REVENUE

The following table summarizes revenue from contracts with customers for the years ended December 31, 2018, 2017 and 2016 (in thousands) into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors:



	December 31,
	2018		2017		2016
Product sales, net:
Gralise	$	58,077	$	77,034	$	88,446
CAMBIA	35,803		31,597		31,273
Zipsor	16,387		16,700		27,539
Total neurology product sales, net	110,267		125,331		147,258
NUCYNTA products	18,944		239,539		281,261
Lazanda	755		15,010		26,547
Total product sales, net	129,966		379,880		455,066
Commercialization agreement:
Commercialization rights and facilitation services, net	100,038		—		—
Revenue from transfer of inventory	55,705		—		—
Royalties and milestone revenue	26,061		844		831
Total revenues	$	311,770	$	380,724	$	455,897

NUCYNTA product sales for the year ended December 31, 2018 reflect the Company’s sales of NUCYNTA between January 1 and January 8, 2018. During the year ended December 31, 2018 the Company recognized sales reserve estimate adjustments related to sales recognized for NUCYNTA and Lazanda in prior periods. Separately, during the first quarter of 2018, in connection with the Collegium transaction, the Company recognized Nucynta product revenue of $12.5 million related to the release of NUCYNTA sales reserves which were primarily recorded in the fourth quarter of 2017, as financial responsibility for those reserves transferred to Collegium upon closing of the Commercialization Agreement.

Original Commercialization Agreement with Collegium

In December 2017, the Company, Collegium and Collegium NF, LLC, a Delaware limited liability company and wholly owned subsidiary of Collegium (Newco), entered into a Commercialization Agreement (Commercialization Agreement), pursuant to which the Company granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the United States. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The Company also agreed to provide services to Collegium, including to arrange for the supply of NUCYNTA products by the Company’s existing contract manufacturing organizations (“CMOs”) (the “Facilitation Services”). The Company identified the following three promised goods and services under the Commercialization Agreement: (1) the license to commercialize the NUCYNTA pain products (License), (2) services to arrange for supplies of NUCYNTA pain products using the Company’s existing contract manufacturing contracts with third parties (Facilitation Services); and (3) the transfer of control of all NUCYNTA finished goods held at closing (Inventory Transfer).

The Inventory Transfer was deemed to be a distinct performance obligation which was completed during the first quarter of 2018. The Company concluded that the License and the Facilitation Services are not distinct from one another as the Commercialization Agreement does not grant to Collegium a license to manufacture NUCYNTA. The Company (i) exclusively controls the intellectual property underlying the NUCYNTA products for the United States market, (ii) retains responsibility for facilitating NUCYNTA product supply through its CMOs, and (iii) exclusively maintains all CMO contractual relationships. As a result, Collegium’s right to commercialize NUCYNTA is inherently dependent upon the Facilitation Services. Because (i) Collegium is contractually required to use the Facilitation Services to arrange for product supply and (ii) tapentadol is a Schedule II controlled substance for which manufacturing arrangements are not easily transferred or bypassed, there is strong interdependency between the License and the Facilitation Services. These Facilitation Services are administrative in nature but necessary for the commercialization right to have utility to Collegium.

In January 2018, the Company determined the total fixed elements of the transaction price to be $553.2 million, which consisted of $537.0 million in total annual minimum royalty payments for years 2018 through 2021, a $10.0 million upfront fee, and a $6.2 million payment for NUCYNTA finished goods inventory. The Company determined that the duration of the Commercialization Agreement began on the effective date of January 9, 2018 and lasts through December 31, 2021, including the minimum royalty period and the period in which Collegium would incur a $25.0 million termination penalty on terminating the Commercialization Agreement. Beginning January 1, 2022 and for each year of the Commercialization Agreement thereafter, royalties are: (i) 58% of net sales of NUCYNTA up to $233 million, payable quarterly within 45 days of the end of each calendar quarter, plus (ii) 25% of annual net sales of NUCYNTA between $233 million and $258 million, plus (iii) 17.5% of annual net sales of NUCYNTA above $258 million. Payments described in clauses (ii) and (iii) hereof will be paid annually within 60 days of the end of the calendar year.

