Collaborative Arrangements and Licensing Agreements

6 Months Ended

Jun. 30, 2014

Collaborative Arrangements and Licensing Agreements [Abstract]

Collaborative Arrangements and Licensing Agreements

7. Collaborative Arrangements and Licensing Agreements

Traditional Pharmaceutical Alliances and Licensing

AstraZeneca

In December 2012, we entered into a global collaboration agreement with AstraZeneca to discover and develop antisense drugs against five cancer targets.  As part of the agreement, we granted AstraZeneca an exclusive license to develop and commercialize ISIS-STAT3_Rx and ISIS-AR_Rx for the treatment of cancer and an option to license up to three cancer drugs under a separate research program.  We are eligible to receive milestone payments and license fees from AstraZeneca as programs advance in development.  In addition, we are eligible to receive royalties up to the low to mid-teens on any product sales of drugs resulting from this collaboration.  Under the terms of the agreement, we received $31 million in upfront and near-term payments comprised of a $25 million upfront payment we received in December 2012 and a $6 million payment we received in June 2013, of which we recognized $11.5 million upon receipt of the payments.  We are recognizing the remaining $19.5 million as follows:

● $11.2 million related to the ISIS-AR_Rx program, which we amortized through March 2014;

● $7.6 million related to the option to license three drugs under a separate research program, which we are amortizing through December 2016; and

● $0.7 million related to the ISIS-STAT3_Rx program, which we are amortizing through November 2014.

Together with AstraZeneca, we are evaluating ISIS-STAT3_Rx in patients with advanced cancer. AstraZeneca is conducting a Phase 1b/2a clinical study of ISIS-STAT3_Rx in patients with advanced metastatic hepatocellular carcinoma, or HCC.  We are also conducting a clinical study evaluating ISIS-STAT3_Rx in patients with advanced lymphomas, including patients with diffuse large b-cell lymphoma.  We are responsible for completing our clinical study in patients with advanced lymphomas and AstraZeneca is responsible for all other development activities for ISIS-STAT3_Rx. In June 2013, we and AstraZeneca added a second development candidate, ISIS-AR_Rx, to our collaboration. ISIS-AR_Rx is an antisense drug we designed to treat patients with prostate cancer by inhibiting the production of the androgen receptor, or AR. Through June 2014, we have earned $25 million in milestone payments related to the development of ISIS-AR_Rx, including a $15 million milestone payment we earned in June 2014 when we initiated a Phase 1 study of ISIS-AR_Rx.  If AstraZeneca successfully develops ISIS-STAT3_Rx, ISIS-AR_Rx, and three drugs under the research program, we could receive substantive milestone payments of more than $955 million, including up to $300.5 million for the achievement of development milestones and up to $655 million for the achievement of regulatory milestones.  We could earn the next milestone payment of $15 million if we meet pre-agreed efficacy and safety criteria in our ongoing ISIS-STAT3_Rxstudy in patients with advanced cancer.

In August 2013, we added another collaboration program with AstraZeneca to discover and develop an antisense drug against an undisclosed target. AstraZeneca has the option to license a drug resulting from this research collaboration, and if AstraZeneca exercises its option, it will be responsible for all further development and commercialization of the drug. We received a $750,000 upfront payment, which we are amortizing through December 2015. We are eligible to receive license fees and substantive milestone payments of $163.2 million, including up to $45.3 million for the achievement of research and development milestones and up to $105 million for regulatory milestones.  We will earn the next $3.3 million milestone payment if AstraZeneca selects a development candidate under this collaboration.  In addition, we are eligible to receive royalties up to the low teens on sales from any product that AstraZeneca successfully commercializes under this collaboration program.

Our agreement with AstraZeneca will continue until the expiration of all payment obligations under the agreement. In addition, the agreement, or any program under the agreement, may terminate early under the following situations:

● AstraZeneca may terminate the agreement or any program at any time by providing written notice to us;

● AstraZeneca may terminate the agreement or any program by providing written notice if we undergo a change of control with a third party; and

● Either we or AstraZeneca may terminate the agreement or any program by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement, or the entire agreement if the other party becomes insolvent.

