6. Collaborations, Licensing and Contingencies

Collaboration Arrangements

A collaborative arrangement is a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties who are both: (i) active participants in the activity; and (ii) exposed to significant risks and rewards. From time to time, the Company enters into collaborative arrangements and other licensing agreements for its research and development and manufacturing activities. Each is unique in nature and the Company’s significant agreements are discussed below.

Bayer

In August 2010, the Company entered into a license agreement with Bayer Consumer Care AG that provided Bayer with an exclusive license to develop, manufacture and commercialize ATX-101 outside of the United States and Canada. In connection with the License Agreement the Company also entered into a related Services, Research, Development and Collaboration Agreement with Bayer’s affiliate, Intendis GmbH. These agreements were referred to jointly as the collaboration arrangement with Bayer, and Bayer Consumer Care AG and Intendis GmbH are referred to jointly as Bayer.

In March 2014, the Company entered into an agreement whereby it acquired the rights to develop and commercialize ATX-101 outside of the United States and Canada from Bayer. Under the new agreement, KYTHERA Holdings Ltd., a wholly-owned Bermuda subsidiary of the Company, purchased these rights. As a result of this agreement, Bayer was issued 698 thousand shares of the Company’s common stock valued at $33.0 million based on an average closing stock price of $47.27 over a period set forth in the agreement. Additionally, the Company issued an unsecured promissory note for $51.0 million, which was subordinated to amounts owed under the Company’s credit facility, bears interest at 5% per annum and is payable no later than 2024. Additionally, Bayer is eligible to receive up to $123.8 million upon the achievement of certain long-term sales milestone payments on annual sales of ATX-101 outside of the United States and Canada. As of March 31, 2015, the achievement of the related sales levels is not considered to be probable.

The acquisition date costs allocated to the acquired rights consists of the following (in thousands):

Fair value of common stock issued	$	31,429
Fair value of note payable to Bayer	21,600
Other	(272		)
Total in-process research and development	$	52,757

The fair value of the common stock issued is based on the closing price of our common stock on the acquisition date of $45.02 per share. As the note payable to Bayer includes an interest rate which was below the borrowing rate available to the Company at issuance, it was recorded at its fair value of $21.6 million, which is the present value of the future cash flows assuming a borrowing rate of 15%, which approximates the market rate for debt with similar terms and consideration of default and credit risk. Other represents the net impact of the reduction in costs resulting from the residual restricted cash of $967 thousand that reverted to the Company, partially offset by $695 thousand of transaction costs related to the acquisition.

This transaction was accounted for as an acquisition of a group of assets. As the acquired rights to ATX-101, represent acquired-in-process research and development, with no alternative future uses, the costs allocated to such rights, $52.8 million, were immediately expensed upon acquisition and reflected as in-process research and development in the condensed consolidated statement of operations and comprehensive loss. This charge is considered to be a component of research and development expense.

See Note 4, “Notes Payable” for a more detailed discussion of the promissory note.

Actelion Pharmaceuticals Ltd. and the Trustees of the University of Pennsylvania

In February 2015, the Company entered into a licensing arrangement with Actelion Pharmaceuticals Ltd. (“Actelion”) and the Trustees of the University of Pennsylvania (“University of Pennsylvania”) pursuant to which it obtained exclusive worldwide rights to setipiprant, a clinical-stage selective and potent oral antagonist to the prostaglandin D2 (PGD2) receptor and exclusive worldwide rights to certain patent rights owned by the University of Pennsylvania covering the use of PGD2 receptor antagonists for the treatment of hair loss. As part of the agreement, Actelion received an initial payment of $1.5 million and will be eligible to receive up to an additional $25.5 million in potential development and regulatory milestones, as well as royalties on sales if setipiprant is successfully commercialized. The $1.5 million was paid during the three months ended March 31, 2015 and is included in research and development expense in the accompanying condensed consolidated statement of operations and comprehensive loss. University of Pennsylvania will receive an initial payment of $100 thousand, certain annual license maintenance fees beginning in the third year of the agreement, as well as is eligible to receive up to $4.1 million in milestone payments and royalties on sales of products commercialized under the patents provided for in the agreement. As of March 31, 2015, the achievement of the related milestones is not considered to be probable.

Los Angeles Biomedical Research Institute

In August 2005, the Company entered into an exclusive license agreement with Los Angeles Biomedical Research Institute at Harbor/UCLA Medical Center, (“LA Biomed”), pursuant to which it obtained a worldwide exclusive license to practice, enforce and otherwise exploit certain patent rights related to the use of the active ingredient in ATX-101. The exclusive license requires the Company to pay LA Biomed a milestone payment of $500 thousand upon receipt of marketing approval of ATX-101, as well as non-royalty sublicense fees equal to 10% of any sublicense income, up to a total of $5.0 million, 50% of which the Company may elect to satisfy through the issuance of capital stock, of which $3.6 million has been incurred and paid. Additionally, upon commercialization of a licensed product or service, the Company is obligated to pay low- to mid- single digit royalties on net product sales of ATX-101.

Contingencies

From time to time, the Company may be subject to various litigation and related matters arising in the ordinary course of business. The Company is subject to certain legal proceedings, complaints and claims arising out of the conduct of its business. The Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. Since the Company believes that it has provided adequate reserves, when necessary, it anticipates that the ultimate outcome of any matters currently pending against the Company will not materially affect the consolidated financial position, results of operations or consolidated cash flows of the Company.