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Roche License Agreements
12 Months Ended
Dec. 31, 2017
Collaborative Agreement [Abstract]  
Roche License Agreements
Roche License Agreement
Overview
In December 2013, the Company entered into the License Agreement with Roche to develop and commercialize certain antibodies that target α-synuclein, including PRX002/RG7935, which are referred to collectively as “Licensed Products.” Upon the effectiveness of the License Agreement in January 2014, the Company granted to Roche an exclusive, worldwide license to develop, make, have made, use, sell, offer to sell, import and export the Licensed Products. The Company retained certain rights to conduct development of the Licensed Products and an option to co-promote PRX002/RG7935 in the U.S. During the term of the License Agreement, the Company and Roche will work exclusively with each other to research and develop antibody products targeting α-synuclein potentially including incorporation of Roche’s proprietary Brain Shuttle™ technology to potentially increase delivery of therapeutic antibodies to the brain. The License Agreement provides that Roche would make an upfront payment to the Company of $30.0 million, which was received in February 2014, the clinical milestone payment of $15.0 million triggered by the initiation of the Phase 1 study for PRX002/RG7935 in the clinic, which was received in May 2014, and the clinical milestone payment of $30.0 million triggered by dosing of the first patient in the Phase 2 study for PRX002/RG7935, which was received in August 2017.
For PRX002/RG7935, Roche is also obligated to pay:
• up to $380.0 million upon the achievement of development, regulatory and various first commercial sales milestones;
• up to an additional $175.0 million in ex-U.S. commercial sales milestones; and
• tiered, high single-digit to high double-digit royalties in the teens on ex-U.S. annual net sales, subject to certain adjustments.

Roche bears 100% of the cost of conducting the research activities under the License Agreement. In the U.S., the parties share all development and commercialization costs, as well as profits, all of which will be allocated 70% to Roche and 30% to the Company, for PRX002/RG7935 in the Parkinson’s disease indication, as well as any other Licensed Products and/or indications for which the Company opts in to participate in co-development and co-funding. After the completion of specific clinical trial activities, the Company may opt out of the co-development and cost and profit sharing on any co-developed Licensed Products and instead receive U.S. commercial sales milestones totaling up to $155.0 million and tiered, single-digit to high double-digit royalties in the teens based on U.S. annual net sales, subject to certain adjustments, with respect to the applicable Licensed Product.
The Company filed an Investigational New Drug Application (“IND”) with the FDA for PRX002/RG7935 and subsequently initiated a Phase 1 study in 2014. Following the Phase 1 study, Roche will be primarily responsible for developing, obtaining and maintaining regulatory approval for, and commercializing Licensed Products. Roche will also become responsible for the clinical and commercial manufacture and supply of Licensed Products within a defined time period following the effective date of the License Agreement.
In addition, the Company has an option under the License Agreement to co-promote PRX002/RG7935 in the U.S. in the Parkinson’s disease indication. If the Company exercises such option, it may also elect to co-promote additional Licensed Products in the U.S. approved for Parkinson’s disease. Outside the U.S., Roche will have responsibility for developing and commercializing the Licensed Products. Roche bears all costs that are specifically related to obtaining or maintaining regulatory approval outside the U.S. and will pay the Company a variable royalty based on annual net sales of the Licensed Products outside the U.S.
While Roche will record product revenue from sales of the Licensed Products, the Company and Roche will share in the net profits and losses of sales of the PRX002/RG7935 for the Parkinson's disease indication in the U.S. on a 70%/30% basis with the Company receiving 30% of the profit and losses provided that the Company has not exercised its opt-out right.
The License Agreement continues on a country-by-country basis until the expiration of all payment obligations under the License Agreement. The License Agreement may also be terminated (i) by Roche at will after the first anniversary of the effective date of the License Agreement, either in its entirety or on a Licensed Product-by-Licensed Product basis, upon 90 days’ prior written notice to the Company prior to first commercial sale and 180 days’ prior written notice to Prothena after first commercial sale, (ii) by either party, either in its entirety or on a Licensed Product-by-Licensed Product or region-by-region basis, upon written notice in connection with a material breach uncured 90 days after initial written notice, and (iii) by either party, in its entirety, upon insolvency of the other party. The License Agreement may be terminated by either party on a patent-by-patent and country-by-country basis if the other party challenges a given patent in a given country. The Company’s rights to co-develop Licensed Products under the License Agreement will terminate if the Company commences certain studies for certain types of competitive products. The Company’s rights to co-promote Licensed Products under the License Agreement will terminate if the Company commences a Phase 3 study for such competitive products.
The License Agreement cannot be assigned by either party without the prior written consent of the other party, except to an affiliate of such party or in the event of a merger or acquisition of such party, subject to certain conditions. The License Agreement also includes customary provisions regarding, among other things, confidentiality, intellectual property ownership, patent prosecution, enforcement and defense, representations and warranties, indemnification, insurance, and arbitration and dispute resolution.
Collaboration Accounting

