Revenue Recognition

6 Months Ended

Jun. 30, 2011

Unaudited Interim Financial Statements and Revenue Recognition [Abstract]

Revenue Recognition

(9) Revenue Recognition

     An important part of the Company’s business strategy is to enter into research and development collaborations with biotechnology and pharmaceutical corporations that bring expertise and resources to the potential research and development and commercialization of drugs based on the Company’s technology. Under the Company’s research and development collaborations, the Company has generally licensed specified portions of its intellectual property and provided research and development services to the collaborator during the period of continued involvement in the early portion of the collaborations. The collaborators have generally been responsible for drug development activities initiated after the collaboration is effective. The collaborators are also generally responsible for any commercialization activities that may be initiated if any of the drug candidates receive marketing approval from the appropriate regulatory authority.

     Under the Company’s existing collaborative arrangements, the Company has received non-refundable license fees, milestone payments, reimbursements of certain internal and external research and development expenses and patent-related expenses. The Company is also entitled to receive royalties on product sales. The Company classifies all of these amounts as revenue in its statement of operations since it considers licensing intellectual property and providing research and development and patent-related services to be part of its central business operations. In the three and six months ended June 30, 2010, alliance revenue consisted primarily of revenue recognized under the Merck KGaA and Merck collaborations. Since the Company completed the research portions of these collaborations during 2010, all of the upfront license fee payments were fully amortized and recognized by December 2010. Consequently, the Company did not recognize any revenue under the Merck KGaA and Merck collaborations during the three and six months ended June 30, 2011. Alliance revenue for the three and six months ended June 30, 2011 and 2010, including revenue recognized under the Company’s collaborative arrangements with Merck KGaA and Merck during the 2010 period, was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2011		2010		2011		2010
Collaboration revenue
Merck KGaA	$	—	$	3,048	$	—	$	7,351
Merck		—		1,296		—		2,546
		—		4,344		—		9,897
Other revenue		33		42		41		66
Total alliance revenue	$	33	$	4,386	$	41	$	9,963

     During the three and six months ended June 30, 2010, the Company incurred approximately $1,000 and $16,000, respectively, in third-party expenses in connection with its collaborative arrangements. The Company did not incur any such expenses in the corresponding 2011 periods. These third party expenses are classified as research and development and general and administrative expenses in the Company’s statement of operations.

     When evaluating multiple element arrangements, the Company considers whether each deliverable of the arrangement represents a separate unit of accounting based on specified criteria such as whether the deliverable has standalone value to the collaborator. Any fixed or determinable payments that the Company expects to receive under the arrangement are allocated among the separate units of accounting and the appropriate revenue recognition criteria are applied to each of these separate units. Any item that does not qualify as a separate unit of accounting is combined with other appropriate items and the combined deliverable is treated as a separate unit of accounting.

     The allocation of fixed or determinable payments to the separate units of accounting is based on the relative-selling-price method, which is based on the following hierarchy used in determining the selling price for each unit of accounting: (1) Vendor specific objective evidence, or “VSOE”, the price at which the item is regularly sold by the vendor on a standalone basis, is the preferred method. (2) Third-party evidence, or “TPE”, of vendors selling similar goods to similarly situated customers on a standalone basis if VSOE of selling price of a product or service is not available. (3) Best estimate of selling price, or “BESP”, if neither VSOE nor TPE of selling price of a product or service is available.

     The timing of revenue recognition from upfront license fees received under collaboration agreements depends upon the terms of the agreement.

     The Company recognizes revenue from reimbursements earned in connection with research and development collaboration agreements as related research and development costs are incurred, and contractual services are performed. The Company includes amounts contractually owed to it under these research and development collaboration agreements, including any earned but unbilled receivables, in receivables in its balance sheets. The Company’s principal costs under these agreements are generally for its personnel and related expenses of conducting research and development, as well as for research and development performed by outside contractors or consultants or related research and development materials provided by third parties or for clinical trials it conducts on behalf of a collaborator.

     For payments that are contingent upon milestone events or achieving a specific result from the research and development efforts the Company recognizes these milestone payments as revenue in their entirety upon achieving the related milestone provided the milestone meets the criteria specified below. Milestones typically consist of significant events in the development life cycle of the related technology, such as initiating clinical trials, filing for approval with regulatory agencies, and obtaining approvals from regulatory agencies. The Company recognizes revenue from milestone payments received under collaboration agreements in their entirety upon achieving the related milestone, provided that the milestone event is substantive, its achievability was not reasonably assured at the inception of the agreement, the amount attributed to the milestone is reasonable in relation to the Company’s performance and to the amounts attributed to the other deliverables in the arrangement and the Company has no further performance obligations relating to the milestone event. In the event that the agreement provides for payment to be made subsequent to the Company’s standard payment terms, the Company recognizes revenue when payment becomes due.

     Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the Company’s balance sheets. The Company classifies amounts that it expects to recognize in the next twelve months as short-term deferred revenue. The Company classifies amounts that it does not expect to recognize within the next twelve months as long-term deferred revenue.

     Although the Company follows detailed guidelines in measuring revenue, certain judgments affect the application of its revenue policy. For example, in connection with its existing collaboration agreements, any deferred revenue the Company has recorded on its balance sheet is classified as short-term or long-term deferred revenue based on its best estimate of when such amounts will be recognized. However, these estimates are based on the Company’s collaboration agreements and its then current operating plan and, if either should change, the Company may recognize a different amount of deferred revenue over the subsequent twelve-month period.

     The Company’s estimate of deferred revenue also reflects management’s estimate of the periods of its involvement in its collaborations and the estimated periods over which its performance obligations will be completed. In some instances, the timing of satisfying these obligations can be difficult to estimate. Accordingly, the Company’s estimates may change in subsequent periods. Such changes to estimates would result in a change in revenue recognition amounts. If these estimates and judgments change over the course of these agreements, it may affect the timing and amount of revenue that the Company recognizes and records in subsequent periods.

     Additional information on the Company’s collaborative arrangements is included in Note (10).