During the three and six months ended June 30, 2014, we earned revenue of $15.6 million and $19.1 million, respectively, from our relationship with AstraZeneca which represented 27 percent and 22 percent, respectively, of our total revenue for those periods. In comparison, we earned revenue of $15.3 million and $17.8 million for the same periods in 2013.  Our balance sheet at June 30, 2014 included deferred revenue of $5.5 million related to our relationship with AstraZeneca.

Biogen Idec

We have established four strategic collaborations with Biogen Idec that broaden and expand our severe and rare disease franchise for neurological disorders.

ISIS-SMN_Rx

In January 2012, we entered into a global collaboration agreement with Biogen Idec to develop and commercialize ISIS-SMN_Rx for the treatment of SMA.  We received an upfront payment of $29 million, which we are amortizing through February 2017.  We are eligible to receive a license fee, milestone payments and royalties up to the mid-teens on any product sales of ISIS-SMN_Rx. Biogen Idec has the option to license ISIS-SMN_Rx until completion of the first successful Phase 2/3 study or the completion of two Phase 2/3 studies. If Biogen Idec exercises its option, it will pay us a license fee and will assume global development, regulatory and commercialization responsibilities.

We and Biogen Idec amended our original agreement to reflect changes made to the clinical development plan for ISIS-SMN_Rx in January 2014.  We and Biogen Idec added a new open-label extension study, which is being offered to those children with SMA who have completed dosing in our previous studies.  We also expanded the dosing in the Phase 2 study in infants with SMA.  In addition, we increased the number of patients to be included in the Phase 3 studies in infants.  As a result of these changes, we and Biogen Idec agreed to increase the payments that we are eligible to receive under this collaboration by nearly $35 million.

In July 2014, we initiated the Phase 3 study evaluating ISIS-SMN_Rx in infants with SMA. In addition, we are evaluating ISIS-SMN_Rx in a Phase 2 open-label, multiple-dose, dose-escalation study in children with SMA and a Phase 2 open-label, multiple-dose, dose-escalation pilot study in infants with SMA.  Through July 2014, we have earned $17.3 million in payments for advancing ISIS-SMN_Rx, including $9.3 million in payments we earned in the first quarter of 2014 related to the amendments made to the clinical development plan for ISIS-SMN_Rx.  Accounting rules require us to amortize the $9.3 million we received related to the amendment of the clinical development plan for ISIS-SMN_Rx over our estimated period of performance, which is as follows:

● $3.8 million related to the Phase 2 studies in children and infants with SMA, which we are amortizing through July 2014; and

● $5.5 million related to an open-label extension study in children with SMA, which we are amortizing through December 2014.

Under the terms of the amended agreement, we are eligible to receive up to $303.8 million in a license fee and payments, including $78.8 million in substantive milestone and other payments associated with the clinical development of ISIS-SMN_Rx prior to licensing and $150 million in substantive milestone payments if Biogen Idec achieves pre-specified regulatory milestones. We will earn the next milestone payment of $18 million if we dose the first patient in the Phase 3 study in infants with SMA, which is designed to support marketing registration for ISIS-SMN_Rx in the United States and Europe.

ISIS-DMPK_Rx

In June 2012, we and Biogen Idec entered into a second and separate collaboration and license agreement to develop and commercialize a novel antisense drug targeting DMPK for the treatment of myotonic dystrophy type 1, or DM1, ISIS-DMPK_Rx.  We are responsible for global development of the drug through the completion of the first Phase 2 clinical trial.  Biogen Idec has the option to license the drug through the completion of the first Phase 2 trial. Under the terms of the agreement, we received an upfront payment of $12 million, which we are amortizing through June 2017.  Over the term of the collaboration we are eligible to receive up to $259 million in a license fee and substantive milestone payments. As of June 30, 2014, we have earned $24 million in substantive milestone payments associated with the clinical development of ISIS-DMPK_Rx, including a $14 million milestone payment we earned in June 2014 when we initiated a Phase 1 study for ISIS-DMPK_Rx. We are eligible to receive up to another $35 million in milestone payments associated with the development of ISIS-DMPK_Rx prior to licensing.  We are also eligible to receive up to $130 million in milestone payments if Biogen Idec achieves pre-specified regulatory milestones. In addition, we are eligible to receive royalties up to the mid-teens on any product sales of the drug. We will earn the next milestone payment of $35 million if we initiate a Phase 2 study for ISIS-DMPK_Rx.

