For the year ended December 31, 2019, the Company had linaclotide collaboration agreements with Allergan for North America and AstraZeneca for China (including Hong Kong and Macau), as well as linaclotide license agreements with Astellas for Japan and with Allergan for the Allergan License Territory. The Company also had agreements with Allergan to co-promote VIBERZI in the U.S. and with Alnylam to perform disease awareness activities for AHP and sales detailing activities for GIVLAARI. The following table provides amounts included in the Company’s

consolidated statements of operations as collaborative arrangements revenue and sale of API primarily attributable to transactions from these arrangements (in thousands):

(1)	In August 2016, the Company terminated the Co-Promotion Agreement for COLOGUARD with Exact Sciences Corp. Under the terms of the agreement, the Company continued to receive royalty payments through July 2017.

(2)	During the year ended December 31, 2018, the Company recorded approximately $0.8 million in revenue related to the sale of API to Allergan, separate from its existing revenue agreements.

Accounts receivable, net included approximately $43.9 million and approximately $21.0 million related to collaborative arrangements revenue and sale of API, collectively, as of December 31, 2019 and 2018, respectively. Related party accounts receivable, net included approximately $110.1 million and approximately $63.0 million related to collaborative arrangements revenue, net of approximately $4.1 million and approximately $3.1 million related to related party accounts payable as of December 31, 2019 and 2018, respectively. As of December 31, 2019, deferred revenue was approximately $0.9 million related to the disease education and promotional agreement with Alnylam.

As of December 31, 2019 and 2018, there were no impairment indicators for the accounts receivable recorded.

Linaclotide Agreements

Collaboration Agreement for North America with Allergan

In September 2007, the Company entered into a collaboration agreement with Allergan to develop and commercialize linaclotide for the treatment of IBS-C, CIC, and other GI conditions in North America. Under the terms of this collaboration agreement, the Company received a non-refundable, upfront licensing fee and shares equally with Allergan all development costs as well as net profits or losses from the development and sale of linaclotide in the U.S. The Company receives royalties in the mid-teens' percent based on net sales in Canada and Mexico. Allergan is solely responsible for the further development, regulatory approval and commercialization of linaclotide in those countries and funding any costs. The collaboration agreement for North America also includes contingent milestone payments, as well as a contingent equity investment, based on the achievement of specific development and commercial milestones. At December 31, 2019, $205.0 million in license fees and all six development milestone payments had been received by the Company, as well as a $25.0 million equity investment in the Company’s capital stock. The Company can also achieve up to $100.0 million in a sales-related milestone if certain conditions are met, which will be recognized as collaborative arrangements revenue when it is probable that a significant reversal of revenue would not occur, and the associated constraints have been lifted.

During the years ended December 31, 2019, 2018 and 2017, the Company incurred approximately $37.6 million, approximately $39.2 million, and approximately $28.5 million in total research and development expenses under the linaclotide collaboration for North America. As a result of the research and development cost-sharing provisions of the linaclotide collaboration for North America, the Company offset approximately $7.2 million and approximately $9.0 million in research and development costs during the years ended December 31, 2019 and 2018, respectively, to reflect the obligations of each party under the collaboration to bear half of the development costs incurred. The Company recognized approximately $0.6 million in incremental research and development costs during the year ended December 31, 2017, to reflect the obligations of each party under the collaboration to bear half of the development costs incurred.

The Company and Allergan began commercializing LINZESS in the U.S. in December 2012. The Company receives 50% of the net profits and bears 50% of the net losses from the commercial sale of LINZESS in the U.S. Net profits or net losses consist of net sales of LINZESS to third-party customers and sublicense income in the U.S. less the cost of goods sold as well as selling, general and administrative expenses. LINZESS net sales are calculated and recorded by Allergan and may include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions. If either party provided fewer calls on physicians in a particular year than it was contractually required to provide, such party’s share of the net profits would be adjusted as set forth in the collaboration agreement for North America. During the year ended December 31, 2017, the adjustment to the share of the net profits was eliminated in connection with the co-promotion activities under the Company’s agreement with Allergan to co-promote VIBERZI in the U.S., as described below in Agreement with Allergan for VIBERZI. Additionally, these adjustments to the share of the net profits have been eliminated, in full, in 2018 and all subsequent years under the terms of the Company’s commercial agreement with Allergan entered into in January 2017 under which the Company promoted Allergan’s CANASA^® product and promoted its DELZICOL^® products as described below in Commercial Agreement with Allergan. The Company has completed its obligations under the terms of the commercial agreement with Allergan.

