NOTE 3 — COLLABORATION AGREEMENTS

(a) Collaboration Agreement with Astellas

The Company entered into a collaboration agreement with Astellas in October 2009. Under the Astellas Collaboration Agreement, the Company and Astellas agreed to collaborate on the development of enzalutamide for the U.S. market, including associated regulatory filings with the U.S. Food and Drug Administration, or the FDA. Based on the positive results from the AFFIRM trial, the Company elected to exercise its right under the Astellas Collaboration Agreement to co-promote enzalutamide in the U.S. market. Should enzalutamide receive marketing approval by the FDA, following such approval and the launch of enzalutamide in the United States, the Company and Astellas will co-promote enzalutamide in the United States and each will provide 50% of the sales and medical affairs field forces supporting enzalutamide in the U.S. market. Astellas is responsible for development of, seeking regulatory approval for and commercialization of enzalutamide outside the United States and for commercial manufacture of enzalutamide on a global basis. Both the Company and Astellas have agreed not to commercialize certain other products having a similar mechanism of action as enzalutamide for the treatment of specified indications for a specified time period, subject to certain exceptions.

The Company and Astellas share equally the costs and expenses of developing and commercializing enzalutamide for the U.S. market, except that (a) development costs for studies useful in both the U.S. market and either Europe or Japan are shared two-thirds by Astellas and one-third by the Company, and (b) both the Company and Astellas will be responsible for all commercialization costs incurred in fielding and supporting their respective sales and marketing teams and will be entitled to receive a fee for each detail made by their respective sales forces. The Company and Astellas will share profits (or losses) resulting from the commercialization of enzalutamide in the United States equally. Outside the United States, Astellas will bear all development and commercialization costs and will pay the Company tiered, double-digit royalties on the aggregate net sales of enzalutamide.

The agreement establishes several joint committees consisting of an equal number of representatives from both parties that operate by consensus to oversee the collaboration. In the event that a joint committee is unable to reach consensus on a particular issue, then, depending on the issue, a dispute may be decided at the joint committee level by the party with the final decision on the issue or escalated to senior management of the parties. If a dispute is escalated to senior management and no consensus is reached, then the dispute may be decided by the party to whom the contract grants final decision on such issue. Other issues can only be decided by consensus of the parties, and unless and until the parties’ representatives reach agreement on such issue, no decision on such issue will be made, and the status quo will be maintained.

Under the Astellas Collaboration Agreement, Astellas paid the Company a non-refundable, up-front cash payment of $110.0 million. The Company is also eligible to receive up to $335.0 million in development milestone payments, plus up to an additional $320.0 million in sales milestone payments. As of June 30, 2012, the Company had received an aggregate of $13.0 million in development milestone payments under the Astellas Collaboration Agreement. The Company is required to share 10% of the up-front and development milestone payments received under the Astellas Collaboration Agreement with The Regents of the University of California, or UCLA, pursuant to the terms of our enzalutamide license agreement. In the ongoing litigation with UCLA regarding ARN-509 initiated by the Company, UCLA has alleged that the Company is also required to share with UCLA 10% of any sales milestone payments the Company may receive under the Astellas Collaboration Agreement. The Company disputes this allegation, and intends to defend its position vigorously. The Company and Astellas each are permitted to terminate the Astellas Collaboration Agreement for an uncured material breach by, or the insolvency of, the other party. Astellas has a right to terminate the Astellas Collaboration Agreement unilaterally by advance written notice to the Company, but except in certain specific circumstances, generally cannot exercise that termination right until the first anniversary of enzalutamide’s first commercial sale. Following any termination of the Astellas Collaboration Agreement in its entirety, all rights to develop and commercialize enzalutamide will revert to the Company, and Astellas will grant a license to the Company to enable the Company to continue such development and commercialization. In addition, except in the case of a termination by Astellas for an uncured material breach, Astellas will supply enzalutamide to the Company during a specified transition period.

(b) Former Collaboration Agreement with Pfizer

The Company entered into a collaboration agreement with Pfizer in October 2008. Under the terms of the agreement, the Company and Pfizer agreed to collaborate on the development of dimebon for Alzheimer’s disease and Huntington disease for the U.S. market, including associated regulatory filings with the FDA. Pfizer paid the Company a non-refundable, up-front cash payment of $225.0 million. Under the terms of the former collaboration agreement with Pfizer, the Company and Pfizer shared the costs and expenses of developing and commercializing dimebon for the U.S. market on a 60%/40% basis, with Pfizer assuming the larger share.