Neurology

In December 2012, we and Biogen Idec entered into a third and separate collaboration to develop and commercialize novel antisense drugs to three targets to treat neurological or neuromuscular diseases.  We are responsible for the development of the drugs through the completion of the initial Phase 2 clinical study.  Biogen Idec has the option to license a drug from each of the three programs through the completion of Phase 2 studies. Under the terms of the agreement, we received an upfront payment of $30 million, which we are amortizing through December 2020. Over the term of the collaboration we are eligible to receive up to $259 million in a license fee and substantive milestone payments per program.  We could receive up to $59 million in development milestone payments to support research and development of each program, including amounts related to the cost of clinical trials. We could also receive up to $130 million in milestone payments if Biogen Idec achieves pre-specified regulatory milestones.  In addition, we are eligible to receive royalties up to the mid-teens on any product sales of drugs resulting from each of the three programs.  We will earn the next milestone payment of $10 million if we initiate an IND-enabling toxicology study for a development candidate identified under this collaboration.

Strategic Neurology

In September 2013, we and Biogen Idec entered into a fourth and separate collaboration, which is a long-term strategic relationship focused on applying antisense technology to advance the treatment of neurological diseases.  As part of the collaboration, Biogen Idec gained exclusive rights to the use of our antisense technology to develop therapies for neurological diseases and has the option to license drugs resulting from this collaboration. The exclusivity for neurological diseases will last six years, and may be extended for any drug development programs being pursued under the collaboration. Under the terms of the agreement, we received an upfront payment of $100 million and are eligible to receive milestone payments, license fees and royalty payments for all drugs developed through this collaboration, with the specific amounts dependent upon the modality of the molecule advanced by Biogen Idec.  If we have a change of control during the first six years of the collaboration, we may be required to refund Biogen Idec a portion of the $100 million upfront payment, with the amount of the potential refund decreasing ratably as we progress through the initial six year term of the collaboration. We are amortizing the $100 million upfront payment through September 2019.  Because the amortization period for the upfront payment will never be less than the initial six year term of the collaboration, the amount of revenue we recognize from the upfront payment will never exceed the amount that Biogen Idec could potentially require us to refund.

For each antisense molecule that is chosen for drug discovery and development under this collaboration, we are eligible to receive up to approximately $260 million in a license fee and substantive milestone payments. We are eligible to receive up to approximately $60 million for the achievement of research and development milestones, including amounts related to the cost of clinical trials, and up to $130 million for the achievement of regulatory milestones. We will usually be responsible for drug discovery and early development of antisense drugs and Biogen Idec will have the option to license antisense drugs after Phase 2 proof of concept. Biogen Idec will then be responsible for later phase development and commercialization of the licensed drug. In addition, we are eligible to receive royalties up to the mid-teens on any product sales of antisense drugs developed under this collaboration. If other modalities, such as small molecules or monoclonal antibodies are chosen, we are eligible to receive up to $90 million in substantive milestone payments, including up to $57 million for the achievement of research and development milestones and up to $55 million for the achievement of regulatory milestones. Biogen Idec will be responsible for all of the drug discovery and development activities for drugs using other modalities.  In addition, we are eligible to receive single-digit royalties on any product sales of any drugs using non-antisense modalities developed under this collaboration.  In June 2014, we earned a $10 million milestone payment when Biogen Idec chose the first target to advance under this collaboration. We could earn the next milestone payment of up to $10 million if we initiate an IND-enabling toxicology study for a target under this collaboration.