The Company evaluated its collaboration arrangement for North America with Allergan under ASC 606 and concluded that all development-period performance obligations had been satisfied as of September 2012. However, the Company has determined that there are three remaining commercial-period performance obligations, which include the sales detailing of LINZESS, participation in the joint commercialization committee, and approved additional trials. The consideration remaining includes cost reimbursements in the U.S., as well as commercial sales-based milestones and net profit and loss sharing payments based on net sales in the U.S. Additionally, the Company receives royalties in the mid-teens’ percent based on net sales in Canada and Mexico. Royalties, commercial sales-based milestones, and net profit and loss sharing payments will be recorded as collaborative arrangements revenue or expense in the period earned, in accordance with the sales-based royalty exception, as these payments relate predominately to the license granted to Allergan. The Company records royalty revenue in the period earned based on royalty reports from its partner, if available, or based on the projected sales and historical trends. The cost reimbursements received from Allergan during the commercialization period will be recognized as earned in accordance with the right-to-invoice practical expedient, as the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization period.

Under the Company’s collaboration agreement with Allergan for North America, LINZESS net sales are calculated and recorded by Allergan and include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions, as noted above. These amounts include the use of estimates and judgments, which could be adjusted based on actual results in the future. The Company records its share of the net profits or net losses from the sales of LINZESS in the U.S. on a net basis less commercial expenses, and presents the settlement payments to and from Allergan as collaboration expense or collaborative arrangements revenue, as applicable. This treatment is in accordance with the Company’s revenue recognition policy, given that the Company is not the primary obligor and does not have the inventory risks in the collaboration agreement with Allergan for North America. The Company relies on Allergan to provide accurate and complete information related to net sales of LINZESS in accordance with U.S. generally accepted accounting principles in order to calculate its settlement payments to and from Allergan and record collaboration expense or collaborative arrangements revenue, as applicable.

From time to time, in accordance with the terms of the collaboration with Allergan for North America, the Company engages an independent certified public accounting firm to review the accuracy of the financial reporting from Allergan to the Company. In connection with such a review during the three months ended September 30, 2018, Allergan reported to the Company an approximately $59.3 million negative adjustment to LINZESS net sales. The

adjustment related to the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances made by Allergan during the years ended December 31, 2015, 2016 and 2017, and subsequent actual payments made. This adjustment was primarily associated with estimated governmental and contractual rebates, as reported by Allergan. Upon receiving this information from Allergan, the Company recorded a change in accounting estimate to reduce collaborative arrangements revenue by approximately $29.7 million during the three months ended September 30, 2018 related to the Company’s share of this adjustment. In addition, during the three months ended December 31, 2018, Allergan reported to the Company a true-up of approximately $0.2 million related to the previously reported adjustment for the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances.

The Company recognized collaborative arrangements revenue from the Allergan collaboration agreement for North America during the years ended December 31, 2019, 2018 and 2017 as follows (in thousands):


	Year Ended December 31,
	2019		2018		2017
Collaborative arrangements revenue related to sales of LINZESS in the U.S.	$	325,429	$	264,243	$	256,238
Royalty revenue		2,162		1,934		2,295
Other ⁽¹⁾		—		—		1,677
Total collaborative arrangements revenue	$	327,591	$	266,177	$	260,210

(1)	Includes net profit share adjustments of approximately $1.7 million recorded during the year ended December 31, 2017 related to a change in estimated selling expenses previously recorded.

The collaborative arrangements revenue recognized in the years ended December 31, 2019, 2018 and 2017 primarily represents the Company’s share of the net profits and net losses on the sale of LINZESS in the U.S.

The following table presents the amounts recorded by the Company for commercial efforts related to LINZESS in the U.S. in the years ended December 31, 2019, 2018 and 2017 (in thousands):


	Year Ended December 31,
	2019		2018		2017
Collaborative arrangements revenue related to sales of LINZESS in the U.S.⁽¹⁾⁽²⁾	$	325,429	$	264,243	$	256,238
Selling, general and administrative costs incurred by the Company⁽¹⁾		(38,123)		(42,435)		(41,252)
The Company’s share of net profit	$	287,306	$	221,808	$	214,986

(1)

Includes only collaborative arrangements revenue or selling, general and administrative costs attributable to the cost-sharing arrangement with Allergan. Excludes approximately $2.4 million, approximately $2.2 million, and approximately $0.9 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to patent prosecution and patent litigation costs recognized in connection with the collaboration agreement with Allergan.

(2)

Certain of the unfavorable adjustments to the Company’s share of the LINZESS net profits were reduced or eliminated in connection with the co-promotion activities under the Company’s agreement with Allergan to co-promote VIBERZI in the U.S., as described below in Agreement with Allergan for VIBERZI.

In May 2014, CONSTELLA^® became commercially available in Canada and, in June 2014, LINZESS became commercially available in Mexico. The Company records royalties on sales of CONSTELLA in Canada and LINZESS in Mexico in the period earned. The Company recognized approximately $2.2 million, approximately $1.9 million, and approximately $2.3 million of combined royalty revenues from Canada and Mexico during the years ended December 31, 2019, 2018 and 2017, respectively.

