10.

REGULUS

In September 2007, the Company and Isis established Regulus, a company focused on the discovery, development and commercialization of microRNA therapeutics, a potential new class of drugs to treat the pathways of human disease. Regulus, which initially was established as a limited liability company, converted to a C corporation in January 2009 and changed its name to Regulus Therapeutics Inc. Regulus operates as an independent company with a separate board of directors, scientific advisory board and management team.

In consideration for the Company’s and Isis’ initial interests in Regulus, each party granted Regulus exclusive licenses to its intellectual property for certain microRNA therapeutic applications as well as certain patents in the microRNA field. In addition, the Company made an initial cash contribution to Regulus of $10.0 million, resulting in the Company and Isis making approximately equal aggregate initial capital contributions to Regulus. In March 2009, the Company and Isis each purchased $10.0 million of Series A preferred stock of Regulus. In October 2010, in connection with its strategic alliance with Regulus formed in June 2010, Sanofi made a $10.0 million equity investment in Regulus. As a result of the $10.0 million equity investment made by Sanofi, the Company recognized a gain of $4.4 million. This amount was recorded as other income in the Company’s consolidated statements of comprehensive loss for the year ended December 31, 2010.

From the formation of Regulus in September 2007 to October 2012, the Company accounted for its interest in Regulus using the equity method of accounting. The Company reviewed the consolidation guidance that defines a VIE and concluded that Regulus qualified as a VIE during such time period. The Company did not consolidate Regulus as the Company lacked the power to direct the activities that could significantly impact the economic success of this entity.

Summary results of Regulus’ statements of comprehensive loss for the nine months ended September 30, 2012 and the years ended December 31, 2011 and 2010 and the balance sheet at December 31, 2011 are presented in the tables below, in thousands:


	Nine months ended September 30,			Year ended December 31,
	2012			2011			2010
Statements of Comprehensive Loss Data:
Net revenues	$	9,462		$	13,789		$	8,601
Operating expenses		17,733			20,926			24,099

Loss from operations		(8,271	)		(7,137	)		(15,498	)
Other (expense) income		(2,289	)		(259	)		(91	)
Income tax benefit (expense)		28			(206	)		30

Net loss	$	(10,532	)	$	(7,602	)	$	(15,559	)


	December 31, 2011
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	38,144
Current assets		38,666
Total assets		42,881
Current liabilities		12,850
Non-current liabilities		28,834
Notes payable		11,259
Net assets		1,197

Under the equity method of accounting, the Company was required to recognize losses up to the amount of Regulus’ debt, which was guaranteed by the Company. This resulted in a negative carrying amount. In October 2012, Regulus completed an initial public offering, resulting in the Company’s ownership percentage decreasing from approximately 44% to 17% of Regulus’ outstanding common stock. Upon the completion of the Regulus’ initial public offering, the Company’s debt guarantee was terminated.

Based upon the Company’s new ownership percentage of 17%, as well as a review of qualitative factors, the Company does not believe that it has the ability to exercise significant influence over the operating decisions and financial policies of Regulus and has therefore discontinued the equity method of accounting for Regulus at September 30, 2012. The Company determined that the period between September 30, 2012 and the date on which Regulus’ closed its initial public offering was immaterial for additional equity method accounting. Accordingly, beginning October 10, 2012, the Company has accounted for its investment in Regulus as an available-for-sale marketable security due to its readily determinable fair value. At December 31, 2012, the fair value of the Regulus equity securities was $38.7 million. As a result of the issuance of additional common stock by Regulus, the Company recognized a gain of $16.1 million. This amount was recorded as other income in the Company’s consolidated statements of comprehensive loss for the year ended December 31, 2012. The Company’s carrying amount in Regulus increased to $12.4 million following the initial public offering, which became the initial basis of its investment in Regulus under the accounting standard for marketable securities. In addition, the Company recorded $15.7 million as an unrealized gain in other comprehensive income, net of an intraperiod tax benefit of $10.6 million.

The Company has historically classified the equity method investment amount in the financial statement caption “Investment in joint venture (Regulus Therapeutics Inc.)” on the Company’s consolidated balance sheets. For the purposes of the 2012 balance sheet, this amount is zero and the Company has reclassified the 2011 balance of $0.6 million to the financial statement caption “Other assets.”