Out-Licensing Agreements

6 Months Ended

Jun. 30, 2022

Out-licensing Agreements

Out-licensing Agreements

10.Out-Licensing Agreements

Huadong Collaboration Agreements

On February 21, 2022 (the “Effective Date”), the Company entered into two collaboration and license agreements (each, a “Collaboration Agreement” and together, the “Collaboration Agreements”) with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. (“Huadong”), pursuant to which the Company granted Huadong exclusive rights to develop and commercialize rilonacept and develop, manufacture and commercialize mavrilimumab (each, a “Licensed Product” and together, the “Licensed Products”) in the following countries: People’s Republic of China, Hong Kong SAR, Macao SAR, Taiwan Region, South Korea, Indonesia, Singapore, The Philippines, Thailand, Australia, Bangladesh, Bhutan, Brunei, Burma, Cambodia, India, Laos, Malaysia, Maldives, Mongolia, Nepal, New Zealand, Sri Lanka, and Vietnam (collectively, the “Territory”). The Company otherwise retained its current rights to the Licensed Products outside the Territory.

Under the Collaboration Agreements, the Company received a total upfront cash payment of $22,000, which includes $12,000 for the Territory license of rilonacept and $10,000 for the Territory license of mavrilimumab. The Company will be eligible to receive up to approximately $70,000 in payments for rilonacept, and up to approximately $576,000 in payments for mavrilimumab, including specified development, regulatory and sales-based milestones. Huadong will also be obligated to pay the Company tiered percentage royalties on a Licensed Product-by-Licensed Product basis ranging from the low-teens to low-twenties on annual net sales of each Licensed Product in the Territory, subject to certain reductions tied to rilonacept manufacturing costs and certain other customary reductions, with an

aggregate minimum floor. Royalties will be payable on a Licensed Product-by-Licensed Product and country-by-country or region-by-region basis until the later of (i) 12 years after the first commercial sale of the applicable Licensed Product in such country or region in the Territory, (ii) the date of expiration of the last valid patent claim of the Company’s patent rights or any joint collaboration patent rights that covers the applicable Licensed Product in such country or region in the Territory, and (iii) the expiration of the last regulatory exclusivity for the applicable Licensed Product in such country or region in the Territory.

Pursuant and subject to the terms of the Collaboration Agreements, Huadong has the exclusive right to conduct Territory-specific development activities for the Licensed Products in the Territory, the first right to support global development of the Licensed Products by serving as the sponsor of the global clinical trials conducted in the Territory and the exclusive right to commercialize the Licensed Products in the Territory. Huadong will be responsible for all costs of development activities and commercialization in the Territory. Both the Company and Huadong participate in a Joint Steering Committee (“JSC”), which coordinates and oversees the exploitation of the Licensed Products in the Territory.

The Company will supply certain materials to support development and commercialization activities for both mavrilimumab and rilonacept. Under the Collaboration Agreement for mavrilimumab, Huadong has the right to assume manufacturing responsibilities for materials in the Territory. Under the Collaboration Agreement for rilonacept, Huadong does not have rights to perform manufacturing activities in the Territory.

Absent early termination, each Collaboration Agreement will continue on a country-by-country or region-by-region basis until there are no more royalty payments owed to the Company in such country or region for the applicable Licensed Product. Huadong has the right to terminate each Collaboration Agreement at its discretion upon 12 months’ notice and either party may terminate the applicable Collaboration Agreement in the event of an uncured material breach of the other party or in the case of insolvency of the other party. In addition, the Company may terminate the applicable Collaboration Agreement if Huadong or its affiliates or sublicensees challenges the scope, validity, or enforceability of the Company’s patent rights being licensed to Huadong. If Huadong and its affiliates do not conduct any material development or commercialization activities with respect to a Licensed Product in the People’s Republic of China for a continuous period of longer than six months, then, subject to certain exceptions, the Company may terminate the Collaboration Agreement applicable to such Licensed Product with 60 days’ prior written notice. In addition, Huadong’s rights under each Collaboration Agreement in certain regions within the Territory may be subject to termination upon failure by Huadong to perform certain clinical, development or commercialization activities, as applicable, with respect to the applicable Licensed Product in such regions.

The Company concluded that Huadong is a customer in these Collaboration Agreements, and as such, each Collaboration Agreement falls within the scope of the revenue recognition guidance in ASC 606.

The Company concluded that the Collaboration Agreements should not be combined and treated as a single arrangement for accounting purposes as the Collaboration Agreements were negotiated separately with separate and distinct commercial objectives, the amount of consideration in one Collaboration Agreement is not dependent on the price or performance of the other Collaboration Agreement, and the goods and services promised in the Collaboration Agreements are not a single performance obligation.

Accounting for Mavrilimumab Collaboration Agreement

As of the Effective Date, the Company identified the following material promises in the mavrilimumab Collaboration Agreement that were evaluated under the scope of ASC 606: delivery of (i) exclusive license for mavrilimumab in the Territory and (ii) clinical manufacturing supply of certain materials for mavrilimumab products in the Territory.

The Company also evaluated whether certain options outlined within the mavrilimumab Collaboration Agreement represented material rights that would give rise to a performance obligation and concluded that none of the options convey a material right to Huadong and therefore are not considered separate performance obligations within the mavrilimumab Collaboration Agreement.

