an upfront payment upon delivery of certain information to Celgene, $17.0 million is for potential success-based development and regulatory milestones, and the remainder is for potential commercial payments in the event sales of the test do not exceed certain pre-specified minimum annual revenue during the first three years following regulatory approval. There have been several amendments to the collaboration agreement to expand the scope of development work and in return the Company has received additional payments totaling $2.1 million.
The Company will retain all commercial rights to the diagnostic test developed under this collaboration, subject to certain backup rights granted to Celgene to commercialize the diagnostic test in a particular country if the Company elects to cease distribution or elects not to distribute the diagnostic in such country. Assuming success in the clinical trial process, and subject to regulatory approval, the Company will market and sell the diagnostic assay and Celgene has agreed to make certain potential commercial payments to the Company in the event sales of the assay do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval.
The Company achieved and was paid for milestones totaling $6.0 million during 2014. The process of successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing a product candidate is highly uncertain and the attainment of any additional milestones is therefore uncertain and difficult to predict. In addition, certain milestones are outside the Company’s control and are dependent on the performance of Celgene and the outcome of a clinical trial and related regulatory processes. Accordingly, the Company is not able to reasonably estimate when, if at all, any additional milestone payments may be payable to the Company by Celgene.
During the three months ended September 30, 2017, the Company recorded a $0.1 million reduction of cumulative revenue under the agreement. This reduction in cumulative revenue resulted from the Company's performance of development activities during the period, which were more than offset by cost increases resulting from a change in timing and the amount of estimated future regulatory costs associated with internal and external resources needed to support this collaboration. The Company recognized collaboration revenue related to the Celgene agreement of $0.6 million for the three months ended September 30, 2016, and $0.5 million and $2.3 million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, the Company had recorded $5.1 million of deferred revenue related to the Celgene collaboration, of which $2.8 million is estimated to be recognizable as revenue within one year.
Merck & Co., Inc.
In May 2015, the Company entered into a clinical research collaboration agreement with Merck, to develop an assay intended to optimize immune-related gene expression signatures and evaluate the potential to predict benefit from Merck’s anti-PD-1therapy, KEYTRUDA. Under the terms of the collaboration agreement, the Company received $3.9 million in payments during 2015.
In February 2016, the Company expanded its collaboration with Merck by entering into a new development collaboration agreement to clinically develop and commercialize a novel diagnostic test, based on an optimized gene expression signature, to predict response to KEYTRUDA in multiple tumor types. In connection with the execution of the development collaboration agreement, the Company and Merck terminated the May 2015 clinical research collaboration and moved all remaining activities under the related work plan to the new development collaboration agreement. Under the terms of the new collaboration agreement, the Company is responsible for developing and validating the diagnostic test and, if the parties thereafter determine to proceed, will also be responsible for seeking regulatory approval for and commercializing the related test products. During 2016, the Company received $12.0 million upfront as a technology access fee and is eligible to receive up to an additional $12.0 million of near-term preclinical milestone payments, of which $8.5 million was achieved and received during 2016, and other potential downstream regulatory milestone payments. In addition, the Company is eligible to receive funding for certain development costs.
The Company recognized collaboration revenue of $8.8 million and $2.2 million related to the Merck agreement for the three months ended September 30, 2017 and 2016, respectively, and $15.4 million and $6.1 million for the nine months ended September 30, 2017 and 2016, respectively. During the three months ended September 30, 2017, the Company was informed by Merck of certain changes to the timing and scope of regulatory activities, resulting in a decrease to the expected future regulatory costs associated with this collaboration. Revenue recognized during the three months ended September 30, 2017 is comprised of revenue generated by the performance of development activities during the period as well as the impact of this change in estimate. As of September 30, 2017, the Company had recorded $12.1 million of deferred revenue related to the Merck collaboration, $10.0 million of which is estimated to be recognized as revenue within one year. The Company received development funding of $2.3 million and $1.9 million for the three months ended September 30, 2017 and 2016, respectively, and $5.6 million and $5.7 million for the nine months ended September 30, 2017 and 2016, respectively.
Medivation, Inc. and Astellas Pharma, Inc.
In January 2016, the Company entered into a collaboration agreement with Medivation and Astellas to pursue the translation of a novel gene expression signature algorithm discovered by Medivation into a companion diagnostic assay using the nCounter Analysis System. In September 2016, Medivation was acquired by Pfizer, Inc. (“Pfizer”) and became a wholly owned subsidiary of Pfizer. In May 2017, the Company received notification from Pfizer and Astellas terminating the collaboration agreement as a result of a decision to discontinue the related clinical trial.    
During the three and nine months ended September 30, 2017, the Company recognized collaboration revenue of $0.3 million and $11.5 million, respectively, including the favorable impact of a $1.0 million termination penalty for the nine-months ended September 30, 2017. The Company recognized collaboration revenue of $1.5 million and $3.6 million related to the Medivation/Astellas agreement for the three and nine months ended September 30, 2016, respectively.
Lam Research Corporation
In August 2017, the Company entered into a collaboration agreement with Lam Research Corporation (“Lam”) with respect to the development and commercialization of the Hyb & Seq sequencing platform and related assays. Pursuant to the terms of the collaboration agreement, Lam will contribute up to an aggregate of $50.0 million, payable quarterly, based on allowable development costs. Lam is eligible to receive certain single-digit percentage royalty payments from the Company on net sales of certain products and technologies developed under the collaboration agreement. The maximum amount of royalties payable to Lam will be capped at an amount up to three times the amount of development funding actually provided by Lam. The Company will retain exclusive rights to obtain regulatory approval, manufacture and commercialize the Hyb & Seq products. Lam will participate in development through a joint steering committee. The Company will reimburse Lam for the cost of up to 10 full-time Lam employees each year in accordance with the product development plan.
In connection with the execution of the collaboration agreement, the Company issued Lam a warrant to purchase up to 1.0 million shares of the Company’s common stock with the number of underlying shares exercisable at any time proportionate to the amount of the $50.0 million commitment that has been provided by Lam. The exercise price of the warrant is $16.75 per share, and it will expire on the seventh anniversary of the issuance date. The warrant was determined to have a fair value of $6.7 million upon issuance, and such amount will be recorded as additional paid in capital proportionately from the quarterly collaboration payments made by Lam.
During the three and nine months ended September 30, 2017, the Company recognized collaboration revenue of $0.9 million. The Company received development funding of $9.2 million related to the Lam collaboration for the three and nine months ended September 30, 2017, of which $8.0 million is included in accrued liabilities in the condensed consolidated balance sheet as of September 30, 2017 representing amounts received in advance. Through September 30, 2017, no amounts are due or have been paid by the Company to Lam for services provided by Lam employees under the terms of the agreement.