Revenue Recognition

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

REVENUE RECOGNITION

Our major sources of revenue during the reporting periods were product revenues from Makena, Feraheme, and Intrarosa.

Product Revenue and Allowances and Accruals

The following table provides information about disaggregated revenue by products for the three and nine months ended September 30, 2019 and 2018 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Product sales, net
Feraheme	$	44,205	$	36,963	$	126,294	$	99,796
Makena	34,272		80,221		96,464		275,377
Intrarosa	5,607		4,925		14,898		10,331
Other	23		129		156		302
Total product sales, net	$	84,107	$	122,238	$	237,812	$	385,806

Total gross product sales were offset by product sales allowances and accruals for the three and nine months ended September 30, 2019 and 2018 as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Gross product sales	$	254,073	$	238,856	$	704,976	$	776,458
Provision for product sales allowances and accruals:
Contractual adjustments	144,108		93,213		381,633		290,896
Governmental rebates	25,858		23,405		85,531		99,756
Total	169,966		116,618		467,164		390,652
Product sales, net	$	84,107	$	122,238	$	237,812	$	385,806

The following table summarizes the product revenue allowance and accrual activity for the three and nine months ended September 30, 2019 (in thousands):



	Contractual			Governmental
	Adjustments			Rebates			Total
Balance at December 31, 2018	$	57,199		$	29,114		$	86,313
Provisions related to current period sales	233,305			44,539			277,844
Adjustments related to prior period sales	4,200			15,134			19,334
Payments/returns relating to current period sales	(176,392		)	(11,909		)	(188,301		)
Payments/returns relating to prior period sales	(40,538		)	(36,362		)	(76,900		)
Balance at June 30, 2019	$	77,774		$	40,516		$	118,290
Provisions related to current period sales	139,697			27,296			166,993
Adjustments related to prior period sales	4,475			(1,438		)	3,037
Payments/returns relating to current period sales	(117,780		)	(4,899		)	(122,679		)
Payments/returns relating to prior period sales	(20,239		)	(2,611		)	(22,850		)
Balance at September 30, 2019	$	83,927		$	58,864		$	142,791

We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional.

During the three and nine months ended September 30, 2019, we recorded adjustments of $(1.4) million and $13.7 million, respectively, for Medicaid rebates received that related to prior period sales and $4.5 million and $8.7 million, respectively, for contractual adjustments related to prior period sales. We concluded that these adjustments represented changes in estimate during the three and nine months ended September 30, 2019 due to higher Medicaid and payer utilization and subsequent rebate obligations than anticipated based on our historical experience.

Variable Consideration

Under ASC 606, we are required to make estimates of the net sales price, including estimates of variable consideration (such as rebates, chargebacks, discounts, copay assistance and other deductions), and recognize the estimated amount as revenue, when we transfer control of the product to our customers. In addition, we estimated variable consideration related to our share of net distributable profits from our former authorized generic partner, Prasco LLC (“Prasco”). We estimate variable consideration for our product revenues using an “expected value” method. No amounts recognized as part of our product revenues were constrained as of September 30, 2019.

Collaboration Revenue

During the first quarter of 2019, in conjunction with the Perosphere transaction, we assumed responsibility for a clinical trial collaboration agreement with a pharmaceutical company. This agreement provides for milestone payments to us, provided we meet certain clinical obligations in connection with our ciraparantag program. We also acquired $6.4 million of deferred revenue related to this agreement, which represents the fair value of upfront milestone payments received by Perosphere under this agreement prior to acquisition. During the quarter ended September 30, 2019, we were informed by the pharmaceutical

company of its intention to terminate the clinical trial collaboration agreement. Although we do not believe this company has grounds for termination, we are engaged in discussions with such partner to come to a mutually agreeable resolution.

In accordance with ASC 808, we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of payments under this agreement and concluded that the pharmaceutical company meets the definition of a customer. As a result, this agreement was accounted for under ASC 606. We determined that the promises to perform various research and development activities related to our ciraparantag program are not distinct because they are all necessary and highly interdependent with one another for the purpose of pursuing regulatory approval of ciraparantag. As such, these promises are combined into a single performance obligation, which is the submission for regulatory approval of ciraparantag in the U.S. and the European Union.

In order to evaluate the appropriate transaction price, we considered that the remaining $34.8 million of potential milestone payments relate to activities which cannot progress until FDA clearance is received for a device needed to conduct the future clinical trials. As a result, these amounts were excluded from the transaction price and fully constrained based on the probability of achievement, which is outside of our control. In addition, as of September 30, 2019, the transaction price is limited to the $6.3 million of deferred revenue acquired. We will reevaluate the transaction price, including all constrained amounts, at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust our estimate of the transaction price.

We will recognize revenue based on the transaction price determined at the end of each reporting period based on an input method in the form of research effort relative to expected research effort at the completion of the performance obligation. This is based on the relative costs of the research and development activities incurred and expected to be incurred in the future to satisfy the performance obligation, which is estimated to be completed over approximately two years. The estimated period of performance to satisfy the performance obligation and project cost is reviewed quarterly and adjusted, as needed, to reflect our current expectations regarding the costs and timing of the deliverable and will be updated in the event the agreement is terminated. These estimates are subject to a number of assumptions and actual results could differ materially from our assumptions in future periods.

As of September 30, 2019, deferred revenue related to the agreement amounted to $6.3 million, of which $1.1 million was included in current liabilities. No milestone payments were received during the nine months ended September 30, 2019.