3.	Significant Agreements

Roche Holdings, Inc. and its affiliates

Summary of the Transaction

On January 11, 2015, the Company signed a broad strategic collaboration with Roche Holdings, Inc. and certain of its affiliates (collectively, “Roche”) to further advance the Company’s leadership position in genomic analysis and molecular information solutions in oncology. The transaction, which is a broad multi-part arrangement that includes an R&D collaboration, an ex-U.S. commercial collaboration, a U.S. medical education collaboration, and an equity investment with certain governance provisions, closed on April 7, 2015.

Under the terms of the transaction, Roche (a) made a primary investment of $250,000,000 in cash through the purchase of 5,000,000 newly issued shares of the Company’s common stock at a purchase price of $50.00 per share and (b) completed a tender offer to acquire 15,604,288 outstanding shares of the Company’s common stock at a price of $50.00 per share. Immediately following the closing of the transaction, Roche owned approximately 61.3% of the outstanding shares. As of June 30, 2018, Roche’s ownership was approximately 56.6% of the outstanding shares. Upon the closing of the transaction, the size of the Board of Directors of the Company (“Board”) was increased to nine, including three designees of Roche. In February 2017, the Board was increased to ten members. In June 2017, the Board was decreased to nine members when a director retired from the Board at our 2017 annual meeting of stockholders.

The Company assessed the agreements related to each of the R&D collaboration, an ex-U.S. commercial collaboration, and the U.S. medical education collaboration and determined they should be treated as separate contracts for accounting purposes.

Summary of the R&D Collaboration Agreement

Under the terms of the Collaboration Agreement by and among the Company, F. Hoffmann-La Roche Ltd, and Hoffmann-La Roche Inc., dated January 11, 2015 (as amended, the “R&D Collaboration Agreement”), Roche could pay the Company more than $150,000,000 over a period of five years to access its molecular information platform, to reserve capacity for sample profiling, and to fund R&D programs. Amounts under the R&D Collaboration Agreement will be received as services are performed and obligations are fulfilled under each platform program. Roche will utilize the Company’s molecular information platform to standardize sample profiling conducted as part of its clinical trials, to enable comparability of clinical trial results for R&D purposes, and to better understand the potential for combination therapies. In addition, Roche and the Company will jointly develop solutions related to cancer immunotherapy testing, blood-based genomic analysis using ctDNA assays, and next generation companion diagnostics, each of which represents a distinct platform within the R&D Collaboration Agreement. The R&D Collaboration Agreement is governed by a Joint Management Committee (“JMC”) formed by an equal number of representatives from the Company and Roche. There are also other sub-committees for each platform that will be established to oversee the day to day responsibilities of the respective platform. The JMC will, among other activities, review and approve R&D plans and establish and set expectations for the other platform sub-committees. The JMC and other sub-committees, although considered promises under the arrangement, are immaterial in relation to the entire arrangement and therefore were not identified as performance obligations.

On April 6, 2016, the Company and Roche entered into the First Amendment to the R&D Collaboration Agreement, which reduced certain restrictions on the Company’s activities in immuno-oncology and revised certain criteria for the achievement of a development milestone.

On June 16, 2016, the Company and Roche entered into the Second Amendment to the R&D Collaboration Agreement, which set forth the terms of an omnibus development program to provide for R&D projects that do not fall within the scope of the other programs already covered by the R&D Collaboration Agreement. R&D reimbursements and milestone payments will be recognized using an input method measure of progress based on costs incurred by the Company.

On July 25, 2016, the Company and Roche entered into a Third Amendment to the R&D Collaboration Agreement, which modified certain exclusivity provisions relating to cancer immunotherapy.

On December 20, 2016, the Company and Roche entered into a Fourth Amendment to the R&D Collaboration Agreement, which further modified certain exclusivity provisions relating to cancer immunotherapy.

On September 8, 2017, the Company and Roche entered into a Fifth Amendment to the R&D Collaboration Agreement, which reduced certain exclusivity provisions relating to blood-based tumor mutational burden assays.

