Celgene Collaboration Agreement

In July 2016, the Company entered into the Celgene Collaboration Agreement. The primary goal of the collaboration is to co-develop and co-commercialize innovative biologic immunotherapies that either activate or suppress the immune system by binding to targets identified by leveraging the Company’s Translational Science Platform. Under the Celgene Collaboration Agreement, the Company granted Celgene exclusive options to develop and commercialize the Company’s lead product candidate, vopratelimab (formerly JTX-2011), and up to four early-stage programs, consisting of targets to be selected from a pool of certain B cell, T regulatory cell and tumor-associated macrophage targets. Additionally, Celgene has an exclusive option to develop and commercialize the Company’s product candidate JTX-4014, an anti-PD-1 antibody, which, upon exercise of such option, will be a shared program that may be used by both parties in and outside of the collaboration. Prior to Celgene exercising any of its options, the Company is responsible for all research and development activities under the Celgene Collaboration Agreement.

The Company received a non-refundable upfront cash payment of $225.0 million in July 2016 upon the execution of the Celgene Collaboration Agreement. The Company also received $36.1 million from the sale of 10,448,100 shares of Series B-1 convertible preferred stock upon the execution of a Series B-1 Preferred Stock Purchase Agreement with Celgene, which shares converted into 2,831,463 shares of common stock upon the completion of the IPO. If Celgene elects to exercise any of the program options, Celgene will pay the Company an option-exercise fee of $10.0 million to $60.0 million that varies by program, with an aggregate of $182.5 million if Celgene exercises all six program options. The initial research term of the collaboration is four years, which can be extended, at Celgene’s option, annually for up to three additional years for additional consideration that ranges from $30.0 million to $45.0 million per year, for an aggregate of $120.0 million if the term is extended for an additional three years.

In January 2019, Celgene and Bristol-Myers Squibb Company (“BMS”) announced an agreement under which Celgene will be acquired by BMS, subject to shareholder and regulatory approvals.

Worldwide Development Cost and U.S. Operating Profit and Loss Sharing

Upon the exercise of each program option, the parties will enter into a co-development and co-commercialization agreement (“Co-Co Agreements”) or, in the case of JTX-4014, a license agreement (“JTX-4014 License Agreement”) that governs the development and commercialization of the applicable program. Although the agreements will not be executed unless and until Celgene exercises an option, the parties have agreed to the terms of the Co-Co Agreements and the JTX-4014 License Agreement as part of the Celgene Collaboration Agreement.

Under the Co-Co Agreements and the JTX-4014 License Agreement, the Company will share with Celgene the U.S. profits or losses and development costs on such collaboration program as follows:


•	The Company will retain 60 percent of the U.S. operating profits or losses arising from commercialization of vopratelimab, with 40 percent allocated to Celgene.

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The Company will retain 25 percent of the U.S. operating profits or losses arising from commercialization of the first program (the “Lead Program”), other than vopratelimab or JTX-4014, for which an IND is filed under the collaboration, with 75 percent allocated to Celgene. Celgene has a one-time right to substitute and swap the economics and governance of this program with that of another program for which it exercises an option (other than vopratelimab and JTX-4014).


•	The Company and Celgene will equally share U.S. operating profits or losses arising from commercialization of up to three additional programs (other than vopratelimab, JTX-4014 or the Lead Program) (the “Other Programs”).


•	The Company and Celgene will share all development costs, other than for JTX-4014, in accordance with the applicable Co-Co Agreements, of which Celgene’s portion of the costs range from 67 percent to 85 percent.

If Celgene exercises its option for a program other than JTX-4014, the Company will enter into a Co-Co Agreement, pursuant to which Celgene will have the exclusive right to develop and commercialize the products arising out of such collaboration program outside of the United States, and the Company will be eligible to receive tiered royalties ranging from a high single digit to mid-teen percentage rate on net product sales outside of the United States. Under each Co-Co Agreement, the Company will also have the right to opt out of profit sharing and instead receive milestones and royalties.

