Licensing and Commercialization Agreements

Gene Therapy Agreements with the University of Florida and the University of Pennsylvania

On June 6, 2018, the Company entered into an exclusive global license agreement (the "RHO-adRP License Agreement") with the University of Florida Research Foundation ("UFRF") and the University of Pennsylvania ("Penn," and together with UFRF, the "Licensors"). Under the agreement, the Company was granted a worldwide, exclusive license under specified patent rights and a worldwide, non-exclusive license under specified know-how, including specified preclinical data, to manufacture, develop and commercialize certain adeno-associated virus, or AAV, gene therapy products for the treatment of rhodopsin-mediated diseases. Included in the RHO-adRP License Agreement are patent rights covering a novel AAV gene therapy product candidate intended to treat rhodopsin-mediated autosomal dominant retinitis pigmentosa (the "RHO-adRP Licensed Product").

During June 2018, the Company paid a $0.5 million upfront license issuance fee in connection with entry into the agreement, which was recorded as a research and development expense, as well as accrued patent prosecution expenses of approximately $30 thousand, which was recorded as general and administrative expense. Under the agreement, the Company agreed to pay an annual license maintenance fee in the low double-digit thousands of dollars, which will be payable on an annual basis until the first commercial sale of a licensed product. In addition, the Company has agreed to reimburse UFRF for the costs and expenses of patent prosecution and maintenance related to the licensed patent rights.

The Company has further agreed to pay UFRF, on behalf of both Licensors, up to an aggregate of $23.5 million if the Company achieves specified clinical, marketing approval and reimbursement approval milestones with respect to a licensed product and up to an aggregate of an additional $70.0 million if the Company achieves specified commercial sales milestones with respect to a licensed product.

The Company is also obligated to pay UFRF, on behalf of both Licensors, royalties at a low single-digit percentage of net sales of licensed products. Such royalties are subject to customary deductions, credits, and reductions for lack of patent coverage and loss of regulatory exclusivity. Beginning on the earlier of (i) the calendar year following the first commercial sale of a licensed product and (ii) the first business day of 2031, the Company is also obligated to pay certain minimum royalties, not to exceed an amount in the low hundreds of thousands of dollars on an annual basis, which minimum royalties are creditable against the Company's royalty obligation with respect to net sales of licensed products due in the year the minimum royalty is paid. In addition, if the Company or its affiliate sublicenses any of the licensed patent rights to a third party, the Company will be obligated to pay UFRF, on behalf of both Licensors, a low double-digit percentage of the consideration received in exchange for such sublicense. If the Company receives a rare pediatric disease priority review voucher from the U.S. Food and Drug Administration in connection with obtaining marketing approval for a licensed product and the Company subsequently uses such priority review voucher in connection with a different product candidate or sells such priority review voucher, the Company will be obligated to make certain payments to UFRF, on behalf of both Licensors.

Unless earlier terminated by the Company, the RHO-adRP License Agreement will expire upon the expiration of the Company’s obligation to pay royalties to UFRF on net sales of licensed products. The Company may terminate the agreement at any time for any reason upon prior written notice. Penn or UFRF may terminate the RHO-adRP License Agreement in the event of certain breaches by the Company or in the event of certain insolvency events regarding the Company.

In addition to the exclusive license agreement, the Company and Penn also agreed to a Master-Sponsored Research Agreement (the "MSA"), facilitated by the Penn Center for Innovation. Under the MSA, the Company and Penn plan to conduct preclinical studies for the RHO-adRP Licensed Product, as well as a natural history study for RHO-adRP patients.

Prior Licensing and Commercialization Agreement with Novartis Pharma AG

Prior to 2018, the Company's revenue resulted from payments received under the Novartis Agreement, as modified by the July 2017 letter agreement entered into by the Company and Novartis. These two agreements are described below. The Company used the relative selling price method to allocate arrangement consideration to the Company’s performance obligations under the Novartis Agreement. The Company completed the deliverables under the Novartis Agreement and the Letter Agreement during the third quarter of 2017.

Below is a summary of the components of the Company's collaboration revenue for the three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
License revenue	$	—	$	—	$	—	$	—
Research and development activity revenue	—		1,658		—		3,316
API transfer revenue	—		—		—		—
Joint operating committee revenue	—		3		—		7
Total collaboration revenue	$	—	$	1,661	$	—	$	3,323

In May 2014, the Company entered into the Novartis Agreement. Under the Novartis Agreement, the Company granted Novartis exclusive rights under specified patent rights, know-how and trademarks controlled by the Company to manufacture, from bulk API supplied by the Company, standalone Fovista products and products combining Fovista with an anti-VEGF agent to which Novartis has rights in a co-formulated product, for the treatment, prevention, cure or control of any human disease, disorder or condition of the eye, and to develop and commercialize those licensed products in all countries outside of the United States (the “Novartis Territory”). The Company agreed to use commercially reasonable efforts to complete its ongoing pivotal Phase 3 clinical program for Fovista and Novartis agreed to use commercially reasonable efforts to develop a standalone Fovista product and a co-formulated product containing Fovista and an anti-VEGF agent to which Novartis has rights, as well as a pre-filled syringe presentation of such products and to use commercially reasonable efforts, subject to obtaining marketing approval, to commercialize licensed products in the Novartis Territory in accordance with agreed development and marketing plans.