On November 1, 2017, the Company and Roche entered into a Sixth Amendment to the R&D Collaboration Agreement, which further modified certain exclusivity provisions relating to cancer immunotherapy.

On July 10, 2018, the Company and Roche entered into a Seventh Amendment to the R&D Collaboration Agreement, which modified certain capacity and fee provisions related to the molecular information platform program, effective as of April 7, 2018.

Molecular Information Platform Program

Under the molecular information platform program within the R&D Collaboration Agreement, the following promises were identified: (i) cross-licenses for access to relevant intellectual property (“IP”), (ii) sample profiling, (iii) access to the Company’s molecular information database, and (iv) full-time equivalent persons (“FTEs”) per year for performance of database queries and the delivery of results.

The Company assessed which promises within the arrangement are distinct from the other promises and identified the following separate performance obligations: (i) sample profiling and (ii) access to the Company’s molecular information database and FTEs per year for the performance of database queries and the delivery of results. The cross-licenses grant each party access to relevant IP to perform under the contract or to exploit the promised services. The licenses are delivered at the inception of the arrangement and relate to development and sample profiling work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the development and sample profiling activities and have little value to Roche without these other promised services. Therefore, the licenses are combined with the other performance obligations identified under the molecular information platform program and are not considered distinct.

The Company identified an estimated transaction price of approximately $85,000,000 related to the molecular information platform program, which was allocated to the individual performance obligations based on standalone selling price. Revenue related to sample profiling will be recognized at the point in time at which test results are delivered to Roche. The database access and FTE payments will be recognized using a time-elapsed measure of progress over the five-year contract life. The FTEs will perform database queries and will deliver results of the requested database queries. The value to Roche is not only the access to the database, but also the service being performed by the FTEs. Therefore, the Company concluded the FTEs should be combined with the database access as one performance obligation.

Immunotherapy Testing Platform Development Program

Under the immunotherapy testing platform development program within the R&D Collaboration Agreement, the following promises were identified: (i) cross-licenses for access to relevant IP and (ii) obligations to perform R&D services for immuno-biomarker discovery and signature identification.

The Company assessed which promises within the arrangement are distinct from the other promises and identified a single performance obligation for the performance of R&D services for immuno-biomarker discovery and signature identification. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the promised service. The licenses are delivered at the inception of the arrangement and relate to R&D work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the R&D activities and have little value to Roche without these other promised services. Therefore, the licenses are combined with the other performance obligation identified under the immunotherapy testing platform development program and are not considered distinct.

Under this platform, Roche will reimburse the Company for certain R&D costs incurred related to the immuno-biomarker discovery and signature identification activities, as well as costs incurred in the development of immunotherapy assays for clinical studies. In addition, Roche will be required to make certain milestone payments upon the achievement of specified clinical events under the immunotherapy testing platform development program. Clinical milestone payments up to $6,600,000 in the aggregate are triggered upon the initiation of Roche clinical trials using immunotherapy assays developed under the R&D Collaboration Agreement. The R&D reimbursements and clinical milestone payments will be recognized using an input method measure of progress based on costs incurred by the Company.

Circulating Tumor DNA (ctDNA) Platform Development Program

Under the ctDNA platform development program within the R&D Collaboration Agreement, the following promises were identified: (i) cross-licenses for access to relevant IP and (ii) obligations to perform R&D services for the development of a ctDNA clinical trial assay, including its analytical validation.

The Company assessed which promises within the arrangement are distinct from the other promised services and identified a single performance obligation for the performance of R&D services for the development of a ctDNA clinical trial assay. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the promised service. The licenses are delivered at the inception of the arrangement and relate to R&D work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the R&D activities and have little value to Roche without these other promised services. Therefore, the licenses are combined with the other performance obligation identified under the ctDNA platform development program and are not considered distinct.

The Company was responsible for all R&D costs under the ctDNA platform development program. Roche was required to make certain milestone payments upon the achievement of specified events. Milestone payments equal to $12,000,000 in the aggregate were triggered upon successful analytical validation of a ctDNA clinical trial assay and delivery of a ctDNA clinical trial assay for use in Roche clinical trials. All milestones were recognized at the point in time at which benefit transferred to Roche.