Furthermore, if Celgene exercises its option for JTX-4014, the Company will enter into the JTX-4014 License Agreement, pursuant to which Celgene and the Company will each have equal rights to develop and commercialize JTX-4014 in combination with other proprietary molecules in their or the Company’s respective pipelines or in combination with products arising out of collaboration programs. Subject to terms specified in the license agreement for JTX-4014, the party owning the proprietary molecule that is combined with JTX-4014, if such molecule does not arise from a collaboration program with Celgene, will be solely responsible for all development and commercialization costs related to such combination. If JTX-4014 is combined with a product arising from a collaboration program, then the parties will share costs and, if co-packaged or co-formulated, profits or losses in accordance with the Co-Co Agreements for such other product.

Milestones and Royalties

Under the Co-Co Agreements and the JTX-4014 License Agreement, Celgene is required to pay the Company for specified development, regulatory and commercial milestones, if achieved, up to approximately $2.3 billion, across all collaboration programs. The development milestones are payable on initiation of certain clinical trials and range from $32.5 million to $105.0 million, per program, with an aggregate total of $290.0 million. The regulatory approval milestones are payable upon regulatory approval in the United States and outside the United States and range from $7.5 million to $50.0 million per milestone, with an aggregate total of $700.0 million. The commercial milestones are payable upon achievement of specified aggregate product sales outside the United States for each program and range from $40.0 million to $200.0 million per milestone, with an aggregate total of $1.270 billion. The Company is also eligible to receive royalties on product sales outside the United States ranging from high single digit to mid-teen royalties.

Exercise of Options

Celgene may exercise its option for a program at any time until the expiration of an option term for that program. For each program, the option term ends 45 to 60 days following Celgene’s receipt of a data package that includes certain information relating to the program’s research and development activities. The data package for a program may be delivered to Celgene after the applicable development milestone for such program has been achieved. Depending on the program, the applicable development milestone is (i) IND acceptance, (ii) availability of certain Phase 1a data or (iii) availability of certain Phase 1/2 data. If Celgene fails to exercise its option during the option term for a program, the Company will continue to retain all rights to such program. If Celgene exercises its option for a program other than JTX-4014, then the Company will enter into a Co-Co Agreement with Celgene for such program in substantially the form attached to the agreement as an exhibit.

Under the Co-Co Agreement for vopratelimab and one additional program for which Celgene opts in, other than JTX-4014, the Company will be responsible for leading development and commercialization activities in the United States and Celgene will be responsible for development and commercialization activities outside the United States. For all other additional programs for which Celgene opts in, other than JTX-4014, Celgene will lead development and commercialization activities worldwide.

If Celgene exercises its option for JTX-4014, the Company and Celgene will enter into a license agreement, in substantially the form attached to the agreement as an exhibit, pursuant to which the Company and Celgene will both be able to equally access JTX-4014 for combinations within each other’s portfolios and with other molecules that are subject to the agreement, subject to joint governance. Once Celgene opts in with respect to a given program, Celgene and the Company must each use commercially reasonable efforts to develop and commercialize the corresponding product in the United States.

Termination

At any point during the Celgene Collaboration Agreement, including during the research, development and clinical trial process, or during the term of the applicable co-development and co-commercialization or license agreement, respectively, Celgene can terminate the applicable agreement with the Company in its entirety, or with respect to any program under the Celgene Collaboration Agreement, upon 120 days’ notice and can terminate the entire agreement with the Company in connection with a material breach of the agreement by the Company that remains uncured for 90 days.

Exclusivity

During the Celgene Collaboration Agreement’s research term (i.e., for four years plus up to three one-year extensions that Celgene may elect), the Company may not alone, or with a third party, research, develop, manufacture or commercialize a biologic that binds to ICOS or a defined pool of B cell, T regulatory cell or tumor-associated macrophage targets that meet certain criteria, each termed a “Collaboration Exclusive Target”, and inhibit, activate or otherwise modulate the activity of such Collaboration Exclusive Target. In addition, if Celgene exercises its option for a program within the Celgene Collaboration Agreement, other than JTX-4014, then until termination or expiration of the applicable Co-Co Agreement for such program, the Company may not directly or indirectly research, develop, manufacture or commercialize, outside of the Celgene Collaboration Agreement, any biologic with specified activity against that program’s Collaboration Exclusive Target.

