The Company has entered into a number of collaboration agreements under which it may have received non-refundable upfront payments. Each arrangement is assessed in accordance with ASC 606 under the five-step model as described in note 3j. The Company generally recognizes revenue from non-refundable upfront payments over the estimated term of the performance obligation or period in which the underlying benefit is transferred to the customer. If non-refundable license fees have value to the customer on a standalone basis, separate from the undelivered performance obligations, they are recognized upon delivery. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Research and development milestones in the Company’s collaboration agreements may include the following types of events:

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completion of pre-clinical research and development work leading to selection of product candidates;

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initiation of Phase 1, Phase 2 or Phase 3 clinical trials; and

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achievement of certain other scientific or development events.

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filing of regulatory applications for marketing approval in the U.S., Europe or Japan, including investigational new drug applications and new drug applications; and

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marketing approval in a major market, such as the U.S., Europe or Japan.

Commercialization milestone payments may include payments triggered by annual product sales that achieve pre-specified thresholds.

The Company evaluates each arrangement that includes research and development and sales-based milestone payments to determine whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within the control of the Company are not considered probable of being achieved. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones, and if necessary, adjusts its estimate of the overall transaction price.

In December 2019, the Company entered into the Neurocrine Collaboration Agreement with Neurocrine Biosciences to establish a collaboration under which the parties will identify, research and develop sodium channel inhibitors. Pursuant to this agreement, the Company granted an exclusive license to XEN901, now known as NBI-921352, a clinical stage selective Nav1.6 sodium channel inhibitor for the treatment of epilepsy. The Company also granted an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391 (collectively, the “DTCs”). The agreement also includes a two-year research collaboration to discover, identify and develop additional novel Nav1.6 and Nav1.2/1.6 inhibitors (“Research Compounds”), with an option to extend for an additional year.

At execution of the agreement, Neurocrine Biosciences paid the Company an upfront fee of $50,000, which included a $30,000 payment in cash and a $20,000 equity investment in the Company. For additional information regarding the equity investment, refer to note 11a. The Company is eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $1,692,500, comprised of (a) up to $25,000 upon the U.S. Food and Drug Administration’s acceptance of an Investigational New Drug application for XEN901, with 55% of the amount in the form of an equity investment in the Company at a 15% premium to the Company's 30-day volume weighted average price at that time, subject to Neurocrine Biosciences’ common share ownership of the Company being below 19.9%, (b) up to $1,067,500 in additional development and regulatory milestone payments related to XEN901 and other licensed Nav1.6 or Nav1.2/1.6 inhibitor products, and (c) up to $600,000 in additional sales-based milestone payments for multiple products. In addition, the Company is eligible to receive royalties on net sales in and outside the U.S., ranging from (a) for XEN901, a low double-digit percentage to a mid-teen percentage and a high-single digit percentage to low double-digit percentage, respectively; (b) for DTCs, a high-single digit percentage to a low double-digit percentage and a mid-single digit percentage to a high-single digit percentage, respectively; and (c) for Research Compounds, a mid-single digit percentage to a high-single digit percentage and a tiered mid-single digit percentage, respectively. Royalty rates are subject to customary reductions.

The Company has an option to co-fund 50% of the development costs of XEN901 or another product candidate in the U.S., exercisable upon achievement of certain milestones, in exchange for increased U.S. royalties. The Company has not exercised this option as of December 31, 2019.