Companion Diagnostics (CDx) Development Program

Under the Companion Diagnostic (CDx) Development Program within the R&D Collaboration Agreement, the following promises were identified: (i) cross-licenses for access to relevant IP, (ii) obligations to perform R&D services for the development of CDx assays for use in connection with certain Roche products, and (iii) obligations to maintain commercial availability of our assay inclusive of Roche biomarkers.

The Company assessed which promises within the arrangement are distinct from the other promised services and identified the following separate performance obligations: (i) obligation to perform R&D services for the development of a CDx assay and (ii) obligation to maintain commercial availability of our assay inclusive of Roche biomarkers. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the promised services. The licenses are delivered at the inception of the arrangement and relate to R&D work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the R&D activities and have little value to Roche without these other promised services. Therefore, the licenses are combined with the obligation to perform R&D services for the development of a CDx assay as a single performance obligation.

Under this platform, Roche reimbursed the Company for certain costs incurred related to R&D under the Companion Diagnostic (CDx) Development Program with respect to approved and investigational markers. In addition, Roche was required to make certain milestone payments upon the achievement of specified regulatory and commercial events under the Companion Diagnostic (CDx) Development Program. Regulatory milestone payments of $600,000 were triggered upon obtaining FDA approval of a premarket approval application for each CDx product developed under the arrangement. The R&D reimbursements and regulatory milestone payments were recognized using an input method measure of progress based on costs incurred by the Company. Commercial milestone payments are triggered upon the performance of a specified number of CDx assays for certain commercial clinical diagnostic uses. Any commercial milestone payments received by the Company will be recognized using an input method to measure progress, resulting in a time-elapsed measure of progress.

Termination of the R&D Collaboration Agreement

The R&D Collaboration Agreement may be terminated by either the Company or Roche on a program-by-program basis, upon written notice, in the event of the other party’s uncured material breach. Roche may also terminate the entire R&D Collaboration Agreement or an individual program under the R&D Collaboration Agreement for any reason upon written notice to the Company, subject to certain exceptions. If the R&D Collaboration Agreement is terminated, license and IP rights are returned to each party and the Company must return to Roche or dispose of any unused samples delivered for profiling purposes. If Roche terminates the R&D Collaboration Agreement as a result of a breach by the Company, Roche retains the license rights granted to certain IP of the Company, and the Company shall refund to Roche any reserved capacity fees and database access fees previously received by the Company that were unused based on the passage of time up to termination for the given contract year. If the R&D Collaboration Agreement is terminated by Roche without cause or by the Company due to a breach by Roche, the Company has a right to receive the contractual payments it would have expected to receive for each program had the agreement not been terminated.

Summary of the Ex-U.S. Commercialization Agreement

In addition to the R&D Collaboration Agreement, the Company entered into the Ex-U.S. Commercialization Agreement with Roche (as most recently amended and restated in February 2018, the “Ex-U.S. Commercialization Agreement”) designed to facilitate the delivery of the Company’s services outside the United States (“Ex-U.S.”) in partnership with Roche. Pursuant to the Ex-U.S. Commercialization Agreement, on April 7, 2016, Roche obtained Ex-U.S. commercialization rights to the Company’s existing services and to future co-developed services. The Company remains solely responsible for commercialization of its services within the United States. The selected geographic areas where Roche exercised its commercialization rights constitute the “Roche Territory.” For those geographic areas that Roche does not select, the commercialization rights for such geographic areas revert back to the Company. The Ex-U.S. Commercialization Agreement is governed by the JMC. There is also a Joint Operational Committee (“JOC”) that has been established to oversee the activities under the Ex-U.S. Commercialization Agreement. The JMC will have the responsibilities as outlined under the R&D Collaboration Agreement. The JMC and JOC, although considered promises under the arrangement, are immaterial in relation to the entire arrangement and therefore were not identified as performance obligations.

