Collaboration Arrangements

9 Months Ended

Sep. 30, 2011

Collaboration Arrangements

Collaboration Arrangements

4. Collaboration Arrangements

LABA collaboration with GSK

In November 2002, the Company entered into its long-acting beta2 agonist (LABA) collaboration with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease (COPD) and asthma. For the treatment of COPD, the collaboration is developing combination products, RELOVAIR™ and the LAMA/LABA (GSK573719/vilanterol or ‘719/VI). For the treatment of asthma, the collaboration is developing RELOVAIR™. RELOVAIR™ is an investigational once-daily combination medicine consisting of a LABA, VI, previously referred to as GW642444 or ‘444, and an inhaled corticosteroid (ICS), fluticasone furoate (FF). The LAMA/LABA, ‘719/VI, is an investigational once-daily combination medicine consisting of the long-acting muscarinic antagonist (LAMA) ‘719, and the LABA, VI.

The current lead product candidates in the LABA collaboration, VI and FF, were discovered by GSK. In the event that VI is successfully developed and commercialized, the Company will be obligated to make milestone payments to GSK which could total as much as $220.0 million if both a single-agent and a combination product or two different combination products are launched in multiple regions of the world. If the results of the Phase 3 studies with RELOVAIR™ are positive, a portion of these potential milestone payments could be payable to GSK within the next two years. The Company is entitled to annual royalties from GSK of 15% on the first $3.0 billion of annual global net sales and 5% for all annual global net sales above $3.0 billion. Sales of single-agent LABA medicines and combination medicines would be combined for the purposes of this royalty calculation. For other products combined with a LABA from the LABA collaboration, such as ‘719/VI, royalties are upward tiering and range from the mid-single digits to 10%. However, if GSK is not selling a LABA/ICS combination product at the time that the first other LABA combination is launched, then the royalties described above for the LABA/ICS combination medicine would be applicable.

In connection with the LABA collaboration, in 2002, Glaxo Group Limited, an affiliate of GSK, purchased shares of the Company’s Series E preferred stock for an aggregate purchase price of $40.0 million. On July 22, 2011, Glaxo Group Limited converted 2,580,645 shares of the Company’s Class A common stock into the Company’s common stock on a one share-for-one share basis in accordance with the terms of the Company’s restated certificate of incorporation.

Strategic Alliance with GSK

In March 2004, the Company entered into its strategic alliance with GSK. Under this alliance, GSK received an option to license exclusive development and commercialization rights to product candidates from certain of the Company’s discovery programs on pre-determined terms and on an exclusive, worldwide basis. Upon GSK’s decision to license a program, GSK is responsible for funding all future development, manufacturing and commercialization activities for product candidates in that program. In addition, GSK is obligated to use diligent efforts to develop and commercialize product candidates from any program that it licenses. If the program is successfully advanced through development by GSK, the Company is entitled to receive clinical, regulatory and commercial milestone payments and royalties on any sales of medicines developed from the program. If GSK chooses not to license a program, the Company retains all rights to the program and may continue the program alone or with a third party.

In 2005, GSK licensed the Company’s bifunctional muscarinic antagonist-beta2 agonist (MABA) program for the treatment of COPD, and in October 2011, the Company and GSK expanded the MABA program by adding six additional preclinical MABA compounds discovered by the Company (the “Additional MABAs”). GSK’s development, commercialization, milestone and royalty obligations under the strategic alliance remain the same with respect to ‘081, the lead compound in the MABA program. GSK is obligated to use diligent efforts to develop and commercialize at least one MABA within the MABA program, but may terminate progression of any or all Additional MABAs at any time and return them to the Company, at which point the Company may develop and commercialize such Additional MABAs alone or with a third party. Both GSK and the Company have agreed not to conduct any MABA clinical studies outside of the strategic alliance so long as GSK is in possession of the Additional MABAs. If a single-agent MABA medicine containing ‘081 is successfully developed and commercialized, the Company is entitled to receive royalties from GSK of between 10% and 20% of annual global net sales up to $3.5 billion, and 7.5% for all annual global net sales above $3.5 billion. If a MABA medicine containing ‘081 is commercialized only as a combination product, such as a MABA/ICS, the royalty rate is 70% of the rate applicable to sales of the single-agent MABA medicine. For single-agent MABA medicines containing an Additional MABA, the Company is entitled to receive royalties from GSK of between 10% and 15% of annual global net sales up to $3.5 billion, and 10% for all annual global net sales above $3.5 billion. For combination products containing an Additional MABA, such as a MABA/ICS, the royalty rate is 50% of the rate applicable to sales of the single-agent MABA medicine. If a MABA medicine containing ‘081 is successfully developed and commercialized in multiple regions of the world, the Company could earn total milestone payments up to $125.0 million for a single-agent medicine and up to $250.0 million for both a single-agent and a combination medicine. If a MABA medicine containing an Additional MABA is successfully developed and commercialized in multiple regions of the world, the Company could earn total milestone payments up to $129.0 million.

In connection with the expansion of the MABA program, GSK relinquished its option right on the Company’s MonoAmine Reuptake Inhibitor (MARIN) program and Angiotensin Receptor-NEP Inhibitor (ARNI) program. GSK has no further option rights on any of the Company’s research or development programs under the strategic alliance.

