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Collaboration Agreements
6 Months Ended
Jun. 30, 2018
Deferred Revenue Disclosure [Abstract]  
Collaboration Agreements
Collaboration Agreements
The Company evaluates the classification of payments within the statements of operations between the participants in each of its collaboration agreements at inception of the agreement 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 June 30, 2018 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, which is generally in the same period related costs are incurred. 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.
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 Company's 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, to be applied to the research and development of the Company's Hyb & Seq platform, 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 research and product 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 the warrant 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 six months ended June 30, 2018, the Company recognized collaboration revenue relating to the agreement with Lam of $4.0 million and $8.2 million, respectively. The Company received development funding of $7.9 million and $11.4 million related to the Lam collaboration for the three and six months ended June 30, 2018, respectively. At June 30, 2018, the Company had recorded $1.7 million of deferred revenue related to the Lam collaboration, of which $0.8 million is estimated to be recognizable as revenue within one year. In addition, $9.1 million is included in customer deposits in the condensed consolidated balance sheet as of June 30, 2018 representing amounts received in advance. The Company incurred costs of $0.1 million during the three and six months ended June 30, 2018 related to services provided by Lam employees under the terms of the agreement. During the three and six months ended June 30, 2018, Lam did not exercise any warrants.
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 using the nCounter Analysis System to identify a subset of patients with Diffuse Large B-Cell Lymphoma. In February 2018, the Company and Celgene entered into an amendment to their collaboration agreement in which Celgene agreed to provide the Company additional funding for work intended to enable a subtype and prognostic indication for the test being developed under the agreement for Celgene’s drug REVLIMID. In addition, the amendment provides an additional milestone payment to the Company payable upon achievement of certain regulatory activities and timelines. In connection with this amendment, the Company agreed to remove the right to receive payments from Celgene in the event commercial sales of the companion diagnostic test do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval. In addition, the amendment allows Celgene, at its election, to use trial samples with additional technologies for companion diagnostics.
Pursuant to the Company's agreement as amended in February 2018, the Company is eligible to receive payments from Celgene totaling up to $27.3 million, of which $5.8 million was received as an upfront payment upon delivery of certain information to Celgene and $21.5 million is for development funding and potential success-based development and regulatory milestones. There have been several amendments to the collaboration agreement 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.
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 and six months ended June 30, 2018, the Company increased its estimated future costs, in part as a result of the amended agreement which expanded the scope and nature of the work being performed in future periods. Additionally, the Company became aware of new information during the quarter which resulted in an increase of future costs related primarily to ongoing regulatory activities associated with the collaboration. As a result of the higher cost estimates in future periods, the Company recognized a reduction of cumulative revenue of $0.2 million for the six months ended June 30, 2018. The Company recognized collaboration revenue related to the Celgene agreement of $0.5 million and $0.6 million for the three and six months ended June 30, 2017, respectively. At June 30, 2018, the Company had recorded $6.4 million of deferred revenue related to the Celgene collaboration, of which $5.2 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 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. In February 2016, the Company expanded its collaboration with Merck by entering into a new development collaboration agreement to clinically develop, seek regulatory approval for, and commercialize a diagnostic test, to predict response to KEYTRUDA in multiple tumor types. During 2016, the Company received $12.0 million upfront as a technology access fee and $8.5 million of preclinical milestone payments. In October 2017, Merck notified the Company of its decision not to pursue regulatory approval of the companion diagnostic test for KEYTRUDA and, in August 2018, the Company and Merck agreed to mutually terminate their development collaboration agreement, effective as of September 30, 2018, following the completion of certain close-out activities. As part of the mutual termination agreement, Merck granted to the Company a non-exclusive license to certain intellectual property that relates to Merck’s tumor inflammation signature.
The Company recognized collaboration revenue of $0.5 million and $4.5 million related to the Merck agreement for the three months ended June 30, 2018 and 2017, respectively, and $1.4 million and $6.6 million for the six months ended June 30, 2018 and 2017, respectively. The Company received development funding of $0.3 million and $1.5 million for the three months ended June 30, 2018 and 2017, respectively, and $0.9 million and $3.3 million for the six months ended June 30, 2018 and 2017, respectively. At June 30, 2018, the Company had recorded $0.1 million of deferred revenue related to the Merck collaboration which is estimated to be recognizable as revenue within one year.
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.