The License Agreement was evaluated under ASC 808, Collaborative Agreements. At the outset of the contract, the Company concluded that this agreement does not qualify as a collaboration under ASC 808 as a result of the Company not sharing significant risks due to the net profit and loss split where Roche incurs substantially more of the costs of the collaboration as well as the Company's opt-out provision. The Company believes that Roche is the principal in the sales transactions with third parties as it is the primary obligor, bearing inventory and credit risk. The Company will record its share of pre-tax commercial profit generated from the collaboration with Roche, as collaboration revenue when the profit share can be reasonably estimated and collectability is reasonably assured. Prior to commercialization of a Licensed Product, the Company's portion of the expenses related to the License Agreement reflected on its income statement will be limited to R&D expenses. After commercialization, if the Company opts-in to co-detail commercialization expenses related to commercial capabilities, including the establishment of a field sales force and other activities to support the Company’s commercialization efforts, will be recorded as SG&A expense and will be factored into the computation of the profit and loss share. The Company will record the portion of the net receivable related to commercialization activities as collaboration revenue.
Multiple Element Accounting
The License Agreement was evaluated under ASC 605-25, Multiple Element Arrangements. The License Agreement includes the following deliverables: (1) an exclusive royalty bearing license, with the right to sublicense to develop and commercialize certain antibodies that target α-synuclein, including PRX002/RG7935 delivered at the effective date; (2) the Company's obligation to supply clinical material as requested by Roche for a period up to twelve months; (3) the Company's obligation to provide manufacturing related services to Roche for a period up to twelve months; (4) the Company's obligation to provide development activities under the development plan including the preparation and filing of the IND and initiation of the Phase I clinical trial estimated to be carried out over the next two years; and (5) the Company's obligation to provide indeterminate research services for up to three years at rates that are not significantly discounted and fully reimbursable by Roche.
All of the deliverables were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting under ASC 605-25. Factors considered in the determination included, among other things, for the license, the research and development capabilities of Roche and Roche’s sublicense rights, and for the remaining deliverables the fact that they are not proprietary and can be and have been provided by other vendors.
The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable excluding refund rights, concessions or performance bonuses. As such, the Company will exclude from such allocable consideration the milestone payments and royalties regardless of the probability of receipt because such payments are not considered fixed or determinable. Such milestone payments and royalties will be evaluated separately as the related contingencies are resolved. Consideration for research services were not allocated as the amount is not fixed and determinable and is not at a significant incremental discount. There are no refund rights, concessions or performance bonuses to consider.
The Company allocated the fixed and determinable consideration to the license and other deliverables using the relative selling price method based on the best estimate of selling price for the license and third party evidence for the remaining deliverables. The best estimate of selling price for the license was based on a discounted cash flow model. The key assumptions used in the discounted cash flow model used to determine the best estimate of selling price for the license granted to Roche under the License Agreement included the market opportunity for commercialization of PRX002/RG7935 in the U.S. and the Royalty Territory (for jointly funded products the Royalty Territory is worldwide except for the U.S. for all Licensed Products that are not jointly funded the Royalty Territory is worldwide), the probability of successfully developing and commercializing PRX002/RG7935, the remaining development costs for PRX002/RG7935, and the estimated time to commercialization of PRX002/RG7935.
The Company’s discounted cash flow model included several market conditions and entity-specific inputs, including the likelihood that clinical trials will be successful, the likelihood that regulatory approval will be obtained and the product commercialized, the appropriate discount rate, the market locations, size and potential market share of the product, the expected life of the product, and the competitive environment for the product. The market assumptions were generated using a patient-based forecasting approach, with key epidemiological, market penetration, dosing, compliance, length of treatment, and pricing assumptions derived from primary and secondary market research, referenced from third-party sources.
The Company concluded that a change in the assumptions used to determine the BESP of the license deliverable would not have a significant effect on the allocation of arrangement consideration. Based on the relative selling price method, the amount that the Company recognized on the effective date of the agreement concurrent with the delivery of the license and know-how was limited to the lesser of the amount otherwise allocable using the relative selling price method, which based on the discounted cash flow model was determined to be $35.6 million, or the non-contingent amount which was the $30.0 million upfront fee. As the remaining deliverables are delivered, any consideration received will be allocated to license revenue and the other deliverables based on their relative percentages until such time as the full allocated consideration of $35.6 million has been recognized as license revenue, and the balance of the monetary consideration will be recorded as an offset against R&D expenses. The Company recognized the $30.0 million upfront payment as collaboration license revenue in the first quarter of 2014.
Under this agreement, the Company recognizes research reimbursement as collaboration revenue as earned. The Company recognized $0.9 million as collaboration revenue for research reimbursement from Roche for the year ended December 31, 2017, as compared to $1.1 million for the year ended December 31, 2016 and $1.4 million for the year ended December 31, 2015. Cost sharing payments to Roche are recorded as R&D expenses. The Company recognized $7.2 million in R&D expenses for payments made to Roche during the year ended December 31, 2017, as compared to $3.1 million for the year ended December 31, 2016 and $2.9 million for the year ended December 31, 2015.
Reimbursement for development costs from Roche under the cost-sharing arrangement were allocated between license revenue and an offset to R&D expenses based on the relative selling price method until the full allocated consideration of $35.6 million was recognized as license revenue, after which the full reimbursement is recorded as an offset to R&D expenses. In the year ended December 31, 2015, the Company reached the full allocated consideration of $35.6 million recognized as license revenue; accordingly, future development revenue were recorded as an offset to R&D expenses. Reimbursement for development costs from Roche during the year ended December 31, 2017 was $1.7 million, as compared to $3.6 million for the year ended December 31, 2016, which was recognized as an offset to R&D expenses. Reimbursement for development costs from Roche during the year ended December 31, 2015 was $5.1 million, of which $0.2 million was recognized as collaboration license revenue and $4.9 million was recognized as an offset to R&D expenses.
Milestone Accounting
Under the License Agreement, the Company is eligible to receive milestone payments upon the achievement of development, regulatory and various first commercial sales milestones. Milestone payments are evaluated under ASU 2010-17, Milestone Method of Revenue Recognition. Factors considered in this determination included scientific and regulatory risk that must be overcome to achieve each milestone, the level of effort and investment required to achieve the milestone, and the monetary value attributed to the milestone. Accordingly, the Company recognizes payments related to the achievement of these milestones when the milestone is achieved.