The Company assessed the above promises and determined that the exclusive license for mavrilimumab in the Territory is reflective of a vendor-customer relationship and therefore represents a performance obligation within the scope of ASC 606. The exclusive license for mavrilimumab in the Territory is considered functional intellectual property and distinct from other promises under the Collaboration Agreement as Huadong can benefit from the license on its own or together with other readily available resources and the license is separately identifiable from the other promises. The clinical manufacturing supply of certain materials for mavrilimumab products in the Territory is considered distinct from the exclusive license for mavrilimumab as Huadong can benefit from the manufacturing services together with the license transferred by the Company at the inception of the Collaboration Agreement. Therefore, each represents a separate performance obligation within a contract with a customer under the scope of ASC 606 at contract inception.

The Company determined the transaction price under ASC 606 at the inception of the mavrilimumab Collaboration Agreement which includes $10,000, consisting of the upfront payment. The Company also includes an estimate of variable consideration associated with the clinical manufacturing supply of certain materials when those materials are shipped. The Company determined that any variable consideration related to development and regulatory milestones is deemed fully constrained and therefore excluded from the transaction price due to the high degree of uncertainty and risk associated with these potential payments, as the Company determined that it could not assert that it was probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company also determined that royalties and sales milestones relate solely to the licenses of intellectual property. Revenue related to these royalties and sales milestones will only be recognized when the associated sales occur, and relevant thresholds are met, under the sales or usage-based royalty exception of Topic 606.

As noted above, the Company identified two performance obligations in the mavrilimumab Collaboration Agreement: (i) the delivery of the exclusive license for mavrilimumab in the Territory; and (ii) the clinical manufacturing supply of certain materials for mavrilimumab products in the Territory. The selling price of each performance obligation in the mavrilimumab Collaboration Agreement was determined based on the Company’s standalone selling price (“SSP”) with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company allocated the variable consideration related to the manufacturing obligations to the future clinical supply of mavrilimumab products in the Territory and the remaining fixed and variable consideration to the license obligation. The Company recognizes revenue for the license performance obligations at a point in time, that is upon transfer of the license to Huadong. As control of the license was transferred on the Effective Date and Huadong could begin to use and benefit from the license, the Company recognized $10,000 of collaboration revenue during the six months ended June 30, 2022 under the mavrilimumab Collaboration Agreement. The Company will recognize revenue for the clinical manufacturing supply obligations at a point in time, that is upon each delivery of the supply to Huadong.

Accounting for Rilonacept Collaboration Agreement

As of the Effective Date, the Company identified the following material promises in the rilonacept Collaboration Agreement that were evaluated under the scope of ASC 606: delivery of (i) exclusive license for rilonacept in the Territory; (ii) clinical manufacturing supply of certain materials for rilonacept products in the Territory; and (iii) commercial manufacturing supply of certain material for rilonacept products in the Territory.

The Company also evaluated whether certain options outlined within the rilonacept Collaboration Agreement represented material rights that would give rise to a performance obligation and concluded that none of the options convey a material right to Huadong and therefore are not considered separate performance obligations within the rilonacept Collaboration Agreement.

The Company assessed the above promises and determined that there is one combined performance obligation for the exclusive license for rilonacept and clinical and commercial manufacturing obligations for rilonacept products in the Territory. Huadong cannot exploit the value of the exclusive license for rilonacept products in the Territory without receipt of supply as the exclusive license for rilonacept products in the Territory does not convey to Huadong the right to manufacture and therefore the Company has combined the exclusive license for rilonacept products in the Territory and the manufacturing obligations into one performance obligation.

The Company determined the transaction price under ASC 606 at the inception of the rilonacept Collaboration Agreement which includes $12,000, consisting of the upfront payment. The Company also includes an estimate of variable consideration associated with the clinical manufacturing supply of certain materials when those materials are shipped. The Company determined that any variable consideration related to development and regulatory milestones, sales milestones and royalties are deemed fully constrained and therefore excluded from the transaction price due to the high degree of uncertainty and risk associated with these potential payments, as the Company determined that it could not assert that it was probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Royalties and sales milestones will be recognized as the Company delivers the commercial manufactured product to Huadong. Any changes in estimates may result in a cumulative catch-up based on the number of units of manufactured product delivered.

As noted above, the Company identified a single combined performance obligation in the rilonacept Collaboration Agreement consisting of the exclusive license for rilonacept and clinical and commercial manufacturing obligations for rilonacept products in the Territory. The Company recognizes revenue for the combined performance obligation consisting of the exclusive license for rilonacept and clinical and commercial manufacturing obligations for rilonacept products in the Territory at a point in time, upon which control of materials are transferred to Huadong for each delivery of the associated materials. The Company currently expects to recognize the revenue over the life of the agreement. This estimate considers the timing of development and commercial activities under the rilonacept License Agreement and may be reduced or increased based on changes in the various activities.

The Company has not recognized any revenue under the rilonacept License Agreement for the three months and six months ended June 30, 2022 as there has been no delivery of materials under the rilonacept License Agreement to date. The full transaction price of $12,000 is recorded in long-term deferred revenue, based upon timing of anticipated future shipments.

The following table summarizes deferred revenue in connection with collaboration agreements for the six months ended June 30, 2022:

	Balance at						Balance at End
	Beginning of Period		Additions		Deductions		of Period
Six Months Ended June 30, 2022
Huadong rilonacept	$	—	$	12,000	$	—	$	12,000
Deferred revenue	$	—	$	12,000	$	—	$	12,000