We determined that the ISIS-STAT3-2.5
Rx
license had stand-alone value because it is an exclusive license
that gives AstraZeneca the right to develop ISIS-STAT3-2.5
Rx
or to sublicense its rights. In addition,
ISIS-STAT3-2.5
Rx
is currently in development and it is possible that AstraZeneca or another third party could
conduct clinical trials without assistance from us. As a result, we considered the ISIS-STAT3-2.5
Rx
license and
the development services for ISIS-STAT3-2.5
Rx
to be separate units of accounting. We recognized the portion of
the consideration allocated to the ISIS-STAT3-2.5
Rx
license immediately because we delivered the license and
earned the revenue. We are recognizing as revenue the amount allocated to the development services for
ISIS-STAT3-2.5
Rx
over the period of time we perform services, which we expect will end during the first quarter
of 2015. The ISIS-AR-2.5
Rx
license is also an exclusive license. At the inception of the agreement,
ISIS-AR-2.5
Rx
was in an early stage of research. Therefore, we concluded that our knowledge and expertise with
antisense technology was essential for AstraZeneca or another third party to successfully develop ISIS-AR-2.5
Rx
.
As a result, we determined that the ISIS-AR-2.5
Rx
license did not have stand-alone value and we combined the
ISIS-AR-2.5
Rx
license and related research services into one unit of accounting. We recognized revenue for the
combined unit of accounting over the period of time we performed services, which ended in the first quarter of
2014. We determined that the options under the research program did not have stand-alone value because
AstraZeneca cannot develop or commercialize drugs resulting from the research program until AstraZeneca
exercises the respective option or options. As a result, we considered the research options and the related
research services as a combined unit of accounting. We are recognizing revenue for the combined unit of
accounting over the period of our performance.
We determined that the initial allocable arrangement consideration was the $25 million upfront payment
because it was the only payment that was fixed and determinable when we entered into the agreement. In June
2013, we increased the allocable consideration to $31 million when we received the $6 million payment. There
was considerable uncertainty at the date of the agreement as to whether we would earn the milestone payments,
royalty payments, payments for manufacturing clinical trial materials or payments for finished drug product. As
such, we did not include those payments in the allocable consideration.
We allocated the allocable consideration based on the relative BESP of each unit of accounting. We engaged
a third party, independent valuation expert to assist us with determining BESP. We estimated the selling price of
the licenses granted for ISIS-STAT3-2.5
Rx
and ISIS-AR-2.5
Rx
by using the relief from royalty method. Under this
method, we estimated the amount of income, net of taxes, for each drug. We then discounted the projected
income for each license to present value. The significant inputs we used to determine the projected income of the
licenses included:
•
Estimated future product sales;
•
Estimated royalties on future product sales;
•
Contractual milestone payments;
•
Expenses we expect to incur;
•
Income taxes; and
•
An appropriate discount rate.
We estimated the selling price of the research and development services by using our internal estimates of
the cost to perform the specific services, marked up to include a reasonable profit margin, and estimates of
expected cash outflows to third parties for services and supplies over the expected period that we will perform
research and development. The significant inputs we used to determine the selling price of the research and
development services included:
•
The number of internal hours we will spend performing these services;
•
The estimated number and cost of studies we will perform;
•
The estimated number and cost of studies that we will contract with third parties to perform; and
•
The estimated cost of drug product we will use in the studies.
As a result of the allocation, we recognized $9.3 million of the $25 million upfront payment for the
ISIS-STAT3-2.5
Rx
license in December 2012 and we recognized $2.2 million of the $6 million payment for the
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