The portion of the transaction price allocated to the Inventory Transfer was $55.7 million and was recognized on the closing date as the control of such inventory was transferred to Collegium. The portion of the transaction price allocated to the License and Facilitation Services, as a combined performance obligation, was $497.5 million and would be recognized over ratably though December 31, 2021.

In addition, Collegium assumed responsibility for a portion of the royalties owed by the Company to a third party on sales of NUCYNTA. The royalties owed by Collegium to the third party are 14% of sales with the Company ensuring a minimum royalty of $34.0 million per year on net sales of NUCYNTA greater than $180.0 million. The Company is obligated to cover any shortfall between the minimum royalty amount of $34.0 million and the amounts paid to the third party by Collegium for each of the years ended December 31, 2018 through 2021, as a result of which the Company could be obligated to pay up to $8.8 million per year for each of the years ended December 31, 2018 through 2021.

Amended Commercialization Agreement with Collegium

On November 8, 2018, the Company, Collegium and Newco entered into a third amendment to the Commercialization Agreement (Amendment). Pursuant to the Amendment, the royalties payable by Collegium to the Company in connection with Collegium’s commercialization of NUCYNTA were amended such that effective as of January 1, 2019 through December 31, 2021, the Company will receive: (i) 65% of net sales of NUCYNTA up to $180 million, plus (ii) 14% of annual net sales of NUCYNTA between $180 million and up to $210 million, plus (iii) 58% of annual net sales of NUCYNTA between $210 million and $233 million, plus (iv) 20% of annual net sales of NUCYNTA between $233 million and up to $258 million, plus (v) 15% of annual net sales of NUCYNTA above $258 million. The Amendment does not change the royalties that the Company will receive on annual net sales of NUCYNTA by Collegium for the period beginning January 1, 2022 and for each year of the Commercialization Agreement term thereafter.

The Amendment provides that Collegium shall reimburse the Company for the amount of any minimum annual royalties paid by the Company to the third party on net sales of NUCYNTA during the first four years of the Commercialization Agreement beginning in 2019. The Amendment also provides for Collegium to share certain costs related to the License. The reimbursement and the cost sharing are considered variable consideration. The Amendment is being accounted for prospectively.

In connection with the Amendment Collegium issued the Company a warrant to purchase up to 1,041,667 shares of Collegium common stock at an exercise price of $19.20 per share (Warrant). The Warrant is exercisable for a period of four years and contains customary terms, including with regard to net exercise. The Warrant was valued at $8.8 million as of the date of the Amendment and is considered to be a component of the fixed consideration associated with the Commercialization Agreement. These Warrants are included in Investments on the Company’s Consolidated Balance Sheet, however, as they are non-cash they do not impact investing cash flows.

In November 2018, the Company determined the total fixed elements of the transaction price following the Amendment to be $157.0 million, which consisted of $132.0 million in total annual minimum royalty payments for 2018, the $10.0 million upfront fee, the $6.2 million payment for NUCYNTA finished goods inventory and the $8.8 million attributed to the Warrant. There were no new performance obligations following the modification of the Commercialization Agreement and at the time of the modification, the remaining periods in the series of services related to the single performance obligation to deliver the license and provide facilitation services are distinct from those prior to the modification. As a result, the modification was accounted for as a termination of the old arrangement and the entering into of a new agreement, in accordance with the guidance of ASC 606.

Pursuant to the Amendment, Collegium may only terminate the Commercialization Agreement after December 31, 2020, with 12-months’ notice. In the event any such termination notice has an effective date of termination prior to December 31, 2022, then Collegium shall pay a $5 million termination fee to the Company concurrent with the delivery of such notice. The Company determined that the $5 million termination fee is not substantive and therefore the duration of the Commercialization Agreement is unchanged by the Amendment and lasts through December 31, 2021, which is consistent with the contractual period in which the Company and Collegium have enforceable rights and obligations.

The Amendment provides that the Company may terminate the Commercialization Agreement upon 60 days’ prior written notice to Collegium in the event that (i) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months ending on or before December 31, 2021 are less than $180 million, or (ii) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months commencing on or after January 1, 2022 are less than $170 million.

