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We determined that the ISIS-STAT3
Rx
license had stand-alone value because it is an exclusive license that givesAstraZeneca
the right todevelop ISIS-STAT3
Rx
or to sublicense its rights. In addition, ISIS-STAT3
Rx
is currently indevelopment and it is possible
thatAstraZeneca or another thirdparty could conduct clinical trialswithout assistance fromus. As a result, we consider the ISIS-
STAT3
Rx
license and the development services for ISIS-STAT3
Rx
tobe separate units of accounting.We recognized the portionof the
consideration allocated to the ISIS-STAT3
Rx
license immediately becausewe delivered the license and earned the revenue. We are
recognizing as revenue the amount allocated to the development services for ISIS-STAT3
Rx
over the periodof timewe perform
services. The ISIS-AR
Rx
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-
AR
Rx
. As a result, we concluded that the ISIS-AR
Rx
license does not have stand-alone value andwe combined the ISIS-AR
Rx
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-
STAT3
Rx
and ISIS-AR
Rx
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
An appropriate discount rate.
We estimated the sellingprice of the research anddevelopment services byusingour internal estimates of the cost toperform
the specific services,markedup to include a reasonable profitmargin, and estimates of expected cashoutflows to thirdparties for
services and supplies over the expectedperiod thatwewill perform research anddevelopment. The significant inputswe used to
determine the selling price of the research anddevelopment services included:
The number of internal hourswewill spendperforming these services;
The estimated number and cost of studieswewill perform;
The estimated number and cost of studies that wewill contract with thirdparties to perform; and
The estimated cost of drugproductwewill use in the studies.
As a result of the allocation,we recognized$9.3million of the $25millionupfront payment for the ISIS-STAT3
Rx
license in
December 2012 andwe recognized$2.2millionof the $6million payment for the ISIS-STAT3
Rx
license in June 2013. We are
recognizing the remaining$19.5millionof the $31million over the estimated periodof our performance. Assuming a constant selling
price for the other elements in the arrangement, if therewas an assumed tenpercent increase or decrease in the estimated sellingprice
of the ISIS-STAT3
Rx
license, we determined that the revenuewewouldhave allocated to the ISIS-STAT3
Rx
licensewould change by
approximately sevenpercent, or $750,000, from the amountwe recorded.
Typically, wemust estimate our periodof performancewhen the agreementswe enter intodo not clearlydefine such
information. Our collaborative agreements typically include a research and/or development project planoutlining the activities the
agreement requires eachparty to performduring the collaboration.We estimate the periodof time overwhichwewill complete the
activities forwhichwe are responsible anduse that period of time as our periodof performance for purposes of revenue recognition
and amortize revenue over suchperiod. We havemade estimates of our continuingobligations under numerous agreements and in
certain instances the timing of satisfying these obligations is difficult to estimate. Accordingly, our estimatesmay change in the future.
If our estimates and judgments change over the course of these agreements, itmay affect the timing and amount of revenue thatwe