The Company and Neurocrine Biosciences will collaborate on the conduct of two collaboration programs: (a) a joint research collaboration to discover, identify and preclinically develop Research Compounds (the “Research Program”) and (b) a collaborative development program for XEN901 and two DTCs selected by the joint steering committee (the “Initial Development Program”). The Research Program is intended to include the preclinical development of the Company’s existing non-clinical Research Compounds and the discovery of new back-up and follow-on Research Compounds to XEN901 and the two DTCs selected by the joint steering committee as clinical development candidates for subsequent development and commercialization by Neurocrine Biosciences. During the term of the Research Program, the parties will conduct related activities in accordance with an agreed upon research plan and budget. Each party will be solely responsible for all costs such party incurs to conduct its activities under the research plan, provided that Neurocrine Biosciences will fund the Company for certain full-time employees and out-of-pocket expenses incurred by the Company in accordance with the research budget. The Initial Development Program will include: (a) completion of any preclinical and clinical studies that are ongoing as the date of the Neurocrine Collaboration Agreement for XEN901 and for two DTCs selected by the joint steering committee; (b) a pharmacokinetic, drug-drug interaction and food effect Phase 1 clinical trial of a XEN901 product to examine the adequacy of a new pediatric formulation; and (c) all preclinical studies of two DTCs selected by the joint steering committee. Each party will be responsible for all costs such party incurs to conduct its activities under these development plans, provided that, with respect to XEN901 development activities, Neurocrine Biosciences will fund the Company for certain full-time employees and out-of-pocket expenses incurred by the Company. The Company will also be responsible for a portion of certain near-term manufacturing costs for XEN901 under the collaboration.

The agreement includes the following performance obligations: (i) an exclusive license to XEN901 with associated technology and know-how transfer, (ii) an exclusive license to the DTCs with associated know-how transfer, (iii) a license to Research Compounds and research services under the Research Program, (iv) development services under the Initial Development Program for XEN901, and (v) development services under the Initial Development Program for the DTCs. The license to the Research Compounds and the research services under the Research Program are considered a single performance obligation as Neurocrine Biosciences cannot benefit from such a license on its own or from other resources commonly available in the industry, without the corresponding research services due to the unique and specialized expertise of the Company that is not readily available in the marketplace. Given the current development phase of the Research Compounds, the performance obligation and related revenue has been linked entirely to the performance of research services.

At execution of the agreement, the transaction price consisted of the $30,000 upfront consideration received in cash and a premium of $3,333 on the $20,000 equity investment in the Company measured at fair value on the date of issuance. The Company also considered the following elements in determining the overall transaction price:

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Under the arrangement, the Company is entitled to funding for certain full-time equivalent and external costs incurred by the Company under performance obligations (iii) and (iv). The arrangement consideration related to the services under performance obligations (iii) and (iv) to be performed on behalf of Neurocrine Biosciences were excluded from the initial transaction price allocation because the consideration and performance are contingent upon Neurocrine Biosciences requesting performance of the services and these services are priced at an estimated fair value.

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None of the at-risk substantive performance milestones, including development, regulatory and sales-based milestones, were included in the transaction price, as all milestone amounts are outside the control of the Company and contingent upon Neurocrine Biosciences’s efforts and success in future clinical trials. Consideration associated with at-risk substantive performance milestones is recognized when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Any consideration related to sales-based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Neurocrine Biosciences and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price at each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The total transaction price of $33,333 was allocated to performance obligation (v) based on its estimated standalone selling price determined based on internal development plans and budget, with the balance allocated to performance obligations (i) and (ii) by the residual approach. The residual approach was used as standalone selling prices, including market data, for equivalent performance obligations were not available. The allocation of the transaction price requires significant management judgment. The Company has allocated the transaction price as follows: $28,807 to performance obligations (i) and (ii), which performance obligations are delivered concurrently, and $4,526 to performance obligation (v). The Company measures proportional performance over time using an input method based on cost incurred relative to the total estimated costs for each of the identified obligations at each reporting period. Any changes to these estimates will be recognized in the period in which they change as a cumulative catch up. The considerations allocated to performance obligations (i) and (ii) are expected to be recognized as revenue over an approximate ten month period from the signing of the agreement, which is the expected period to complete the delivery of the licenses and transfer of the relevant technology and know-how. The considerations allocated to performance obligation (v) is expected to be recognized as revenue over an approximate fifteen month period beginning January 2020 which is the expected period to complete the development services under the Initial Development Program for the DTCs.