Under the Ex-U.S. Commercialization Agreement, the following promises were identified: (i) the right, granted by means of a license, for Roche to market and sell the Company’s services in the Roche Territory and (ii) obligations to perform sample profiling and other services relating to Company services sold by Roche in the Roche Territory. The Company concluded that the license is delivered at the inception of the arrangement. The Company does not sell the license separately as it is closely connected to the sample profiling and other services and has little value to Roche without these services being performed. Therefore, the promises identified will be combined as a single performance obligation under the Ex-U.S. Commercialization Agreement and revenue will be recognized at the point in time test results are delivered for each test sold by Roche.

Roche will reimburse the Company for costs incurred in performing sample profiling and other services relating to Company services sold by Roche in the Roche Territory. These reimbursements will be recognized as revenue in the period the sample profiling service has been completed. In addition, Roche will be required to make a one-time milestone payment of $10,000,000 when the aggregate gross margin on sales of certain of the Company’s services reaches $100,000,000 in the Roche Territory in any calendar year. In the event Roche does not satisfy its specified commercialization obligations under the agreement, including its obligation to launch Company services in specific countries within a specified timeframe, after a cure period, Roche may be required to make penalty payments to the Company. This milestone payment and these penalty payments will be constrained and recognized in their entirety when the associated contingency is resolved as no enforceable right to payment exists until achievement.

The Company is entitled to receive, on a quarterly basis, tiered payments ranging from the mid-single digits to high-teens based on a percentage of the aggregate gross margin generated on sales of specified services in the Roche Territory during any calendar year. These payments are recognized in the period when tests are delivered.

The Ex-U.S. Commercialization Agreement may be terminated by either the Company or Roche in its entirety or on a country-by-country or product-by-product basis, upon written notice, in the event of the other party’s uncured breach of its material obligations under the agreement. Roche may also terminate the Ex-U.S. Commercialization Agreement without cause on a product-by-product and/or country-by-country basis, upon written notice to the Company, after the initial five-year term. If the Ex-U.S. Commercialization Agreement is terminated, the license and IP rights granted by the Company to Roche terminate. In addition, if Roche terminates the Ex-U.S. Commercialization Agreement as a result of a breach by the Company, Roche may seek damages via arbitration or be eligible to receive either a one-time payment reflecting the value of the terminated services or a royalty on sales of the terminated products based on the royalty Roche would have paid the Company for the terminated products had the Ex-U.S. Commercialization Agreement not been terminated.

In April 2018, the Company announced a three-party collaboration with Roche and Dian Diagnostics Group, Co., Ltd. (“Dian”) to integrate the Company’s CGP assays into clinical patient care in mainland China and establish a collaboration with Dian for the purpose of implementing the Ex-U.S. Commercialization Agreement in China. Under the collaboration, Dian is the exclusive clinical sequencing partner in China for FoundationOne, FoundationACT and FoundationOneHeme, enabling the delivery of molecular information services associated with these tests for patients in China. Roche maintains commercial exclusivity for the Company’s molecular information services in China, and in cooperation with Dian continues its current in-county activities to support the broad integration of CGP into clinical care.

Summary of the U.S. Education Collaboration Agreement

Within the United States, the Company has entered into the U.S. Education Collaboration Agreement with Genentech, Inc. (“Genentech”), an affiliate of Roche. Genentech has agreed to engage its pathology education team to provide information and medical education to health care providers regarding CGP in cancer. The Company will pay Genentech on a quarterly basis for costs incurred by Genentech in conducting the education activities based on a number of factors. The total amount of payments to be made over the course of the arrangement is immaterial and all payments will be expensed as incurred.

IVD Collaboration Agreement

On April 6, 2016, the Company entered into a Master IVD Collaboration Agreement (the “IVD Collaboration Agreement”) with F. Hoffmann-La Roche Ltd and Roche Molecular Systems, Inc., which memorializes in a definitive agreement the terms set forth in that certain Binding Term Sheet for an In Vitro Diagnostics Collaboration, by and between F. Hoffmann-La Roche Ltd and the Company, which was entered into in connection with the Company’s strategic collaboration with Roche.