License Agreement with Allergan (All countries other than the countries and territories of North America, China (including Hong Kong and Macau), and Japan)

In April 2009, the Company entered into a license agreement with Almirall, S.A. (“Almirall”) to develop and commercialize linaclotide in Europe (including the Commonwealth of Independent States and Turkey) for the treatment of IBS-C, CIC and other GI conditions (the “European License Agreement”). In accordance with the European License Agreement, the Company granted Almirall a right to access its U.S. Phase III clinical trial data for the purposes of

supporting European regulatory approval. Additionally, the Company was required to participate on a joint development committee during linaclotide’s development period and is required to participate in a joint commercialization committee while linaclotide is commercially available. In October 2015, Almirall transferred its exclusive license to develop and commercialize linaclotide in Europe to Allergan.

Additionally, in October 2015, the Company and Allergan separately entered into an amendment to the European License Agreement relating to the development and commercialization of linaclotide in Europe. Pursuant to the terms of the amendment, (i) certain sales-based milestones payable to the Company under the European License Agreement were modified to increase the total milestone payments such that, when aggregated with certain commercial launch milestones, they could total up to $42.5 million, (ii) the royalties payable to the Company during the term of the European License Agreement were modified such that the royalties based on sales volume in Europe begin in the mid-single digit percent and escalate to the upper-teens percent by calendar year 2019, and (iii) Allergan assumed responsibility for the manufacturing of linaclotide API for Europe from the Company, as well as the associated costs. The Company concluded that the 2015 amendment to the European License Agreement was not a modification to the linaclotide collaboration agreement with Allergan for North America.

In January 2017, concurrently with entering into the commercial agreement as described below in Commercial Agreement with Allergan, the Company and Allergan entered into an amendment to the European License Agreement (the “2017 Amendment”). The 2017 Amendment extended the license to develop and commercialize linaclotide in all countries other than China (including Hong Kong and Macau), Japan, and the countries and territories of North America. On a country-by-country and product-by-product basis in such additional territory, Allergan is obligated to pay the Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient in the upper-single digits for five years following the first commercial sale of a linaclotide product in a country, and in the low-double digits thereafter. The royalty rate for products in the expanded territory will decrease, on a country-by-country basis, to the lower-single digits, or cease entirely, following the occurrence of certain events. Allergan is obligated to assume certain purchase commitments for quantities of linaclotide API under the Company’s agreements with third-party API suppliers. The 2017 Amendment did not modify any of the milestones or royalty terms related to Europe.

Prior to the adoption of ASC 606, the Company concluded that the 2017 Amendment was a material modification to the European License Agreement; however, this modification did not have a material impact on the Company's consolidated financial statements as there was no deferred revenue associated with the Amended European License Agreement. The Company also concluded that the 2017 Amendment was not a material modification to the linaclotide collaboration agreement with Allergan for North America. The Company’s conclusions on deliverables under ASC 605-25 are described below in Commercial Agreement with Allergan.

The Company evaluated the European License Agreement under ASC 606. In evaluating the terms of the European License Agreement under ASC 606, the Company determined that there are no remaining performance obligations as of September 2012. However, the Company continues to be eligible to receive consideration in the form of commercial launch milestones, sales-based milestones, and royalties.

The commercial launch milestones, sales-based milestones and royalties under the European License Agreement have historically been recognized as revenue as earned. Under ASC 606, the Company applied the sales-based royalty exception to royalties and sales-based milestones, as these payments relate predominantly to the license granted to Allergan (formerly Almirall). Accordingly, the royalties and sales-based milestones are recorded as revenue in the period earned. The Company records royalties on sales of CONSTELLA in Europe in the period earned based on royalty reports from its partner, if available, or the projected sales and historical trends. The commercial launch milestones are recognized as revenue when it is probable that a significant reversal of revenue would not occur, and the associated constraint has been lifted.

Additionally, the Company evaluated the terms of the 2017 Amendment under ASC 606 and determined that it would be treated as a separate contract given that it adds a distinct good or service at an amount that reflects standalone selling price. The Company determined that all performance obligations in the 2017 Amendment were satisfied in January 2017 when the license for the additional territory was transferred. The Company continues to receive royalties under this agreement, which are recorded in the period earned pursuant to the sales-based royalty exception, as they related predominantly to the license granted to Allergan.

The Company recognized approximately $1.7 million, approximately $1.1 million and approximately $0.6 million of royalty revenue from the Amended European License Agreement during the years ended December 31, 2019, 2018 and 2017, respectively.

License Agreement for Japan with Astellas

In November 2009, the Company entered into a license agreement with Astellas, as amended, to develop and commercialize linaclotide for the treatment of IBS-C, CIC and other GI conditions in Japan (the “2009 License Agreement with Astellas”). Astellas is responsible for all activities relating to development, regulatory approval and commercialization in Japan as well as funding the associated costs and the Company was required to participate on a joint development committee over linaclotide’s development period. During the year ended December 31, 2017, the Company and Astellas entered into a commercial API supply agreement (the “Astellas Commercial Supply Agreement”). Pursuant to the Astellas Commercial Supply Agreement, the Company sells linaclotide API supply to Astellas at a contractually defined rate and recognizes related revenue as sale of API. Under the 2009 License Agreement with Astellas, the Company received royalties which escalated based on sales volume, beginning in the low-twenties percent, less the transfer price paid for the API included in the product sold and other contractual deductions.

