9. BeiGene Agreement

Terms of Agreement

On January 7, 2018, the Company and BeiGene Ltd, ("BeiGene") entered into a Collaboration and License Agreement (the “Agreement”), pursuant to which the Company and BeiGene agreed to collaboratively develop sitravatinib in Asia (excluding Japan and certain other countries), Australia and New Zealand (the “Licensed Territory”). Under the Agreement, the Company granted BeiGene an exclusive license to develop, manufacture and commercialize sitravatinib in the Licensed Territory, with Mirati retaining exclusive rights for the development, manufacture and commercialization of sitravatinib outside the Licensed Territory.

As consideration for the rights granted to BeiGene under the Agreement, BeiGene paid the Company a non-refundable, non-creditable up-front fee of $10.0 million. BeiGene is also required to make milestone payments to the Company of up to an aggregate of $123.0 million upon the first achievement of specified clinical, regulatory and sales milestones. The Agreement additionally provides that BeiGene is obligated to pay to the Company royalties at tiered percentage rates ranging from mid-single digits to twenty percent on annual net sales of licensed products in the Licensed Territory, subject to reduction under specified circumstances. The Agreement also provides that the Company will supply BeiGene with sitravatinib for use in BeiGene’s development activities in the Licensed Territory.

The Agreement will terminate upon the expiration of the last royalty term for the licensed products, which is the latest of (i) the date of expiration of the last valid patent claim related to the licensed products under the Agreement, (ii) 10 years after the first commercial sale of a licensed product and (iii) the expiration of any regulatory exclusivity as to a licensed product. BeiGene may terminate the Agreement at any time by providing 60 days prior written notice to the Company. Either party may terminate the Agreement upon a material breach by the other party that remains uncured following 60 days after the date of written notice of such breach or upon certain bankruptcy events. In addition, the Company may terminate the Agreement upon written notice to BeiGene under specified circumstances if BeiGene challenges the licensed patent rights.

Revenue Recognition

The Company evaluated the Agreement under Topic 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the Agreement, the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including any constraints on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) the Company satisfied each performance obligation.

The Company determined the transaction price is equal to the up-front fee of $10.0 million. The transaction price was allocated to the performance obligations on the basis of the relative stand-alone selling price estimated for each performance obligation. In estimating the stand-alone selling price for each performance obligation, the Company developed assumptions that require judgment and included forecasted revenues, expected development timelines, discount rates, probabilities of technical and regulatory success and costs for manufacturing clinical supplies. A description of the performance obligations identified under the Agreement, as well as the amount of revenue allocated to each performance obligation, follows:

Licenses of Intellectual Property. The license to the Company’s intellectual property, bundled with the associated know-how, represents a distinct performance obligation. The license and associated know-how was transferred to BeiGene during the year ended December 31, 2018, therefore the Company recognized the full revenue related to this performance obligation in the amount of $9.5 million during the year ended December 31, 2018 as license and collaboration revenues in its condensed consolidated statements of operations and comprehensive loss.

Manufacturing Supply Services. The Company's initial obligation to supply sitravatinib for clinical development in the Licensed Territory represents a distinct performance obligation. As such, the Company deferred $0.5 million of revenue related to the manufacturing supply services, and will recognize revenue when BeiGene obtains control of the goods, upon delivery, and which began in late 2018 and will continue into 2020. The Company and BeiGene share equally in the external costs of supplying sitravatinib for clinical development in the Licensed Territory for a limited period of time. The Company records these cost-sharing payments due from BeiGene as license and collaboration revenues. The Company recognized $0.5 million for this performance obligation for the year ended December 31, 2018, of which $0.1 million relates to recognition from the deferred revenue balance, and $0.4 million relates to cost-sharing payments due from BeiGene during 2018. At December 31, 2018, $0.3 million of cost-sharing receivable from BeiGene has been recorded in other current assets on the consolidated balance sheets.

Milestone Payments. During the year ended December 31, 2018, the Company recognized $3.0 million in connection with a milestone payment from BeiGene for initiating the first clinical trial in the Licensed Territory and recorded the milestone payment as license and collaboration revenues. The next clinical development milestone is for BeiGene initiating the first pivotal clinical trial in the Licensed Territory upon which the Company will be paid a $5.0 million milestone payment. The Company is also entitled to certain regulatory milestone payments which are paid upon receipt of regulatory approvals within the Licensed Territory. The Company determined that as of December 31, 2018, the remaining potential milestone payments are probable of significant revenue reversal as their achievement is highly dependent on factors outside the Company's control. Therefore, these payments have been fully constrained and are therefore not recognized as revenue. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint, and if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the reported amount of license and collaboration revenues in the period of adjustment.

Royalties. As the license is deemed to be the predominant item to which sales-based royalties relate, the Company will recognize revenue when the related sales occur. No royalty revenue was recognized during the year ended December 31, 2018.

The following table presents a summary of the activity in the Company's contract liabilities during the year ended December 31, 2018 (in thousands):



Opening balance, January 1, 2018	$	—
Revenue from performance obligations satisfied during reporting period	52
Payments received in advance	(533		)
Closing Balance, December 31, 2018	$	(481	)

The closing balance as of December 31, 2018 includes $0.4 million in deferred revenue within current liabilities, and $0.1 million in deferred revenue and other liabilities.