In January 2012, the Company reported negative top line results from its Phase 3 CONCERT trial of its former product candidate dimebon in patients with mild-to-moderate Alzheimer’s disease. The Company previously had reported negative top line results from its Phase 3 CONNECTION trial of dimebon in patients with mild-to-moderate Alzheimer’s disease and its Phase 3 HORIZON trial of dimebon in patients with Huntington disease. On January 16, 2012, Pfizer exercised its right to terminate the collaboration agreement and the Company and Pfizer discontinued development of dimebon for all indications. During the ensuing 180 days from Pfizer’s termination notification to the Company, the Company and Pfizer continued to wind down their remaining collaboration activities.

(c) Deferred Revenue and Collaboration Revenue

The Company records non-refundable, up-front payments under its current and former collaboration agreements as deferred revenue and recognizes these payments as collaboration revenue on a straight-line basis over the applicable estimated performance period. Milestone payments earned by the Company under its collaboration agreements are recognized as revenue in their entirety in the period in which the underlying milestone event is achieved, except that any milestone payments triggered by events that occur during the performance period and do not qualify as substantive milestones are recorded as deferred revenue and recognized as revenue on a straight-line basis over the expected performance period. Under the Astellas Collaboration Agreement, the Company is eligible to receive profit sharing payments on sales of products in the United States and royalties on sales of products outside of the United States. The Company will recognize any revenue from these events based on the revenue recognition criteria set forth in ASC 605-10-25-1, “Revenue Recognition.”

At June 30, 2012, the Company estimates that its performance period under the Astellas collaboration agreement and its former collaboration agreement with Pfizer will be completed in the second quarter of 2014 and the third quarter of 2012, respectively.

Through June 30, 2012, the Company has received an aggregate of $123.0 million of non-refundable, up-front and development milestone payments under the Astellas Collaboration Agreement and a $225.0 million non-refundable, up-front payment under its former collaboration agreement with Pfizer. Deferred revenue consisted of the following:


	June 30, 2012		December 31, 2011
Current portion:
Deferred revenue from Astellas	$	29,024	$	23,747
Deferred revenue from Pfizer		5,486		36,015

Total	$	34,510	$	59,762

Long-term portion:
Deferred revenue from Astellas	$	29,024	$	47,494
Deferred revenue from Pfizer		—		36,015

Total	$	29,024	$	83,509

Collaboration revenue recognized with respect to the Astellas Collaboration Agreement and the former collaboration agreement with Pfizer consisted of the following:


	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
Collaboration revenue from Astellas	$	7,256	$	6,795	$	13,193	$	12,500
Collaboration revenue from Pfizer		35,656		9,004		66,544		18,008

Total	$	42,912	$	15,799	$	79,737	$	30,508

(d) Cost-Sharing Payments

Under both the Astellas Collaboration Agreement and the former collaboration agreement with Pfizer, the Company and its collaboration partners share certain development and commercialization costs in the United States. The parties make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the overall development and commercialization costs incurred. The Company’s policy is to account for cost-sharing payments to its collaboration partners as increases in expense in its consolidated statements of operations, while cost-sharing payments by its collaboration partners to the Company are accounted for as reductions in expense. Cost-sharing payments related to development activities and commercialization activities are recorded in research and development expenses and selling, general and administrative expenses, respectively.

The Company recorded development cost-sharing payments from Astellas and Pfizer, and corresponding reductions in research and development expenses as follows:


	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
Development cost-sharing payments from Astellas	$	14,013	$	11,226	$	28,128	$	21,113
Development cost-sharing payments from Pfizer		362		2,988		1,689		7,903

Total	$	14,375	$	14,214	$	29,817	$	29,016

The Company recorded commercialization cost-sharing payments (to) from Astellas and Pfizer, and corresponding (increases) reductions in selling, general and administrative expenses as follows:


	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012			2011
Commercialization cost-sharing payments from (to) Astellas	$	146	$	526	$	(670	)	$	458
Commercialization cost-sharing payments from Pfizer		5		23		9			36

Total	$	151	$	549	$	(661	)	$	494