Under the 2009 License Agreement with Astellas, the Company received an up-front licensing fee of $30.0 million, which was recognized as collaborative arrangements revenue on a straight-line basis over the Company’s estimate of the period over which linaclotide was to be developed under the 2009 License Agreement with Astellas in accordance with ASC 605. The development period was completed in December 2016 upon approval of LINZESS by the Japanese Ministry of Health, Labor and Welfare, at which point all previously deferred revenue under the agreement was recognized.

The 2009 License Agreement with Astellas also includes three development milestone payments that totaled up to $45.0 million, all of which were achieved and recognized as revenue through December 31, 2016 in accordance with ASC 605.

The Company had evaluated the terms of the 2009 License Agreement with Astellas under ASC 606 and determined that there were no remaining performance obligations as of December 2016. However, there continued to be consideration in the form of royalties on sales of LINZESS in Japan under the 2009 License Agreement with Astellas. Upon adoption of ASC 606, the Company concluded that the royalties on sales of LINZESS in Japan related predominantly to the license granted to Astellas. Accordingly, the Company applied the sales-based royalty exception and recorded royalties on sales of LINZESS in Japan in the period earned based on royalty reports from Astellas, if available, or the projected sales and historical trends.

Additionally, under the terms of the Astellas Commercial Supply Agreement, the Company determined it had an ongoing performance obligation to supply API. Upon adoption of ASC 606, product revenue is recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment of the product to the customer. This resulted in earlier revenue recognition than the Company’s historical accounting.

During the years ended December 31, 2019, 2018, and 2017, the Company recognized approximately $27.5 million, approximately $69.6 million, and approximately $29.7 million, respectively, from the sale of API to Astellas under the 2009 License Agreement with Astellas and the Astellas Commercial Supply Agreement. The royalties on sales of LINZESS in Japan did not exceed the transfer price of API sold and other contractual deductions during each of the periods presented.

In August 2019, the Company and Astellas amended and restated the 2009 License Agreement with Astellas (the “Amended Astellas License Agreement”). This amendment is considered a modification to the 2009 License Agreement with Astellas and is accounted for as a new and separate contract. Under the terms of the Amended Astellas License Agreement, the Company will no longer be responsible for the supply of linaclotide API to Astellas, and Astellas will be responsible for its own supply of linaclotide API in Japan, beginning in 2020. Astellas committed to purchase certain quantities of linaclotide API from the Company in 2019.

In connection with the execution of the Amended Astellas License Agreement, Astellas paid the Company a non-refundable upfront payment of $10.0 million in August 2019. Further, beginning in 2020, Astellas will, in lieu of the royalty payment terms set forth in the 2009 License Agreement with Astellas, pay royalties to the Company at rates

beginning in the mid-single digit percent and escalating to low-double-digit percent, based on aggregate annual net sales in Japan of products containing linaclotide API. These royalty payments will be subject to reduction following the expiration of certain licensed patents and the occurrence of generic competition in Japan. The Company continued to supply linaclotide API for Japan during 2019 at a contractually defined rate. Additionally, Astellas will reimburse the Company for the Company’s performance of adverse event reporting services at a fixed monthly rate until such services are terminated.

The Company identified the following performance obligations under the Amended Astellas License Agreement:

●

delivery of the expanded license of intellectual property, including the applicable manufacturing know-how;

●

obligation to supply linaclotide API for 2019; and

●

adverse event reporting services.

The Company allocated the $10.0 million upfront payment to the delivery of the expanded license of intellectual property and recognized it as collaborative arrangements revenue at contract inception. The Company allocated the approximately $20.4 million in remaining purchase orders for API to the obligation to supply linaclotide API to Astellas for 2019. Consideration for the supply of linaclotide API is recognized over the performance period as linaclotide API is shipped to Astellas using an output method. Consideration allocated to the adverse event reporting services is recognized as such services are provided over the performance period based on the amount to which the Company has a right to invoice using an output method.

Royalties on sales of LINZESS in Japan relate predominantly to the license granted to Astellas. Accordingly, the Company applies the sales-based royalty exception and records royalties on sales of LINZESS in Japan in the period earned based on royalty reports from its partner, if available, or the projected sales and historical trends.

The Company recognized $10.0 million in collaborative arrangements revenue during the year ended December 31, 2019 related to the upfront fee associated with the execution of the Amended Astellas License Agreement. The Company recognized approximately $18.3 million from the sale of API to Astellas under the Amended License Agreement during the year ended December 31, 2019. The Company recognized an insignificant amount of collaborative arrangements revenue related to adverse event reporting services for the year ended December 31, 2019.