Accounting Analysis under ASC 606

Identification of the Contract(s)

The Company assessed the Celgene Collaboration Agreement and concluded that it represents a contract with a customer within the scope of ASC 606. The Company also concluded that each of the Co-Co Agreements and the JTX-4014 License Agreement, if executed in the future, would represent separate contracts apart from the Celgene Collaboration Agreement.

Identification of Promises and Performance Obligations

The Company determined that the Celgene Collaboration Agreement contains the following promises: (i) research and development services for the product candidate, vopratelimab (“Vopratelimab Research Services”) (ii) research and development services for the product candidate, JTX-4014 (“JTX-4014 Research Services”) (iii) research and development services associated with the Lead Program and Other Programs (“Lead and Other Programs Research Services”), (iv) research services associated with target screening (“Target Screening Services”), (v) non-transferable, limited sub-licensable and non-exclusive licenses to use the Company’s intellectual property and the Company’s rights in the collaboration intellectual property to conduct certain activities, on a program-by-program basis (the “Research Licenses”), (vi) various record-keeping and reporting requirements on a program-by-program basis, (vii) exclusivity provisions with respect to each Collaboration Exclusive Target and biologics binding to such Collaboration Exclusive Targets and (viii) establishment of and participation in a joint steering committee (the “JSC”) and a joint patent committee (the “JPC”). The Company also evaluated the six program options as well as the research term extension options and concluded that none convey a material right to Celgene. Accordingly, neither the program options nor the research term extension options are considered to be promises within the Celgene Collaboration Agreement.

The Company assessed the above promises and concluded that each of the Vopratelimab Research Services, JTX-4014 Research Services, Lead and Other Programs Research Services and Target Screening Services are both capable of being distinct and distinct within the context of the Celgene Collaboration Agreement. Therefore, the Company has concluded that each of the Vopratelimab Research Services, JTX-4014 Research Services, Lead and Other Programs Research Services and Target Screening Services represent separate performance obligations.

The Company determined that the Research Licenses are not distinct within the context of the Celgene Collaboration Agreement as the Research Licenses allow Celgene to evaluate the results of the research and development services performed by the Company and the right to perform its duties under the Celgene Collaboration Agreement, but do not provide Celgene with any commercialization rights. Celgene can only benefit from the Research Licenses in conjunction with the related research and development services. Accordingly, the Research Licenses related to vopratelimab, JTX-4014 and the Lead and Other Programs have been combined with their respective research and development services performance obligations.

Similarly, the Company also determined that the various record-keeping and reporting requirements related to each program and the exclusivity provisions with respect to each Collaboration Exclusive Target and biologics binding to such Collaboration Exclusive Targets are not distinct within the context of the Celgene Collaboration Agreement. Accordingly, the various record-keeping and reporting requirements on a program-by-program basis and the exclusivity provisions with respect to each Collaboration Exclusive Target and biologics binding to such Collaboration Exclusive Targets have been combined with their respective research and development services performance obligations.

Finally, the Company assessed its participation in the JSC and the JPC and concluded that, while it does meet the definition of a performance obligation, it is both quantitatively and qualitatively immaterial in the context of the Celgene Collaboration Agreement. Accordingly, the Company has disregarded its participation in the JSC and the JPC as a performance obligation.

Determination of Transaction Price

As noted above, the Company received a non-refundable upfront cash payment of $225.0 million upon the execution of the Celgene Collaboration Agreement. This upfront payment represents an element of fixed consideration under the Celgene Collaboration Agreement. Celgene also purchased 10,448,100 shares of Series B-1 convertible preferred stock (“Series B-1 Preferred Stock”) for gross proceeds of $36.1 million, which shares converted into 2,831,463 shares of common stock upon the completion of the IPO. The Company determined the shares of Series B-1 Preferred Stock were sold at fair value. Therefore, the proceeds from the issuance of Series B-1 Preferred Stock did not impact the transaction price to be allocated to the performance obligations.

The Company evaluated as possible variable consideration the milestones, royalties, development cost sharing and profit sharing provisions discussed above. The Company concluded that none of these items represent variable consideration under the Celgene Collaboration Agreement as all such amounts are dependent upon the execution of a related Co-Co Agreement or the JTX-4014 License Agreement. The Co-Co Agreements and the JTX-4014 License Agreement, if executed in the future, would represent separate contracts apart from the Celgene Collaboration Agreement.