The clinical and regulatory milestones under the License Agreement after the point at which the Company could opt-out are not considered to be substantive due to the fact that active participation in the development activities that generate the milestones is not required by the License Agreement, and the Company can opt-out of these activities. There are no refund or claw-back provisions and the milestones are uncertain of occurrence even after the Company has opted out. Based on this determination, these milestones will be recognized similar to the commercial milestone, which will be accounted for as contingent revenue payments with revenue recognized upon achievement of the milestone assuming all revenue recognition criteria are met.

In April 2014, the Company together with Roche initiated a Phase 1 clinical trial of PRX002/RG7935. As a result of this initiation, the Company received a $15.0 million milestone payment from Roche under the License Agreement. The Company concluded that the $15.0 million clinical milestone triggered upon the initiation of the Phase 1 study from PRX002/RG7935 in the clinic is consistent with the definition of a substantive milestone included in ASU 2010-17.

In June 2017, the Company achieved a $30.0 million clinical milestone under the License Agreement as a result of dosing of the first patient in the Phase 2 study for PRX002/RG7935, which the Company concluded was a substantive milestone under ASU 2010-17. The milestone was allocated to the units of accounting based on the relative selling price method for income statement classification purposes. As such, the Company recognized $26.6 million of the $30.0 million milestone as collaboration revenue and $3.4 million as an offset to R&D expenses during the year ended December 31, 2017. The Company did not achieve any clinical and regulatory milestones under the License Agreement during the years ended December 31, 2016 and 2015.