Collaboration Agreement for China (including Hong Kong and Macau) with AstraZeneca

In October 2012, the Company entered into a collaboration agreement with AstraZeneca to co-develop and co-commercialize linaclotide in the AstraZeneca License Territory (the “AstraZeneca Collaboration Agreement”). The collaboration provided AstraZeneca with an exclusive nontransferable license to exploit the underlying technology in the AstraZeneca License Territory. The parties shared responsibility for continued development and commercialization of linaclotide under a joint development plan and a joint commercialization plan, respectively, with AstraZeneca having primary responsibility for the local operational execution.

The parties agreed to an Initial Development Plan (“IDP”), which included the planned development of linaclotide in China, including the lead responsibility for each activity and the related internal and external costs. The IDP indicated that AstraZeneca was responsible for a multinational Phase III clinical trial (the “Phase III Trial”), the Company was responsible for nonclinical development and supplying clinical trial material and both parties were responsible for the regulatory submission process. The IDP indicated that the party specifically designated as being responsible for a particular development activity under the IDP should implement and conduct such activities. The activities were governed by a Joint Development Committee (“JDC”), with equal representation from each party. The JDC was responsible for approving, by unanimous consent, the joint development plan and development budget, as well as approving protocols for clinical studies, reviewing and commenting on regulatory submissions, and providing an exchange of data and information.

There were no refund provisions in the AstraZeneca Collaboration Agreement.

Under the terms of the AstraZeneca Collaboration Agreement, the Company received a $25.0 million non-refundable up-front payment upon execution. The Company was also eligible for $125.0 million in additional commercial milestone payments contingent on the achievement of certain sales targets. The parties also shared in the net

profits and losses associated with the development and commercialization of linaclotide in the AstraZeneca License Territory, with AstraZeneca receiving 55% of the net profits or incurring 55% of the net losses until a certain specified commercial milestone was achieved, at which time profits and losses would be shared equally thereafter.

Activities under the AstraZeneca Collaboration Agreement were evaluated in accordance with ASC 605-25 to determine if they represented a multiple element revenue arrangement. The Company identified the following deliverables in the AstraZeneca Collaboration Agreement:

●

an exclusive license to develop and commercialize linaclotide in the AstraZeneca License Territory (the “License Deliverable”) (the deliverable was completed upon execution and all associated revenue was recognized as of December 31, 2016);

●

research, development and regulatory services pursuant to the IDP, as modified from time to time (the “R&D Services”);

●

JDC services;

●

obligation to supply clinical trial material; and

●

co-promotion services for NEXIUM (the “Co-Promotion Deliverable”) (the deliverable was completed and all associated revenue was recognized as of December 31, 2013).

Under ASC 605, the License Deliverable was nontransferable and had certain sublicense restrictions. The Company determined that the License Deliverable had standalone value as a result of AstraZeneca’s internal product development and commercialization capabilities, which would enable it to use the License Deliverable for its intended purposes without the involvement of the Company. The remaining deliverables were deemed to have standalone value based on their nature and all deliverables met the criteria to be accounted for as separate units of accounting under ASC 605-25.

The Company performed R&D services and JDC services and supplied clinical trial materials during the estimated development period. All consideration allocated to such services was being recognized as a reduction of research and development costs, using the proportional performance method, by which the amounts were recognized in proportion to the costs incurred in accordance with ASC 605.

In August 2014, the Company and AstraZeneca, through the JDC, modified the IDP and development budget to include approximately $14.0 million in additional activities over the remaining development period, to be shared by the Company and AstraZeneca under the terms of the AstraZeneca Collaboration Agreement.

The total amount of the non-contingent consideration allocable to the AstraZeneca Collaboration Agreement was approximately $34.0 million (“Arrangement Consideration”), which included the $25.0 million non-refundable up-front payment and approximately $9.0 million representing 55% of the costs for clinical trial material supply services and research, development and regulatory activities allocated to the Company in the IDP or as approved by the JDC in subsequent periods.

The Company allocated the Arrangement Consideration to the non-contingent deliverables based on management’s best estimated selling price (“BESP”) of each deliverable using the relative selling price method, as the Company did not have vendor-specific objective evidence or third-party evidence of selling price for such deliverables. Of the total Arrangement Consideration, approximately $29.7 million was allocated to the License Deliverable, approximately $1.8 million to the R&D Services, approximately $0.1 million to the JDC services, approximately $0.3 million to the clinical trial material supply services, and approximately $2.1 million to the Co-Promotion Deliverable in the relative selling price model.