Each of our agreements with Biogen Idec will continue until the earlier of the date all of Biogen Idec’s options to obtain the exclusive licenses under the applicable agreement expire unexercised or, if Biogen Idec exercises its option, until the expiration of all payment obligations under the applicable agreement. In addition, each agreement, or any program under an agreement, may terminate early under the following situations:

● Biogen Idec may terminate the agreement or any program at any time by providing written notice to us;

● Under specific circumstances, if we are acquired by a third party with a product that directly competes with a compound being developed under the agreement, Biogen Idec may terminate the affected program by providing written notice to us;

● If, within a specified period of time, any required clearance of a transaction contemplated by an agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, is not received, then either we or Biogen Idec may terminate the affected program by providing written notice to the other party; and

● Either we or Biogen Idec may terminate any program by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement with respect to the affected program, or the entire agreement if the other party becomes insolvent.

During the three and six months ended June 30, 2014, we earned revenue of $34.5 million and $44.7 million, respectively, from our relationship with Biogen Idec, which represented 60 percent and 52 percent of our total revenue for those periods.   In comparison, we earned revenue of $7.4 million and $11.2 million for the same periods in 2013.  Our balance sheet at June 30, 2014 included deferred revenue of $136.3 million related to our relationship with Biogen Idec.

GlaxoSmithKline

In March 2010, we entered into a strategic alliance with GSK, for up to six programs, using our antisense drug discovery platform to seek out and develop new drugs against targets for rare and serious diseases, including infectious diseases and some conditions causing blindness. This alliance allows us to control and facilitate development of drugs while still being eligible to receive milestone payments as we advance these drugs in clinical development.  Our strategic alliance currently includes five active programs.  Under the terms of the agreement, we received a $35 million upfront payment and in May 2011 we received a $3 million payment when GSK expanded the collaboration.  In addition, we are eligible to receive on average up to $20 million in milestone payments through Phase 2 proof-of-concept for each program, except for ISIS-TTR_Rx and the fifth target, which we describe below. GSK has the exclusive option to license drugs resulting from this alliance at Phase 2 proof-of-concept for a license fee. If GSK exercises its exclusive option for any drugs resulting from this alliance, it will be responsible for all further development and commercialization for such drug.

In October 2012, we and GSK amended the original agreement to reflect an accelerated clinical development plan for ISIS-TTR_Rx. Under the amended terms of the agreement, we received a $2.5 million upfront payment in December 2012.  Through June 2014, we have received $26 million primarily in milestone payments from GSK related to the development of ISIS-TTR_Rx.  In July 2014, we earned a $1 million milestone payment for further advancing the Phase 2/3 study of ISIS-TTR_Rx. We are eligible to earn an additional $43 million in pre-licensing milestone payments associated with the ISIS-TTR_Rx Phase 2/3 study.  In addition, under the amended agreement, we and GSK increased the regulatory and commercial milestone payments we can earn should ISIS-TTR_Rx receive marketing approval and meet pre-agreed sales targets.

In September 2013, we designated ISIS-HBV_Rx, formerly ISIS-GSK3_Rx, as a development candidate under our collaboration with GSK. ISIS-HBV_Rx is an antisense drug designed to reduce the production of viral proteins associated with hepatitis B virus, or HBV, infection and replication. In June 2014, we amended our agreement to modify the development plans for ISIS-HBV_Rx. As a result, we received a $1 million payment. Through June 2014, we have earned $10 million in substantive milestone payments associated with advancing the ISIS-HBV_Rx program.

In November 2013, we designated ISIS-GSK4_Rx as a development candidate under our collaboration with GSK and earned a $5 million milestone payment.  ISIS-GSK4_Rx is an antisense drug we designed to treat an undisclosed ocular disease.  In April 2014, we and GSK amended our agreement to modify the development plans for ISIS-GSK4_Rx and for the fifth target in our collaboration.  Under the amended terms of the agreement, we are eligible to receive up to $142 million in a license fee, milestone and other payments for the advancement of the fifth target.