In May 2004, GlaxoSmithKline LLC, an affiliate of GSK, purchased 6,387,096 shares of the Company’s Class A common stock for an aggregate purchase price of $108.9 million and, upon the closing of the Company’s initial public offering on October 8, 2004, GlaxoSmithKline LLC purchased an additional 433,757 shares of Class A common stock for an aggregate purchase price of $6.9 million. On July 21, 2011, GSK converted all of the shares of the Company’s Class A common stock held by its affiliates into 9,401,499 shares of the Company’s common stock on a one share-for-one share basis in accordance with the terms of the Company’s restated certificate of incorporation. In addition, Glaxo Group Limited, an affiliate of GSK, purchased shares of the Company’s common stock pursuant to its rights under the Company’s governance agreement with GSK dated June 4, 2004, as amended, as follows:

	Through September 30, 2011
	Common stock shares	Aggregate Amounts(in thousands)
Purchase dates
November 29, 2010	5,750,000	$	129,375
February 24, 2011	152,278	3,609
May 3, 2011	261,299	6,689
August 2, 2011	102,466	2,020

GSK Upfront Fees, Milestone Payments and Revenue

Upfront fees and certain milestone payments have been deferred and are being amortized ratably into revenue over the estimated performance period (the product development period). Upfront fees and milestone payments received from GSK under the LABA collaboration and strategic alliance agreements were as follows:

	Through September 30, 2011
(in thousands)	Upfront Fees		Milestone Payments		Total
GSK Collaborations
LABA/RELOVAIR™ collaboration(1)	$	10,000	$	50,000	$	60,000
Strategic alliance agreement	20,000		—		20,000
Strategic alliance—LAMA license(2)	5,000		3,000		8,000
Strategic alliance—MABA license	5,000		16,000		21,000
Total	$	40,000	$	69,000	$	109,000

(1) The Company does not currently expect to be eligible for any additional milestones under this collaboration.

(2) In August 2004, GSK exercised its right to license the Company’s LAMA program pursuant to the terms of the strategic alliance. In 2009, GSK returned the program to the Company.

During the three months ended September 30, 2011, the Company received a $3.0 million milestone payment from GSK for the initiation of the Phase 1 combination study in the Company’s MABA program. The Company deemed that this milestone and any additional potential milestones related to ‘081 in the MABA program are not substantive due to the fact that achievement of the milestones predominantly relates to GSK’s development, manufacturing and commercialization activities. In October 2011, the Company received an upfront payment of $1.0 million from GSK related to the Additional MABAs. The Company will allocate revenue from this upfront payment and any potential milestones related to the Additional MABAs under the MABA program, as discussed above, to each non-contingent element based upon the relative selling price of each element. When applying the relative selling price method, the Company will determine the selling price for each deliverable using vendor-specific objective evidence (VSOE) of selling price or third-party evidence (TPE) of selling price, if either exists. If neither VSOE nor TPE of selling price exists for a deliverable, the Company will use best estimated selling price for that deliverable. Revenue allocated to each element will then be recognized when earned. The Company deemed that any potential milestones related to the Additional MABAs in the MABA program are not substantive due to the fact that achievement of the milestones predominantly relates to GSK’s development, manufacturing and commercialization activities.

Revenue recognized through amortization of the deferred upfront fees and milestone payments from GSK under the LABA collaboration and strategic alliance agreement was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
GSK Collaborations
LABA/ RELOVAIR™ collaboration	$	1,270	$	1,270	$	3,811	$	3,811
Strategic alliance agreement	489		684		1,858		2,053
Strategic alliance—MABA license	621		502		1,625		1,506
Total	$	2,380	$	2,456	$	7,294	$	7,370

License, Development and Commercialization Agreement with Astellas

In November 2005, the Company entered into a collaboration arrangement with Astellas for the development and commercialization of telavancin. In July 2006, Japan was added to the collaboration, thereby giving Astellas worldwide rights to this medicine. Under this arrangement, the Company is responsible for substantially all costs to develop and obtain U.S. regulatory approval for telavancin and Astellas is responsible for substantially all other costs associated with commercialization of VIBATIV®. The Company is entitled to receive royalties from Astellas on global net sales of VIBATIV® that, on a percentage basis, range from the high teens to the upper twenties depending on sales volume. Astellas has the right to terminate this agreement since VIBATIV® was not approved by the U.S. Food and Drug Administration (FDA) before December 31, 2008.

Through September 30, 2011, the Company had received $191.0 million in upfront, milestone and other fees from Astellas. The Company recorded these payments as deferred revenue and is amortizing them ratably over its estimated performance period (development and commercialization period). The Company is eligible to receive up to an additional $15.0 million in milestone payments. The Company has deemed $10.0 million of the remaining potential milestone payments to be substantive as the Company is responsible for substantially all activities to develop and obtain U.S. regulatory approval for telavancin for the treatment of nosocomial pneumonia. However, the Company’s management believes that the likelihood of achieving this milestone is low. The remaining potential milestone payment of $5.0 million is not deemed substantive due to the fact that pursuing regulatory approval of telavancin in the regions of the world outside of the U.S. is predominantly the responsibility of Astellas.

Revenue recognized under this collaboration agreement was as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2011		2010			2011			2010
Amortization of deferred revenue	$	3,244	$	3,244		$	9,731		$	9,731
Royalties from net sales of VIBATIV®	807		422			2,131			546
Proceeds from VIBATIV® delivered to Astellas	—		—			1,171			1,393
Cost of VIBATIV® delivered to Astellas	—		—			(1,177		)	(943		)
Cost of unrealizable VIBATIV® inventory	—		(820		)	—			(820		)
Total net revenue	$	4,051	$	2,846		$	11,856		$	9,907