Because the Company shared development costs with AstraZeneca, payments from AstraZeneca with respect to both research and development and selling, general and administrative costs incurred by the Company prior to the commercialization of linaclotide in the AstraZeneca License Territory were recorded as a reduction in expense, in accordance with the Company’s policy, which was consistent with the nature of the cost reimbursement. Development costs incurred by the Company that pertain to the joint development plan and subsequent amendments to the joint

development plan, as approved by the JDC, were recorded as research and development expense as incurred. Payments to AstraZeneca were recorded as incremental research and development expense. As a result of the cost-sharing arrangements under the collaboration, the Company recognized approximately $0.3 million in incremental research and development costs during the year ended December 31, 2017.

In March 2017, the Company began providing supply of linaclotide finished drug product and certain commercialization-related services pursuant to the AstraZeneca Collaboration Agreement. During the year ended December 31, 2017, the Company recognized approximately $0.2 million as collaborative arrangements revenue related to linaclotide finished drug product, as this deliverable was no longer contingent.

Upon the adoption of ASC 606, the Company reevaluated the AstraZeneca Collaboration Agreement and, consistent with its conclusions under ASC 605, identified six performance obligations including the license, R&D services, JDC services, supply of clinical trial material, co-promotion services for NEXIUM, and the Joint Commercialization Committee (“JCC”) services. The Company determined that the supply of linaclotide finished drug product for commercial requirements was an optional service at inception of the arrangement and did not provide a material right to AstraZeneca.

At the ASC 606 adoption date, the Company had fully satisfied its obligation to transfer the license and NEXIUM co-promotion services to AstraZeneca. The following remaining performance obligations were ongoing as of the adoption date:

●

R&D Services

●

JDC services;

●

obligation to supply clinical trial material; and

●

JCC services.

Under ASC 606, the Company applied the contract modification practical expedient to the August 2014 amendment, which expanded the scope of the Company’s activities under the IDP and increased the development budget. This practical expedient allows an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented. The application of this practical expedient resulted in a total transaction price of approximately $34.0 million, which was allocable to the Company’s performance obligations on a relative standalone selling price basis.

Under ASC 606, amounts of consideration allocated to the license and NEXIUM co-promotion services would have been recognized in full prior to adoption as these performance obligations were satisfied in October 2012 and December 2013, respectively. Consideration allocated to the R&D Services was recognized as such services were provided over the performance period using an output method based on full-time employee labor hours and external expenses incurred. Consideration allocated to the JDC services was recognized ratably over the development period using a time-based, straight-line attribution model. Revenue from the supply of clinical trial material was recognized as the clinical trial material was delivered to the customer. During the year ended December 31, 2019, the Company incurred no costs related to R&D services and JDC services. During the year ended December 31, 2018, the Company offset approximately $1.2 million related to R&D Services and JDC services.

Additionally, the parties shared in the net profits and losses associated with the development and commercialization of linaclotide in the AstraZeneca License Territory, with AstraZeneca receiving 55% of the net profits or incurring 55% of the net losses until a certain specified commercial milestone was achieved; from that point, profits and losses would have been shared equally thereafter. Any cost reimbursements received from AstraZeneca during the commercialization period were recognized as earned in accordance with the right-to-invoice practical expedient, as the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization period. During the years ended December 31, 2019 and 2018, the Company incurred approximately $1.2 million and approximately $0.9 million, respectively, related to pre-launch commercial services and supply chain services.

In September 2019, the Company and AstraZeneca entered into the Amended AstraZeneca Agreement, under which AstraZeneca obtained the exclusive right to develop, manufacture and commercialize products containing linaclotide in the AstraZeneca License Territory (the “AstraZeneca License”).

Under the Amended AstraZeneca Agreement, the Company will receive non-contingent payments totaling $35.0 million in three installments through 2024. In addition, AstraZeneca may be required to make milestone payments totaling up to $90.0 million contingent on the achievement of certain sales targets and will be required to pay tiered royalties to the Company at rates beginning in the mid-single-digit percent and increasing up to twenty percent based on the aggregate annual net sales of products containing linaclotide in the AstraZeneca License Territory. In connection with the Amended AstraZeneca Agreement, the Company and AstraZeneca entered into a transition services agreement (“AstraZeneca TSA”) and an amended commercial supply agreement (“AstraZeneca CSA”). Under the terms of the AstraZeneca TSA, the Company will provide certain regulatory and administrative services for a term of approximately two years from the date of execution, unless earlier terminated or extended according to the terms of the transition services agreement. Services performed are paid at a mutually agreed upon rate. Amounts for AstraZeneca TSA services are recorded as collaborative arrangements revenue. Under the terms of the AstraZeneca CSA, the Company will supply linaclotide API, finished drug product and finished goods for the Licensed Territory through no later than March 31, 2020 at predetermined rates.

The Company evaluated the Amended AstraZeneca Agreement in accordance with ASC 606 and determined that it would be treated as a separate contract because it adds a distinct good or service at an amount that reflects standalone selling price. The following performance obligations under the Amended AstraZeneca Agreement were identified:

●

delivery of the AstraZeneca License;

●

AstraZeneca TSA services; and

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supply of linaclotide API, finished drug product and finished goods under the AstraZeneca CSA.