Under our agreement, if GSK successfully develops all five programs for one or more indications and achieves pre-agreed sales targets, we could receive license fees and substantive milestone payments of more than $1.2 billion, including up to $172 million for the achievement of development milestones, up to $483.5 million for the achievement of regulatory milestones and up to $428 million for the achievement of commercialization milestones. We will earn the next $1.5 million milestone payment if we initiate an IND-enabling study of ISIS-GSK4_Rx. In addition, we are eligible to receive royalties up to the mid-teens on sales from any product that GSK successfully commercializes under this alliance.

Our alliance with GSK will continue until the earlier of the date all of GSK’s options to obtain the exclusive licenses under the agreement expire unexercised or, if GSK exercises its option, until the expiration of all payment obligations under the agreement. In addition, the agreement, or any program under the agreement, may terminate early under the following situations:

● GSK may terminate any program other than the ISIS-TTR_Rx program at any time by providing written notice to us;

● GSK may terminate the ISIS-TTR_Rx program by providing written notice to us after reviewing specific data from the Phase 3 study for the program; and

● Either we or GSK may terminate any program by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement with respect to the affected program, or the entire agreement if the other party becomes insolvent.

During the three and six months ended June 30, 2014, we earned revenue of $3.5 million and $6.8 million, respectively, from our relationship with GSK, which represented six  percent and eight  percent, respectively, of our total revenue for those periods.  In comparison, we earned revenue of $2.3 million and $12.2 million for the same periods in 2013. Our balance sheet at June 30, 2014 included deferred revenue of $9.1 million related to our relationship with GSK, $7.9 million of which is related to the upfront payments associated with our collaboration with GSK that we are amortizing through our estimated period of performance of July 2015.

Roche

In April 2013, we formed an alliance with Hoffman-La Roche Inc. and F. Hoffmann-La Roche Ltd., collectively Roche, to develop treatments for Huntington’s disease based on our antisense technology. Roche has the option to license the drugs from us through the completion of the first Phase 1 trial. Prior to option exercise, we are responsible for the discovery and development of an antisense drug targeting huntingtin, or HTT, protein. We are also working collaboratively with Roche on the discovery of an antisense drug utilizing Roche’s “brain shuttle” program. If Roche exercises its option, it will be responsible for global development, regulatory and commercialization activities for any drug arising out of the collaboration. Under the terms of the agreement, we received an upfront payment of $30 million in April 2013, which we are amortizing through April 2017.  We are eligible to receive up to $362 million in a license fee and substantive milestone payments including up to $67 million for the achievement of development milestones, up to $170 million for the achievement of regulatory milestones and up to $80 million for the achievement of commercialization milestones. In addition, we are eligible to receive up to $136.5 million in milestone payments for each additional drug successfully developed and up to $50 million in commercial milestones if a drug using Roche’s proprietary brain shuttle technology is successfully commercialized. We are also eligible to receive tiered royalties up to the mid-teens on any product sales of drugs resulting from this alliance. We will earn the next milestone payment of $22 million if we initiate a Phase 1 trial for a drug targeting HTT protein.

Our alliance with Roche will continue until the earlier of the date Roche’s option to obtain the exclusive license under the agreement expires unexercised or, if Roche exercises its option, until the expiration of all payment obligations under the agreement. In addition, the agreement may terminate early under the following situations:

● Roche may terminate the agreement at any time by providing written notice to us;

● Either we or Roche may terminate the agreement by providing written notice to the other party upon the other party’s uncured failure to perform a material obligation under the agreement or if the other party becomes insolvent; and

● Either we or Roche may terminate the brain shuttle program if at least one development candidate is not designated under such program by a mutually agreed deadline.

During the three and six months ended June 30, 2014, we earned revenue of $2.4 million and $4.4 million, respectively, from our relationship with Roche.  In comparison, we earned revenue of $1.3 million for the three and six months ended June 30, 2013. Our balance sheet at June 30, 2014 included deferred revenue of $21.0 million related to our relationship with Roche.

Satellite Company Collaborations

Achaogen, Inc.

