7. Agreement with Eli Lilly and Company

On November 2, 2018, the Company entered into a multi-year research and development collaboration agreement (the “Lilly Agreement”) with Eli Lilly and Company (“Lilly”), pursuant to which the Company agreed to use its proprietary FIND-IO platform to identify novel oncology targets for additional collaborative research and drug discovery by the Company and Lilly. Under the Lilly Agreement, Lilly and the Company granted one another an equal number of exclusive options to research, develop, manufacture and commercialize compounds and products directed to oncology targets identified through the Lilly Agreement.

During the research term under the Lilly Agreement, as a part of target discovery, the Company was responsible for providing Lilly with oncology targets identified using the Company’s FIND-IO platform. From the targets provided by the Company, Lilly could select targets to advance to target validation using criteria developed by both parties. Following completion of the agreed upon target validation plan with respect to a given target, either party could propose to advance that target to compound discovery. For each target advanced to compound discovery, Lilly had the option to obtain an exclusive license with respect to the compounds and products directed to the target. If Lilly did not exercise its option with respect to a given target or has previously exercised all of its options, the Company had the option to obtain licenses with respect to compounds and products directed to that target.

In November 2018, the Company received an upfront, non-refundable payment of $25.0 million under the Lilly Agreement and a concurrent $15.0 million equity investment (Note 10). In addition, Lilly agreed to make quarterly research and development support payments during a portion of the research term as well as to pay option exercise fees upon option exercises by Lilly.

Pursuant to the Lilly Agreement, Lilly agreed to pay an aggregate of up to $1.4 billion in development and regulatory milestones and sales milestones. Additionally, Lilly agreed to pay mid to high single-digit royalties on net sales for all products directed to each target optioned by Lilly. The Company agreed that upon the Company’s exercise of an option with respect to a given target, the Company would pay Lilly option exercise payments and also agreed to pay an aggregate of up to $710.0 million in development and regulatory milestones and sales milestones, as well as royalties.

The Company evaluated the Lilly Agreement under the provisions of ASC 606 and concluded that Lilly was a customer prior to the exercise of its option to obtain an exclusive license with respect to the compounds and products directed to a target advanced to compound discovery. The Company identified the following material promises under the Lilly Agreement: (i) a limited research license to conduct activities under the research collaboration; (ii) research and development services together with the provision of a data package in connection with Lilly’s option; (iii) various governance obligations, most notably participation on a joint steering committee; and (iv) rights related to an optional term extension by Lilly. The Company evaluated Lilly’s option to obtain an exclusive license with respect to the compounds and products directed to a target that has been advanced to compound discovery and concluded that the option was not issued at a significant and incremental discount, and therefore does not provide material rights. As such, they are excluded as performance obligations at the outset of the arrangement. The Company determined that the research license was not capable of being distinct and the related research and development services and governance activities are not distinct in the context of the contract and, as such, the Company determined that these promises should be combined into a single performance obligation, resulting in a total of two performance obligations under the Lilly Agreement; one for research and development services and one for the right related to an optional term extension by Lilly.

The transaction price at the outset of the arrangement was determined to be $32.7 million, comprised of the upfront fee received from Lilly, quarterly research and development support payments to be received from Lilly during a portion of the research term and an equity investment premium as determined by the Company with reference to a valuation of the Company’s preferred stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The transaction price was allocated to the two performance obligations based on their relative standalone selling price determined with reference to the Company’s estimated costs attendant to the obligations. Revenue allocated to the research and development performance obligation was recognized as the research and development services were provided using an input method calculated by comparing research and development costs incurred to date to estimated total research and development costs as a measure of progress towards satisfying the performance obligation. Revenue allocated to Lilly’s right related to an optional term extension was deferred until the right was exercised or lapsed, and will subsequently be recognized accordingly.

While the Lilly Agreement was executed in November 2018, the performance initiated in January 2019. Under the Lilly Agreement, the Company recognized revenue of $6.3 million and $0 for the years ended December 31, 2019 and 2018, respectively.

Deferred revenue consists of the following:


	December 31,
(in thousands)	2019		2018
Deferred revenue, beginning of period	$	26,725	$	—
Up-front payment		—		25,000
Attributed premium on the proceeds from Lilly’s investment in the Company		—		1,725
Research and development support billing		2,000		—
Revenue from research and development arrangement recognized		(6,347)		—
Total deferred revenue, end of period		22,378		26,725
Less: Deferred revenue, current portion		(6,428)		(4,989)
Deferred revenue, non-current portion	$	15,950	$	21,736

On January 10, 2020, Lilly notified the Company of termination of the Lilly Agreement. Refer to Note 16 for additional information on this termination.