In July 2017, the Company and Novartis entered into the Letter Agreement to streamline the process and timeline for evaluating data from the OPH1004 trial once it became available. On October 23, 2017, following the failure of the Phase 3 Fovista program and pursuant to the terms of the Letter Agreement, Novartis elected to terminate the Novartis Agreement with immediate effect.

In May 2014, Novartis paid the Company a $200.0 million upfront payment. In each of September 2014 and March 2015, the Company achieved a $50.0 million enrollment-based milestone, and in June 2016, the Company achieved a $30.0 million enrollment-based milestone, for an aggregate total of $130.0 million in enrollment-based milestones under the Novartis Agreement. The Company used the relative selling price method to allocate these payments to contract deliverables based on its performance obligations under the Novartis Agreement.

Activities under the Novartis Agreement were evaluated under ASC 605-25, Revenue Recognition—Multiple Element Arrangements (“ASC 605-25”) (as amended by ASU 2009-13, Revenue Recognition (“ASU 2009-13”)), the relevant codification applicable at the time, to determine if they represented a multiple element revenue arrangement. The Novartis Agreement included the following deliverables: (1) an exclusive license to commercialize Fovista outside the United States (the “License Deliverable”); (2) the performance obligation to conduct research and development activities related to the Phase 3 Fovista clinical trials and certain Phase 2 trials for Fovista (the “R&D Activity Deliverable”); (3) the performance obligation to supply API to Novartis for development and manufacturing purposes (the “Manufacturing Deliverable”) and (4) the Company’s obligation to participate on the joint operating committee established under the terms of the Novartis Agreement and related subcommittees (the “Joint Operating Committee Deliverable”). The Company’s obligation to provide access to clinical and regulatory information as part of the License Deliverable included the obligation to provide access to all clinical data, regulatory filings, safety data and manufacturing data to Novartis which was necessary for the commercialization of Fovista in the Novartis Territory. The R&D Activity Deliverable included the right and responsibility for the Company to conduct the Phase 3 Fovista clinical program and other Phase 2 studies of Fovista which were necessary or desirable for regulatory approval or commercialization of Fovista. The Manufacturing Deliverable included the obligation for the Company to supply API to Novartis for clinical purposes, for which Novartis agreed to pay the Company’s manufacturing costs. The Joint Operating Committee Deliverable included the obligation to participate in the Joint Operating Committee and related subcommittees at least through the first anniversary of regulatory approval in the European Union. All of these deliverables were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting under ASC 605-25. Factors considered in this determination included, among other things, the subject of the licenses and the research and development and commercial capabilities of Novartis. Accordingly, each unit was accounted for separately.

The Novartis Agreement included a termination right for the Company in the event that specified governmental actions prevented the parties from materially progressing the development or commercialization of licensed products. If the Company elected to exercise this termination option, it would have been required to pay a substantial termination fee equivalent to the entire upfront payment amount. The Company concluded that this termination provision constituted a contingent event that was unknown at the inception of the agreement. As such, the Company recorded the $200.0 million upfront payment in deferred revenue, long-term until such time that the contingency related to this termination provision was resolved. In July 2017, the contingency was resolved when the Company permanently waived this termination right as part of the Letter Agreement.

The Letter Agreement also provided Novartis with a shorter notice period in the event Novartis determined to terminate the Novartis Agreement in certain circumstances. In addition, the Letter Agreement provided Novartis with a fully paid-up, royalty free license to use data from the Lucentis monotherapy arms of the Company's Phase 2b OPH1001 trial and Phase 3 OPH1002 and OPH1003 trials in the Novartis Territory in connection with the development, manufacturing and commercialization of Novartis-controlled anti-VEGF products. The Lucentis study data license continues until the fifth anniversary of the Letter Agreement.

The Company evaluated the Letter Agreement under ASC 605-25, the relevant codification applicable at the time, and determined that the Letter Agreement does not create any new deliverables. The Company is treating the Fovista license granted at the inception of the Novartis Agreement and the Lucentis study data license granted under the Letter Agreement as one collective technology license (the "Licenses") delivered at the inception of the Novartis Agreement. In addition, as the waiver of its right to terminate the Novartis Agreement as a result of specified governmental actions resolved the Company’s contingency with respect to such termination right and the associated termination fee, the Company allocated the entire previously deferred amount, $200.0 million, to the deliverables that were determined based on the relative selling price at contract inception. Upon entry into the Letter Agreement in July 2017, the Company immediately recognized as revenue $189.8 million of the upfront payment allocated to contract deliverables completed during prior periods. Upon termination of the OPH1004 trial in August 2017, the Company recognized the remaining $16.9 million of collaboration revenue, attributable to the R&D Deliverable, previously deferred under the Novartis Agreement. In total, during the third quarter of 2017, the Company recognized $206.7 million in previously deferred collaboration revenue in connection with the Novartis Agreement. The recognition of this revenue during the third quarter of 2017 did not impact the Company's cash balance.

The Company's collaboration revenue for the three and six months ended June 30, 2017 related to the research and development activities performed by the Company during the period under the Novartis Agreement. All activities under the Novartis agreement were completed during the third quarter of 2017 prior to the adoption of ASC 606.