Isis Pharmaceuticals, Inc. Form 10K - page 98

F-10
price; and (iii) best estimate of selling price, orBESP. TheBESP reflects our best estimate ofwhat the selling pricewouldbe ifwe
regularly sold the deliverable on a stand-alone basis.We recognize the revenue allocated to eachunit of accounting aswe deliver the
relatedgoods or services. Ifwe determine that we should treat certaindeliverables as a single unit of accounting, thenwe recognize
the revenue ratablyover our estimated periodof performance.
InDecember 2012, we entered into a collaboration agreement withAstraZeneca todiscover anddevelop antisense
therapeutics against five cancer targets. As part of the collaboration, we received a $25million upfront payment inDecember 2012
and a $6millionpayment in June 2013whenAstraZeneca elected to continue the research collaboration. We are also eligible to
receivemilestone payments, license fees for the researchprogram targets and royalties on anyproduct sales of drugs resulting from
this collaboration. In exchange, we grantedAstraZeneca an exclusive license todevelop and commercialize ISIS-STAT3Rx and ISIS-
ARRx. We alsograntedAstraZeneca options to license up to three cancer drugs under the separate research program.We are
responsible for completing anongoing clinical studyof ISIS-STAT3Rx and IND-enabling studies for ISIS-AR Rx. AstraZeneca is
responsible for all other global development, regulatory and commercialization activities for ISIS-STAT3Rx and ISIS-ARRx. In
addition, ifAstraZeneca exercises its option for anydrugs resulting from the research program, AstraZenecawill assume global
development, regulatory and commercialization responsibilities for suchdrug. Since this agreement hasmultiple elements, we
evaluated the deliverables in this arrangement anddetermined that certaindeliverables, either individuallyor in combination, have
stand-alone value. Below is a list of the four separate units of accountingunder our agreement:
 The exclusive licensewe granted toAstraZeneca to develop and commercialize ISIS-STAT3Rx for the treatment of
cancer;
 The development serviceswe are performing for ISIS-STAT3 Rx;
 The exclusive licensewe granted toAstraZeneca to develop and commercialize ISIS-ARRx and the research serviceswe
are performing for ISIS-ARRx; and
 The option to license up to three drugs under a research program and the research serviceswewill perform for this
program.
We determined that the ISIS-STAT3Rx license had stand-alone value because it is an exclusive license that givesAstraZeneca
the right todevelop ISIS-STAT3Rx or to sublicense its rights. In addition, ISIS-STAT3Rx is currently indevelopment and it is possible
thatAstraZeneca or another thirdparty could conduct clinical trialswithout assistance fromus. As a result, we consider the ISIS-
STAT3Rx license and the development services for ISIS-STAT3Rx tobe separate units of accounting.We recognized the portionof the
consideration allocated to the ISIS-STAT3Rx license immediately becausewe delivered the license and earned the revenue. We are
recognizing as revenue the amount allocated to the development services for ISIS-STAT3Rx over the periodof timewe perform
services. The ISIS-ARRx license is also an exclusive license. Becauseof the early stage of research for ISIS-AR Rx, we believe that our
knowledge and expertisewith antisense technology is essential forAstraZeneca or another thirdparty to successfully develop ISIS-
ARRx. As a result, we concluded that the ISIS-AR Rx license does not have stand-alone value andwe combined the ISIS-ARRx license
and related research services intoone unit of accounting. We are recognizing revenue for the combined unit of accounting over the
periodof timewe perform services.We determined that the options under the researchprogramdidnot have stand-alone value
becauseAstraZeneca cannot develop or commercialize drugs resulting from the researchprogramuntil AstraZeneca exercises the
respective optionor options. As a result, we considered the research options and the related research services as a combinedunit of
accounting. We are recognizing revenue for the combinedunit of accountingover the periodof our performance.
We determined that the initial allocable arrangement considerationwas the $25million upfront payment because it was the
onlypayment that was fixed and determinablewhenwe entered into the agreement. In June 2013, we increased the allocable
consideration to$31millionwhenwe received the $6millionpayment. Therewas considerable uncertainty at the date of the
agreement as towhetherwewould earn themilestone payments, royalty payments, payments formanufacturing clinical trialmaterials
or payments for finisheddrugproduct. As such, we didnot include those payments in the allocable consideration.
We allocated the allocable consideration basedon the relativeBESPof eachunit of accounting. We engaged a thirdparty,
independent valuation expert to assist uswithdeterminingBESP.We estimated the selling price of the licenses granted for ISIS-
STAT3Rx and ISIS-ARRx byusing the relief from royaltymethod. Under thismethod, we estimated the amount of income, net of
taxes, for eachdrug.We thendiscounted the projected income for each license topresent value. The significant inputswe used to
determine the projected income of the licenses included:
 Estimated future product sales;
 Estimated royalties on future product sales;
 Contractualmilestone payments;
 Expenseswe expect to incur;
 Income taxes; and