In 2006, we exclusively outlicensed to Achaogen, Inc. specific know-how, patents and patent applications relating to aminoglycosides. In exchange, Achaogen agreed to certain payment obligations related to aminoglycosides Achaogen developed. Aminoglycosides are a class of small molecule antibiotics that inhibit bacterial protein synthesis and that physicians use to treat serious bacterial infections. Achaogen is developing plazomicin, an aminoglycoside Achaogen discovered based on the technology we licensed to Achaogen.  Plazomicin has displayed broad-spectrum activity in animals against multi-drug resistant gram-negative bacteria that cause systemic infections, including E. coli.  The compound has also demonstrated activity against methicillin-resistant staphylococcus aureus, or MRSA.

In connection with the license, Achaogen issued to us $1.5 million of Achaogen Series A Preferred Stock. Since early 2009, we have received $3 million in milestone payments from Achaogen, of which $500,000 was in Achaogen securities.  Assuming Achaogen successfully develops and commercializes the first two drugs under our agreement, we will receive payments totaling up to $46.3 million for the achievement of key clinical, regulatory and sales events. We will earn the next payment of $4 million if Achaogen initiates a Phase 3 study for plazomicin. We are also eligible to receive royalties on sales of drugs resulting from the program. Achaogen is solely responsible for the continued development of plazomicin.

In March 2014, Achaogen completed an initial public offering. Upon the close of the offering, our investment in Achaogen’s preferred stock converted into approximately 148,000 shares of common stock.  As of June 30, 2014, the fair value of our investment in Achaogen was $1.9 million, which includes a lack of marketability discount because there are restrictions on when we can trade the securities.  At June 30, 2014 and December 31, 2013, we owned less than 10 percent of Achaogen’s equity.

Alnylam Pharmaceuticals, Inc.

In March 2004, we entered into a strategic alliance with Alnylam to develop and commercialize RNA interference therapeutics. Under the terms of the agreement, we exclusively licensed to Alnylam our patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry for double-stranded RNAi therapeutics in exchange for a $5 million technology access fee, participation in fees from Alnylam’s partnering programs, as well as future milestone and royalty payments from Alnylam. In August 2012, we expanded the license to include using the double-stranded RNAi technology for agricultural products. For each drug Alnylam develops under this alliance, we may receive up to $3.4 million in substantive milestone payments, including up to $1.1 million for the achievement of development milestones and $2.3 million for regulatory milestones. In 2013, we earned a $750,000 milestone payment when Alnylam initiated a Phase 3 study for a drug targeting transthyretin amyloidosis, or TTR.  We will earn the next milestone payment of $375,000 if Alnylam initiates a Phase 1 study for a drug in Alnylam’s pipeline. We retained rights to a limited number of double-stranded RNAi therapeutic targets and all rights to single-stranded RNAi, or ssRNAi, therapeutics.

In turn, Alnylam nonexclusively licensed to us its patent estate relating to antisense motifs and mechanisms and oligonucleotide chemistry to research, develop and commercialize ssRNAi therapeutics and to research double-stranded RNAi compounds. We also received a license to develop and commercialize double-stranded RNAi drugs targeting a limited number of therapeutic targets on a nonexclusive basis. If we develop or commercialize an RNAi-based drug using Alnylam’s technology, we will pay Alnylam milestone payments and royalties. For each drug, the potential milestone payments to Alnylam total $3.4 million, which we will pay if we achieve specified development and regulatory events. To date, we do not have an RNAi-based drug in clinical development. Our Alnylam alliance provides us with an opportunity to realize substantial value from our pioneering work in antisense mechanisms and oligonucleotide chemistry and is an example of our strategy to participate in all areas of RNA-targeting drug discovery.

We have the potential to earn sublicense revenue and a portion of milestone payments and royalty payments that Alnylam receives from licenses of our technology it grants to its partners. Through June 2014, we have earned a total of $48.2 million from Alnylam resulting from licenses of our technology for the development of RNAi technology that we granted to Alnylam and Alnylam has granted to its partners, including $7.7 million we earned in the first quarter of 2014 related to Alnylam’s recently announced collaboration with Genzyme. During the six months ended June 30, 2014 and 2013, we earned revenue of $7.7 million and $0.3 million, respectively, from our relationship with Alnylam.