Licensing and royalty revenue
We often enter into agreements to license our proprietary patent rights on an exclusive or non-exclusive
basis in exchange for license fees and/or royalties. We generally recognize as revenue immediately those
licensing fees and royalties for which we have no significant future performance obligations and are reasonably
assured of collecting the resulting receivable. For example, during 2014, we recognized $9.5 million in revenue
fromAlnylam related to its license of our technology to one of its partners because we had no performance
obligations and collectability was reasonably assured.
Valuation of Investments
We consider all liquid investments with maturities of three months or less when we purchase them to be
cash equivalents. Our short-term investments have initial maturities of greater than three months from date of
purchase. We classify our short-term investments as ‘‘available-for-sale’’ and carry them at fair market value
based upon prices for identical or similar items on the last day of the fiscal period. We record unrealized gains
and losses as a separate component of comprehensive income (loss) and include net realized gains and losses in
gain (loss) on investments. We use the specific identification method to determine the cost of securities sold.
We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These
tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets,
which includes our money market funds and treasury securities classified as available-for-sale securities and our
investments in equity securities in publicly-held biotechnology companies; Level 2, defined as inputs other than
quoted prices in active markets that are either directly or indirectly observable, which includes our fixed income
securities and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. Our
Level 3 investments include investments in the equity securities of publicly-held biotechnology companies for
which we calculated a lack of marketability discount because there were restrictions on when we could trade the
securities. We determine the lack of marketability discount by using a Black-Scholes model to value a
hypothetical put option to approximate the cost of hedging the stock until the restriction ended. The majority of
our securities have been classified as Level 2. We obtain the fair value of our Level 2 investments from our
custodian bank or from a professional pricing service. We validate the fair value of our Level 2 investments by
understanding the pricing model used by the custodian banks or professional pricing service provider and
comparing that fair value to the fair value based on observable market prices.
In November 2014, we participated as a selling shareholder in Regulus’ equity offering and as a result we
were subject to trading restrictions on our remaining shares through January 2015. Therefore, at December 31,
2014, our equity securities of Regulus included a lack of marketability discount, and as a result, were classified
as a Level 3 investment. At December 31, 2013, we did not have any investments classified as Level 3.
We have equity investments in privately- and publicly-held biotechnology companies that we have received
as part of a technology license or collaboration agreement. We account for our equity investments in
publicly-held companies at fair value and record unrealized gains and losses related to temporary increases and
decreases in the stock price of these publicly-held companies as a separate component of comprehensive income
(loss). We account for our equity investment in the privately-held company under the cost method of accounting
because we own less than 20 percent and do not have significant influence over their operations. The cost
method investment we hold is in one of our satellite companies and realization of our equity position in the
company is uncertain. In circumstances where realization of our investment is uncertain, we record a full
valuation allowance. In determining if and when a decrease in market value below our cost in our equity
positions is temporary or other-than-temporary, we examine historical trends in the stock price, the financial
condition of the company, near term prospects of the company and our current need for cash. If we determine
that a decline in value in either a public or private investment is other-than-temporary, we recognize an
impairment loss in the period in which the other-than-temporary decline occurs.
During 2014, we realized a net gain on investments we sold of $21.2 million, consisting primarily of the
$19.9 million gain we realized when we sold a portion of our stock in Regulus. We have reflected this gain in a
separate line on our Consolidated Statements of Operations called ‘‘Gain on investment in Regulus Therapeutics
Inc.’’ See further discussion about our investment in Regulus in Note 2
, Investment in Regulus Therapeutics Inc.,
74