The Company determined that the non-contingent payments should be allocated to the delivery of the AstraZeneca License. The non-contingent payments totaling $35.0 million will be paid in installments through 2024. The Company determined that the performance obligation related to the transfer of the AstraZeneca License was satisfied as of the execution date of the Amended AstraZeneca Agreement. As a portion of the payments relating to the transfer of the AstraZeneca License are due significantly after the performance obligation was satisfied, the Company adjusted its transaction price for the significant financing component of approximately $2.6 million. Accordingly, the Company recognized approximately $32.4 million relating to the delivery of the AstraZeneca License as collaborative arrangements revenue during the year ended December 31, 2019 and will recognize the approximately $2.6 million relating to the significant financing component as interest income through 2024 using the effective interest method. Consideration allocated to the AstraZeneca TSA services will be recognized as collaborative arrangements revenue as such services are provided over the performance period using an output method based on the amount to which the Company has a right to invoice. Consideration for the supply of linaclotide API, finished drug product and finished goods under the AstraZeneca CSA will be recognized over the performance period using an output method as linaclotide API, finished drug product and finished goods are shipped to AstraZeneca.

During the year ended December 31, 2019, the Company recognized approximately $32.6 million in collaborative arrangements revenue related to the Amended AstraZeneca License, of which approximately $32.4 million related to the delivery of the AstraZeneca License and approximately $0.2 million related to the AstraZeneca TSA services. During the year ended December 31, 2019, the Company recognized approximately $3.0 million of sale of API on its consolidated statement of operations relating to the supply of linaclotide finished drug product and finished goods under the AstraZeneca CSA.

Co-Promotion and Other Agreements

Agreement with Allergan for VIBERZI

In August 2015, the Company and Allergan entered into an agreement for the co-promotion in the U.S. of VIBERZI, Allergan’s treatment for adults suffering from IBS-D (the “VIBERZI Co-Promotion Agreement”). Under the

terms of the VIBERZI Co-Promotion Agreement, the Company’s clinical sales specialists detailed VIBERZI to the same health care practitioners to whom they detail LINZESS. Allergan was responsible for all costs and activities relating to the commercialization of VIBERZI outside of the co-promotion. The Company’s promotional efforts under the non-exclusive co-promotion began when VIBERZI became commercially available in December 2015. The VIBERZI Co-Promotion Agreement was effective through December 31, 2017.

Under the terms of the VIBERZI Co-Promotion Agreement, the Company’s promotional efforts were compensated based on the volume of calls delivered by the Company’s sales force, with the terms of the agreement reducing or eliminating certain of the unfavorable adjustments to the Company’s share of net profits stipulated by the linaclotide collaboration agreement with Allergan for North America, provided that the Company provided a minimum number of VIBERZI calls on physicians. The Company provided the minimum number of VIBERZI calls on physicians pursuant to the VIBERZI Co-Promotion Agreement, and was compensated with the elimination of certain of the unfavorable adjustments to the Company’s share of net profits stipulated by the linaclotide collaboration agreement with Allergan for North America for the year ending December 31, 2017.

During the year ended December 31, 2017, the Company recognized approximately $1.5 million in revenue related to the VIBERZI Co-Promotion Agreement for the performance of medical education services.

In December 2017, the Company and Allergan entered into an amendment to the commercial agreement with Allergan (the “VIBERZI Amendment”), as described below, to include the VIBERZI promotional activities through December 31, 2018. Under the terms of the VIBERZI Amendment, the Company’s clinical sales specialists continued detailing VIBERZI in the second position to the same health care practitioners to whom they detailed LINZESS in the first position and provided certain medical education services. The Company evaluated the VIBERZI Amendment in accordance with ASC 606 and determined that it would be treated as a separate contract because it adds a distinct good or service at an amount that reflects standalone selling price. The following performance obligations under the VIBERZI Amendment were identified:

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sales detailing of VIBERZI in either first or second position; and

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medical education services.

During the three months ended December 31, 2018, the Company determined that the sales-based milestone was no longer constrained and recognized approximately $1.3 million as collaborative arrangements revenue. During the year ended December 31, 2018, the Company recognized approximately $3.0 million of collaborative arrangements revenue related to VIBERZI for medical education events. In December 2018 and in March 2019, the Company extended the VIBERZI Amendment through April 2019.

In April 2019, the Company entered into a new agreement with Allergan to continue to perform sales detailing activities for VIBERZI, from April 1, 2019 through December 31, 2019 (the “VIBERZI Promotion Agreement”). Under the terms of the VIBERZI Promotion Agreement, the Company’s clinical sales specialists detailed VIBERZI in the second position to the same health care practitioners to whom they detailed LINZESS in the first position. In accordance with ASC 606, the VIBERZI Promotion Agreement is accounted for as a separate contract as it contains distinct services at an amount that reflects standalone selling price, incremental to past agreements. Under the VIBERZI Promotion Agreement the Company identified the performance of VIBERZI second position sales details as the sole performance obligation under the agreement. The Company had the potential to achieve a milestone payment of up to $4.2 million based on the number of VIBERZI prescription extended units filled over the term of the agreement. The Company had the potential to be compensated up to a maximum amount of approximately $4.1 million, based on the number of VIBERZI sales details performed. The Company and Allergan terminated the VIBERZI Promotion Agreement effective January 1, 2020.

