STRATEGIC ALLIANCE AND COLLABORATION WITH SERVIER

Collaboration revenue under the Servier Collaboration Agreement consisted of the following:



	Year Ended December 31,
	2018		2017
	(in thousands)
Milestone payments	$	3,690	$	—
Research and development reimbursable costs	3,683		3,097
Total collaboration revenue	$	7,373	$	3,097

In October 2011, the Company entered into the Servier Collaboration Agreement with Servier for the research, development, and commercialization of RNA-targeting therapeutics in cardiovascular disease. Under the Servier Collaboration Agreement, the Company granted Servier an exclusive license to research, develop, manufacture, and commercialize RNA-targeting therapeutics for certain microRNA targets in the cardiovascular field. In 2017, the Company and Servier agreed to amend the Servier Collaboration Agreement to remove all existing targets, add one new target (microRNA-92), and grant Servier the right to add one additional target through September 2019.

In April 2018, the Company and Servier entered into a seventh amendment to the Servier Collaboration Agreement (the “Servier Amendment”). The Servier Amendment, among other things, (i) updated the development plan for MRG-110 and cost-sharing provisions; (ii) provided for specified development cost reimbursement by Servier to the Company following a determination by a joint committee established by the parties under the Servier Collaboration Agreement that the outcome of a specified portion of a Phase 1 clinical trial has met its primary end point; and (iii) provided for additional development plan cost reimbursement by Servier to the Company following a determination by a joint committee established by the parties under the Servier Collaboration Agreement that a product candidate targeting microRNA-92 will proceed into a Phase 2 clinical trial.

Servier’s rights to each named target are limited to therapeutics in the field of cardiovascular disease, as defined, and in their territory, which is worldwide except for the United States and Japan. The Company retains all other rights including commercialization of therapeutics developed under the Servier Collaboration Agreement in the field of cardiovascular disease in the United States and Japan.

The Company is eligible to receive non-refundable development milestone payments of €5.8 million to €13.8 million ($6.6 million to $15.8 million as of December 31, 2018) and regulatory milestone payments of €10.0 million to €40.0 million ($11.4 million to $45.8 million as of December 31, 2018) for each target. Additionally, the Company may receive up to €175.0 million ($200.3 million as of December 31, 2018) in commercialization milestones, as well as quarterly royalty payments expressed in percentages ranging from the low-double digits to the mid-teens (subject to reductions for patent expiration, generic competition, third-party royalty, and costs of goods) on the net sales of any licensed product commercialized by Servier. Servier is obligated to make royalty payments for a period specified under the Servier Collaboration Agreement.

The Company applies the milestone method of accounting to recognize revenue from milestone payments when earned under the Servier Collaboration agreement, as evidenced by persuasive evidence that the milestone has been achieved and the payment is non-refundable, provided that the milestone event is substantive. In March 2018, the Company and Servier initiated a Phase 1 clinical trial of MRG-110. As a result, under the terms of the Servier Collaboration Agreement, the Company earned and received its first development milestone payment of €3.0 million (or $3.7 million). This amount is included as revenue in the accompanying consolidated statements of operations and comprehensive loss during the year ended December 31, 2018.

As part of the Servier Collaboration Agreement, the Company established a multiple-year research collaboration, under which it jointly performs agreed upon research activities directed to the identification and characterization of named targets and oligonucleotides in the cardiovascular field, which is referred to as the Research Collaboration. The current amended term of the Research Collaboration extends through September 2019. Servier is responsible for funding certain costs of the Research Collaboration, as defined under the Servier Collaboration Agreement.

The development of each product candidate (commencing with registration enabling toxicology studies) under the Servier Collaboration Agreement is performed pursuant to a mutually agreed upon development plan to be conducted by the parties as necessary to generate data useful for both parties to obtain regulatory approval of such product candidates. Servier is responsible for a specified percentage of the cost of research and development activities under the development plan through the completion of one or more Phase 2 clinical trials and will reimburse the Company for a specified portion of such costs it incurs. The costs of Phase 3 clinical trials for each product candidate will be allocated between the parties at a specified percentage of costs. The applicable percentage for each product candidate will be based upon whether certain events under the Servier Collaboration Agreement occur, including if the Company enters into a third-party agreement for the development and/or commercialization of a product in the United States at least 180 days before the initiation of the first Phase 3 clinical trial, or if the Company subsequently enters into a U.S. partner agreement, or if it does not enter into a U.S. partner agreement but files for approval in the United States using data from the Phase 3 clinical trial.

Under the Servier Collaboration Agreement, the Company also granted Servier a royalty-free, non-exclusive license to develop a companion diagnostic in its territory for any therapeutic product that may be developed by Servier under the Servier Collaboration Agreement. The Company also granted Servier an exclusive, royalty-free license to commercialize such a companion diagnostic in its territory for use in connection with the development and commercialization of such therapeutic product in its territory.

The Servier Collaboration Agreement will expire as to each underlying product candidate when Servier’s royalty obligations as to such product candidate have expired. Servier may also terminate the Servier Collaboration Agreement for: (i) convenience upon a specified number of days’ prior notice to the Company or (ii) upon determination of a safety issue relating to development under the agreement upon a specified number of days’ prior notice to the Company. Either party may terminate the Servier Collaboration Agreement upon a material breach by the other party that is not cured within a specified number of days. The Company may also terminate the agreement if Servier challenges any of the patents licensed by the Company to Servier.

The Company determined that the elements within the Servier Collaboration Agreement should be treated as a single unit of accounting because the delivered elements, the licenses, did not have stand-alone value to Servier at the time the license was granted. As such, the Company recognized license fees earned under the Servier Collaboration Agreement as revenue on a proportional performance basis over the estimated period to complete the activities under the Research Collaboration. The total period of performance is equal to the estimated term of the Research Collaboration. The Company measured its progress under the proportional performance method based on actual and estimated full-time equivalents. The Company received a total of $12.4 million (€9.0 million) in non-refundable license fees under the Servier Collaboration Agreement. Based on earlier estimates of the term of the Research Collaboration, these license fees had been fully recognized as revenue during the period from October 2011 through December 2016. Accordingly, no amounts were recognized as license revenue during the years ended December 31, 2018 and 2017.

Amounts incurred but not billed to Servier for research and related intellectual property activities totaled $0.5 million and $1.1 million as of December 31, 2018 and December 31, 2017, respectively. These amounts are included in prepaid expenses and other current assets in the Company’s consolidated balance sheets. As of December 31, 2018, the company had no accounts receivable outstanding for Servier research and related intellectual property activities. As of December 31, 2017, accounts receivable for Servier research and related intellectual property activities totaled $1.4 million.