The Company also considered the existence of any significant financing component within the Celgene Collaboration Agreement given its upfront payment structure. Based upon this assessment, the Company concluded that any difference between the promised consideration and the cash selling price of the services under the Celgene Collaboration Agreement arises for reasons other than the provision of financing, and the difference between those amounts is proportional to the reason for the difference. Accordingly, the Company has concluded that the upfront payment structure of the Celgene Collaboration Agreement does not result in the existence of a significant financing component.

Based upon the above considerations, the Company has concluded that the transaction price associated with the Celgene Collaboration Agreement consists solely of the upfront payment of $225.0 million.

Allocation of Transaction Price to Performance Obligations

The Company has allocated the transaction price to each performance obligation on a relative standalone selling price basis. For all performance obligations, the Company determined the standalone selling price using estimates of the costs to perform the research and development services, including expected internal and external costs for services and supplies, adjusted to reflect a reasonable profit margin. The total estimated cost of the research and development services reflects the nature of the services to be performed and the Company’s best estimate of the length of time required to perform the services.

Recognition of Revenue

The Company recognizes revenue related to the Celgene Collaboration Agreement over time as the services related to each performance obligation are rendered. The Company has concluded that an input method under ASC 606 is a representative depiction of the transfer of services under the Celgene Collaboration Agreement. The method of measuring progress towards delivery of the services incorporates actual internal and external costs incurred, relative to total internal and external costs expected to be incurred to satisfy the performance obligations. The period over which total costs are estimated reflects the Company’s estimate of the period over which it will perform the research and development services to deliver a pre-defined data package to Celgene for each program subject to an option. The Company recognizes revenue for each performance obligation over periods ranging from twelve months to four years. Changes in estimates of total internal and external costs expected to be incurred are recognized in the period of change as a cumulative catch-up adjustment.

For the year ended December 31, 2018, the Company recognized collaboration revenue of $65.2 million under the Celgene Collaboration Agreement related to the $225.0 million upfront payment received in 2016. As of December 31, 2018, the Company has $97.9 million of deferred revenue, which is classified as either current or net of current portion in the accompanying consolidated balance sheets based on the period over which the revenue is expected to be recognized. This deferred revenue balance represents the aggregate amount of the transaction price allocated to the performance obligations that are partially unsatisfied as of December 31, 2018. The Company expects to recognize revenue related to these performance obligations through July 2020.

The following table presents changes in the Company’s contract liabilities during the year ended December 31, 2018 (in thousands):



	Balance as of							Balance as of
	January 1, 2018		Additions		Reductions			December 31, 2018
Contract liabilities:
Deferred revenue	$	163,073	$	—	$	(65,201	)	$	97,872
Totals	$	163,073	$	—	$	(65,201	)	$	97,872

The reductions to the deferred revenue contract liability during the year ended December 31, 2018 were comprised of revenue recognized for research and development services performed, as well as a cumulative catch-up adjustment of $7.1 million arising from changes in costs estimated to be incurred under the Celgene Collaboration Agreement.

All revenue recognized during the year ended December 31, 2018 was included within the beginning balance of the deferred revenue contract liability.

As of December 31, 2018, the Company had not received any option exercise, research term extension, milestone or royalty payments under the Celgene Collaboration Agreement.

Accounting Analysis under ASC 605

Prior to January 1, 2018, the Company recognized revenue related the Celgene Collaboration Agreement in accordance with ASC 605. Under ASC 605, the Company determined that the Celgene Collaboration Agreement included six deliverables: (i) the Vopratelimab Research Services, (ii) the JTX-4014 Research Services, (iii) the Lead and Other Programs Research Services, (iv) the Target Screening Services, (v) the Research Licenses and (vi) participation in the JSC.

The six program options were considered substantive as the Company was at risk with regard to whether Celgene would exercise the options as a result of the significant uncertainties related to drug discovery, research and development given the significant development risk of the targets subject to the options. Additionally, there was also significant uncertainty regarding Celgene’s exercise of the option for JTX-4014 because, although not a novel immunotherapy agent, the Company identified a significant development risk associated with its ability to advance the development of JTX-4014 in a commercially viable manner in a short time frame. The research term extensions were also considered substantive options based upon the risk that Celgene would exercise the research term extension. In addition, the substantial option exercise payments payable by Celgene upon exercise of each option were not priced at a significant and incremental discount. Accordingly, the substantive options were not considered deliverables at the inception of the arrangement and the associated option exercise payments were not included in allocable arrangement consideration. The Company also determined that any obligations contingent upon the exercise of a substantive option were not considered deliverables at the outset of the arrangement.