The Company did not receive payment based on the number of VIBERZI prescription extended units filled because the milestone was not achieved during the year ended December 31, 2019. During the year ended December 31, 2019, the Company recognized approximately $3.7 million of collaborative arrangements revenue related to VIBERZI sales details. The compensation related to the VIBERZI sales details was recognized over the term of the agreement using an output method based on estimated amounts for which the Company had the right to invoice based on the number of sales details performed during the associated period.

Co-Promotion Agreement with Exact Sciences Corp. for COLOGUARD^®

In March 2015, the Company and Exact Sciences Corp. (“Exact Sciences”) entered into an agreement to co-promote Exact Sciences’ COLOGUARD, the first and only U.S. FDA-approved noninvasive stool DNA screening test for colorectal cancer (the “Exact Sciences Co-Promotion Agreement”). The Exact Sciences Co-Promotion Agreement was terminated by the parties in August 2016. Under the terms of the non-exclusive Exact Sciences Co-Promotion Agreement, the Company’s sales team promoted and educated health care practitioners regarding COLOGUARD through July 2016. Exact Sciences maintained responsibility for all other aspects of the commercialization of COLOGUARD outside of the co-promotion. Under the terms of the Exact Sciences Co-Promotion Agreement, the Company was compensated primarily via royalties earned on the net sales of COLOGUARD generated from the healthcare practitioners on whom the Company called with such royalties payable through July 2017. There were no refund provisions in the Exact Sciences Co-Promotion Agreement.

During the year ended December 31, 2017, the Company recognized approximately $2.5 million as collaborative arrangements revenue related to this arrangement in accordance with ASC 605-25.

The Company determined that the Exact Sciences Co-Promotion Agreement was completed prior to the adoption of ASC 606 and accordingly did not reevaluate the terms of the agreement.

Disease Education and Promotional Agreement with Alnylam

In August 2019, the Company and Alnylam entered into a disease education and promotional agreement for Alnylam’s GIVLAARI, a therapeutic for the potential treatment of AHP (the “Alnylam Agreement”). GIVLAARI was approved by the U.S. FDA in December 2019 for the treatment of adult patients with AHP. Under the terms of the agreement, the Company’s sales force will perform disease awareness activities and sales detailing activities of GIVLAARI to gastroenterologists and health care practitioners to whom they detail LINZESS in the first position.

The Company is entitled to receive service fees, payable by Alnylam quarterly, totaling up to $9.5 million over the term of the agreement, which is approximately three years from execution. The Company also is eligible to receive a royalty based on a percentage of net sales of GIVLAARI that are directly attributable to the Company’s promotional efforts. The Company identified the following performance obligation under the Alnylam Agreement:

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performance of disease education activities for AHP and performance of sales details for GIVLAARI (together “Givosiran Education and Promotion Activities”).

The Company allocated the service fees to the performance of Givosiran Education and Promotion Activities and recognizes collaborative arrangements revenue over the term of the agreement as the services are performed using an output method based on the amount to which the Company has a right to invoice. Royalties will be recognized as collaborative arrangements revenue using an output method for Givosiran Education and Promotion Activities based on the amount to which the Company has a right to invoice when the associated constraints have been lifted.

During the year ended December 31, 2019, the Company recognized $2.0 million in collaborative arrangements revenue related to the service fees. As of December 31, 2019, the Company had a deferred revenue balance of approximately $0.9 million related to the Givosiran Education and Promotion Activities performed in accordance with the Alnylam Agreement. The Company did not recognize any royalty revenue related to the Alnylam Agreement.

Other Collaboration and License Agreements

The Company has other collaboration and license agreements that are not individually significant to its business. Pursuant to the terms of one agreement, the Company may be required to pay up to $18.0 million for regulatory milestones, none of which had been paid as of December 31, 2019. Pursuant to the terms of another license agreement, the Company recognized approximately $0.5 million in collaborative arrangements revenue during the year ended December 31, 2019 related to a nonrefundable upfront payment. The Company is eligible to receive up to $63.5 million in development and sales-based milestones, as well as a royalties as a percentage of net sales of a product, under the terms of this agreement. The Company did not record any research and development expense associated with the Company’s other collaboration and license agreements during the year ended December 31, 2019. The Company recorded approximately $5.0 million in research and development expenses associated with the Company’s other

collaboration and license agreements during the year ended December 31, 2018. The Company did not record any research and development expense associated with the Company’s other collaboration and license agreements during the year ended December 31, 2017.