2018 Revenue from the Commercialization Agreement

For the year ended December 31, 2018, the Company recognized royalty revenue from the Commercialization agreement of $155.7 million. The revenue recognized in 2018 under the Commercialization Agreement is impacted by both the original Commercialization Agreement and the Amendment and is comprised of the following components:


•	The Company recognized $55.7 million related to the transfer of inventory upon closing


•	From the effective date of the Commercialization Agreement, January 8, 2018 through the date of the Amendment on November 8, 2018 the Company recognized fixed consideration of $103.8 million which is the ratable recognition of the transaction price allocated to the combined license and facilitation performance obligation.


•	Assertio recognized revenue and expenses related to the third party royalties in 2018 which resulted in a net gross-to-net adjustment of $3.7 million, which reduces commercialization revenue, which is the Company’s obligation related to the shortfall discussed above.

•

Of the variable components of the amended Commercialization Agreement, recognition of the variable royalty revenue which becomes effective for sales beginning January 1, 2019 and Collegium’s payment of royalties to a third party were constrained by the sales based royalty exception and revenue related to the reimbursement for certain costs related to the NUCYNTA license was insignificant for the post-modification period.

Cash collected from Collegium in 2018 includes the upfront payments of $10.0 million for facilitation services and $6.2 million for inventory as well as the annual minimum royalty amounts, payable by Collegium in equal quarterly installments which are $30.8 million for the three months ended March 31, 2018 and $33.8 million per a quarter for the second, third and fourth quarters of 2018. For the year ended December 31, 2018, $132.0 million was received by the Company with respect to royalty payments.

Royalties obligations related to NUCYNTA sales for the year ended December 31, 2018 were $34.0 million of which approximately $29.5 million were paid directly by Collegium to the third party.

Contract Assets

The following table presents changes in the Company’s contract assets as of December 31, 2018 (in thousands):



	Balance							Balance
	as of							as of
	December 31, 2017		Additions		Deductions			December 31, 2018
Contract assets:
Contract asset, net - Collegium	$	—	$	55,705	$	(53,289	)	$	2,416
Contract asset - Ironwood	—		5,000		(5,000		)	—
	—		60,705		(58,289		)	2,416

The Collegium contract asset represents the conditional right to consideration for completed performance under the Commercialization Agreement arising from the transfer of inventory to Collegium on the date of closing of the agreement in January 2018 net of the contract liability of $10.0 million resulting from the upfront payment received and the $8.8 million of warrants received. Portions of the contract asset are reclassified to accounts receivable when the right to consideration becomes unconditional. As of December 31, 2018, $0.8 million and $1.6 million of the contract asset has been recorded within “Prepaid and other current assets” and “Other long-term assets,” respectively.

The Ironwood contract asset is discussed further below.

Collaboration and License Agreements

Ironwood Pharmaceuticals, Inc. The future contingent milestones under the Ironwood Agreement are considered variable consideration and are estimated using the most likely method. As part of adopting ASC 606, the Company evaluated whether the future milestones under the Ironwood Agreement should have been included as part of the transaction price in periods before January 1, 2018. The Company concluded that because of development and regulatory risks at the time, it was probable that a significant revenue reversal could have occurred. Accordingly, the associated future contingent milestone values were not included in the transaction price for periods before January 1, 2018. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue in the period of adjustment. During the second and third quarter of 2018, the Company recognized and collected, respectively, a $5.0 million milestone payment related to the dosing of the first patient in a Phase 3 trial. There was no revenue recognized under this agreement for the year ended December 31, 2017.

PDL BioPharma, Inc. In October 2013, the Company sold its interests in royalty and milestone payments under its license agreements relating to the Company’s Acuform technology in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million. On August 2, 2018 the Company sold its remaining interest in such payments to PDL for $20.0 million. The $20.0 million of revenue was recognized as royalty revenue in the third quarter of 2018.

ASC 606 Adoption

The Company considered the adoption of the new revenue standard, ASC 606, compared to what would have been recognized by the Company under the prior revenue standards, ASC 605. The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2018.