During the year ended December 31, 2019, the Company recognized $2,881 of revenue associated with (i) the exclusive license to XEN901 and (ii) the exclusive license to the DTCs, and $448 for the research and development services under performance obligations (iii) the Research Program and (iv) the Initial Development Program for XEN901. As of December 31, 2019, there is $448 of accounts receivable and $30,452 of deferred revenue related to the Neurocrine Collaboration Agreement, which is classified as either current or non-current on the balance sheet based on the period the services are expected to be delivered.

In September 2019, the Company entered into an agreement with Flexion pursuant to which Flexion acquired all rights with respect to XEN402, and a related compound (collectively “XEN402”), including certain regulatory documentation, intellectual property rights, reports, data and all quantities of XEN402 owned or controlled by the Company. XEN402 is a sodium channel inhibitor that the Company had previously developed with its collaborator Teva. Flexion paid the Company upfront consideration of $3,000. In addition, the Company will also be eligible for various CMC, development and regulatory milestone payments of up to $9,000 through initiation of a Phase 2 proof-of-concept clinical trial, of which $500 related to the initiation of the first GLP toxicology study has been included in the recognized transaction price at December 31, 2019 in accordance with ASC 606 as the outcome is considered highly probable of occurring. Following successful proof-of-concept, the Company may be entitled to future clinical development and global regulatory approval milestone payments of up to $40,750, commercial milestone payments of up to $75,000, as well as future royalties ranging from mid-single to low-double digit percentages. These additional amounts will be recognized as determinable.

(c)

Teva Pharmaceutical Industries Ltd. (“Teva Pharmaceutical”) collaborative development and license agreement:

In December 2012, the Company entered into a collaborative development and license agreement with Teva Pharmaceutical, through its subsidiary, Ivax International GmbH, pursuant to which the Company granted Teva Pharmaceutical an exclusive worldwide license to develop and commercialize certain products, including TV-45070 (formerly XEN402). In March 2018, the Company and Teva Pharmaceuticals International GmbH and Teva Canada Limited (together, “Teva”), entered into a termination agreement terminating by mutual agreement the collaborative development and license agreement. In connection with the termination, Teva returned and the Company cancelled 1,000,000 common shares that were owned by Teva. Pursuant to the terms of the termination agreement, Teva has also returned, licensed or assigned to the Company certain intellectual property, including certain patent rights and transferred regulatory filings related to TV-45070 to the Company. The termination agreement requires the Company to pay a low single-digit percentage royalty to Teva based on net sales of approved products, if any, resulting from any continued development and commercialization of TV-45070 by the Company or a sublicensee during the period that assigned or licensed patents cover such products. This obligation was subsequently assumed by Flexion pursuant to the sale of all rights with respect to XEN402; see note 13b above. The Company has no further financial obligations with respect to the termination agreement with Teva. The Company recorded a gain on the termination of the collaboration agreement of $4,398, net of direct costs incurred in connection with the termination and cancellation of 1,000,000 common shares, based on the estimated fair value represented by the market price of the common shares prior to the closing of the transaction.

In December 2011, the Company entered into a collaborative research and license agreement with Genentech and its affiliate, F. Hoffman-La Roche Ltd. to discover and develop selective oral inhibitors of Nav1.7 for the treatment of pain. Pursuant to this agreement, the Company granted Genentech a worldwide exclusive license to develop and commercialize compounds directed to Nav1.7 and products incorporating such compounds for all uses. The Company also granted Genentech a worldwide non-exclusive license to diagnostic products for the purpose of developing or commercializing such compounds.

Under the terms of the agreement, Genentech paid the Company an upfront fee of $10,000. Genentech also provided funding to the Company for certain of the Company’s full-time equivalents performing the research collaboration plan, which concluded in December 2016.

The Company received and recorded a $5,000 milestone payment in 2013 for the selection of a compound for development and an $8,000 payment in 2014 upon the approval by Health Canada of the clinical trial application. No additional milestone payments or royalties have been received to date.