The IVD Collaboration Agreement provides terms for the Company and Roche to collaborate non-exclusively to develop and commercialize in vitro diagnostic versions of certain existing Company tests, including FoundationOne and FoundationOneHeme, and future Company tests, including those developed under the R&D Collaboration Agreement.

The IVD Collaboration Agreement expires on April 7, 2020, unless earlier terminated as provided therein. Roche also has the right, in its sole discretion, to extend the term of the IVD Collaboration Agreement for additional two-year periods of time during any period of time in which Roche continues to hold at least 50.1% of the Company’s capital stock. Either party may terminate the IVD Collaboration Agreement for an uncured breach of the agreement, or for insolvency or bankruptcy.

Biopharmaceutical Partner

In July 2012, the Company entered into a Master Services Agreement (“Services Agreement”) with a biopharmaceutical partner (“Partner”) to perform sample profiling at the Partner’s request. The Services Agreement established the legal and administrative framework for the partnership between the entities. The Services Agreement also included a right for the Partner to initiate an exclusive negotiation with the Company for the development of a Companion Diagnostic (“CDx”). In March 2014, the Company and Partner expanded the scope of work by executing a Companion Diagnostic Agreement (“Amended Agreement”), thereby amending the Services Agreement to include the joint development and regulatory approval for a CDx. The Amended Agreement defined the term of the arrangement as the earlier of five years or receipt of certain regulatory approvals of a CDx. The Company concluded that the amendment to the original Services Agreement should be treated as a new agreement pursuant to ASC 606 as the Amended Agreement changed both the scope and price of the existing arrangement.

The Company identified six promises under the Amended Agreement: (i) cross-licenses for access to relevant IP, (ii) obligations to continue to perform sample profiling pursuant to the original Services Agreement, (iii) obligations to perform specific R&D activities for the development of a CDx assay for use in connection with the Partner’s product, (iv) obligations to assist in obtaining regulatory approval of the Partner’s product at its request, (v) obligations to perform analytical validation of the CDx assay, and (vi) obligations to make the CDx assay commercially available, following any required regulatory approval.

The Company then determined the following promises were separate performance obligations: (i) obligations to continue to perform sample profiling pursuant to the original Services Agreement, (ii) obligations to perform specific R&D activities for the development of a CDx assay for use in connection with the Partner’s product and to provide assistance in obtaining regulatory approval of the Partner’s product at its request, inclusive of analytical validation of the CDx assay, and (iii) obligations to make the CDx assay commercially available, following any regulatory approval obtained. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the promised services. The licenses are delivered at the inception of the arrangement and primarily relate to the R&D development activities performed under the Amended Agreement. The Company does not sell the licenses separately as they are closely connected to the R&D development activities and have little value to the Partner without the other promised services. Therefore, the licenses are combined with the obligation to perform R&D services for the development of a CDx assay as a single performance obligation.

Under the Amended Agreement, the Partner pays a fixed fee for each sample to be profiled; will reimburse the Company for a portion of costs incurred in performing analytical validation of the CDx assay; and will be required to make certain substantive milestone and other payments upon the achievement of specified regulatory and clinical events tied to the development and commercialization of the CDx. The estimated transaction price under the Amended Agreement was allocated to the performance obligations based on standalone selling price. The transaction price allocated to sample profiling is recognized as results of sample profiling are delivered. Consideration allocated to the R&D development activities is recognized using an input method measure of progress based on costs incurred by the Company. As of December 31, 2016, the CDx assay had achieved regulatory approval and the regulatory and development obligations under the Amended Agreement had been completed. Consideration allocated to the commercial availability performance obligation is recognized using a time-elapsed measure of progress.

Under the Amended Agreement, the Company recognized revenue of $3,059,000 and $5,384,000 for the three and six months ended June 30, 2018, respectively, and $830,000 and $1,300,000 for the three and six months ended June 30, 2017, respectively, which was primarily related to sample profiling.