The Target Screening Services and participation in the JSC deliverables each had standalone value from the other undelivered elements and therefore were separate units of accounting. The Company determined that the research licenses for the vopratelimab and JTX-4014 programs did not have value to Celgene on a standalone basis primarily as a result of the fact that the research licenses allow Celgene to evaluate the results of the research and development services performed by the Company and the right to perform its duties under the agreement, but do not provide Celgene with any commercialization rights. Therefore, the Company determined that the research licenses did not have value to Celgene without the performance of the Vopratelimab Research Services and JTX-4014 Research Services and therefore were not separable from the Vopratelimab Research Services and JTX-4014 Research Services. The Vopratelimab Research Services were separate and distinct from the JTX-4014 Research Services, and therefore, the research license and the Vopratelimab Research Services were a separate combined unit of accounting and the research license and the JTX-4014 Research Services were a separate combined unit of accounting. The Lead and Other Programs Research Services deliverable did not include separate and distinct services and Celgene could use the Lead and Other Programs Research Services for its intended purpose without receipt of the research licenses that could be delivered for the Lead Program and Other Programs. The Lead and Other Programs Research Services therefore were combined with the licenses that could be delivered for the Lead Program and Other Programs, which had an insignificant value, as a separate combined unit of accounting.

The allocable arrangement consideration consisted of the upfront fee of $225.0 million. As described above, Celgene also purchased 10,448,100 shares of Series B-1 Preferred Stock for gross proceeds of $36.1 million. The Company determined the shares of Series B-1 Preferred Stock were sold at fair value. Therefore, the proceeds from the issuance of Series B-1 convertible preferred stock did not have an impact on the arrangement consideration that was allocated to the units of accounting. The Company allocated the allocable arrangement consideration based on the relative selling price of each unit of accounting. For all units of accounting, the Company determined the selling price using BESP. The Company determined the BESP based on internal estimates of the costs to perform the services, including expected internal and external costs for services and supplies, adjusted to reflect a reasonable profit margin. The total cost of the research and development services reflected the nature of the services to be performed and the Company’s best estimate of the length of time required to perform the services. The Company determined that the BESP of the participation in the JSC was insignificant and therefore no consideration was allocated to this unit of accounting. Therefore, the total allocable arrangement consideration was allocated to the Vopratelimab Research Services, the JTX-4014 Research Services, the Lead and Other Programs Research Services and the Target Screening Services.

The Company recognized the consideration allocated to each unit of accounting on a straight-line basis, as there was no discernible pattern or objective measure of performance of the services, over the estimated performance period. The estimated performance period reflected the Company’s estimate of the period over which it would perform the separate and distinct research and development services to deliver a pre-defined data package to Celgene for each program subject to an option. The performance periods for each unit of accounting ranged from twelve months to four years.

The Company evaluated the milestones in the Celgene Collaboration Agreement, the Co-Co Agreements, and the JTX-4014 License Agreement to determine if they were substantive. In evaluating if a milestone was substantive, the Company assessed whether: (i) the consideration was commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration related solely to past performance and (iii) the consideration was reasonable relative to all of the deliverables and payment terms within the arrangement. All development and regulatory milestones in the Celgene Collaboration Agreement, the Co-Co Agreements and the JTX-4014 License Agreement were considered substantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific, clinical, regulatory and other risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, the Company concluded that such amounts would be recognized in the period in which the associated milestone was achieved, assuming all other revenue recognition criteria were met. All commercial milestones would be accounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria were met.

Under ASC 605, the Company recognized collaboration revenue of $71.6 million for year ended December 31, 2017. As of December 31, 2017, the Company had $116.2 million of deferred revenue, which was classified as either “current” or “net of current portion” in the accompanying consolidated balance sheets based on the period over which the revenue was expected to be recognized.