The Company is eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $613,000, comprised of up to $45,500 in pre-clinical and clinical milestone payments, up to $387,500 in regulatory milestone payments, and up to $180,000 in sales-based milestone payments for multiple products and indications. In addition, the Company is eligible to receive royalties based on net sales of the licensed products, which range from a mid single-digit percentage to ten percent for small-molecule inhibitors for the timeframe that such products are covered by the licensed patents and a low single-digit percentage thereafter until the date that is ten years after first commercial sale on a country-by-country basis, plus a low single-digit percentage for large-molecule inhibitors of Nav1.7 for a period of ten years from first commercial sale on a country-by-country basis. The pre-commercial and commercial milestone payments and royalties may be subject to reductions based on the period in which the compound that is selected for development and commercialization was initially conceived.

At execution of the collaborative research and license agreement with Genentech, the transaction price included only the $10,000 upfront consideration received. None of the at-risk substantive performance milestones, including research and development and sales-based milestones, were included in the transaction price, as all milestone amounts are outside the control of the Company and contingent upon Genentech’s efforts and success in future clinical trials. Consideration associated with at-risk substantive performance milestones is recognized when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Any consideration related to sales-based royalties will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Genentech and therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The collaborative research and license agreement with Genentech was amended multiple times, in May 2015, November 2015, March 2016, May 2017, July 2018 and September 2018, to either extend the term of the research program or to provide the Company with greater flexibility in developing compounds that target Nav1.6. Pursuant to the current amendment, the Company obtained a non-exclusive, irrevocable, perpetual, world-wide, sublicensable license under the know-how forming part of the Genentech intellectual property developed under the Nav1.7 collaboration that is necessary or useful to make, use, sell, offer for sale, and import compounds from the Company’s Nav1.6 program that are above a certain potency on Nav1.7 and were conceived prior to a certain date and products containing those compounds. The Company’s license from Genentech includes commercialization rights but we are restricted from developing or commercializing the Company’s Nav1.6 compounds below a certain potency on Nav1.7 and conceived prior to a certain date in the field of epilepsy and any of the Company’s Nav1.6 compounds conceived prior to a certain date, regardless of their potency on Nav1.7, in the field of pain. In exchange for the rights granted to the Company under this amendment, Genentech is eligible to receive a low single-digit percentage, tiered royalty on net sales of the Company’s Nav1.6 compounds conceived prior to a certain date, including XEN901, now known as NBI-921352, for a period of ten years from first commercial sale on a country-by-country basis. In accordance with the Neurocrine Collaboration Agreement, the Company remains solely responsible for all payments to Genentech with respect to certain Nav1.6 compounds, including NBI-921352, licensed to Neurocrine Biosciences. Pursuant to the amendment, Genentech was granted a royalty-free, non-exclusive, world-wide license under the Company’s Nav1.6 intellectual property to make, use, sell, offer for sale and import compounds below a certain potency on Nav1.7 and products containing those compounds for all uses and indications except epilepsy.

In March 2014, the Company entered into a new agreement with Genentech for pain genetics, which focused on identifying genetic targets associated with rare phenotypes where individuals have an inability to perceive pain or where individuals have non-precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual property arising out of the collaboration is jointly owned by the Company and Genentech. The Company also granted Genentech a time-limited, exclusive right of first negotiation on a target-by-target basis to form joint drug discovery collaborations. Under the terms of this agreement, Genentech paid an upfront payment of $1,500 and two $250 milestone payments related to the identification of novel pain targets in September 2015 and July 2017. Genentech’s time-limited, exclusive right of first negotiation, which was exercisable throughout the research term, expired at the same time as the agreement in March 2018. Despite such termination, the Company remains eligible for up to an additional $1,500 in milestone payments.

Pursuant to the terms of the Company’s agreement with the Memorial University of Newfoundland, the Company must pay to the Memorial University of Newfoundland certain milestone payments, a single-digit percentage of net sales for pain products the Company sells directly and a single-digit percentage of royalties received for sales of pain products by Genentech.