Commitments and Contingencies

a. Leases

Descriptions of Lease Agreements

The Company leases laboratory and office facilities in Tarrytown, New York, under a December 2006 lease agreement, as amended, as well as an April 2013 lease agreement, as further described below.

The facilities leased by the Company under the December 2006 lease include (i) space in previously existing buildings, (ii) newly constructed space in two buildings (“Buildings A and B”) that was completed in the third quarter of 2009 and, (iii) under a December 2009 amendment to the lease, additional newly constructed space in a third building (“Building C”) that was completed in the first quarter of 2011. In April 2013, the Company executed an agreement related to Buildings A, B, and C, which extended the term of the lease of those facilities from June 2024 to June 2029; the remaining facilities under the lease will expire in June 2024. The lease contains three renewal options to extend the term of the lease by five years each, escalations at 2.5% per annum, and early termination options for various portions of the space. The lease provides for monthly payments over its term and additional charges for utilities, taxes, and operating expenses.

In April 2013, the Company entered into a lease agreement for additional laboratory and office space to be constructed in two new buildings ("Buildings D and E"), which are expected to be completed in the second half of 2015, at the Company's current Tarrytown, New York location. The initial term of the lease, which is expected to commence in mid-2014, is approximately 15 years and contains three renewal options to extend the term of the lease by five years each. The lease provides for (i) monthly payments over its term, which will be based on the landlord's costs of construction and tenant allowances, and (ii) additional charges for utilities, taxes, and operating expenses.

Certain premises under the December 2006 lease are accounted for as operating leases. However, for Buildings A, B, C, D, and E (collectively, the "Buildings") that the Company is leasing, the Company is deemed, in substance, to be the owner of the landlord's Buildings in accordance with the application of FASB authoritative guidance. Consequently, in addition to capitalizing the tenant improvements, the Company capitalizes the landlord's costs of constructing these new facilities, offset by a corresponding lease obligation on the Company's balance sheet.

The Company also leases certain other laboratory, office, and storage space and equipment under operating and capital leases which expire at various times through 2022.

Commitments under Operating Leases

The estimated future minimum noncancelable lease commitments under operating leases are as follows:



December 31,	Facilities		Equipment		Total
2014	$	8,765	$	2,169	$	10,934
2015	9,348		505		9,853
2016	9,895		24		9,919
2017	9,429		—		9,429
2018	9,606		—		9,606
Thereafter	67,849		—		67,849
	$	114,892	$	2,698	$	117,590

Rent expense under operating leases was:



Year Ended December 31,	Facilities		Equipment		Total
2013	$	9,404	$	471	$	9,875
2012	7,428		601		8,029
2011	7,191		599		7,790

In addition to its rent expense under operating leases, and payments under facility lease obligations (see below), for various facilities, the Company paid rental charges for utilities, real estate taxes, and operating expenses of $11.5 million, $10.9 million, and $9.3 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Commitments under Capital Leases

In 2011, the Company entered into capital leases in connection with acquisitions of new equipment, which expire at various times through 2014. The lease obligations were collateralized with marketable debt securities totaling $3.2 million at December 31, 2012; such collateral was classified as restricted cash and marketable securities. During 2013, the requirement for the Company to collateralize these capital leases was rescinded. The Company did not enter into capital leases in 2013 or 2012.

At the end of the lease term, the Company is required to purchase the leased equipment for a nominal amount defined in the lease agreement. At December 31, 2013 and 2012, capital lease obligations totaled $0.1 million and $1.3 million, respectively, and were included in other liabilities. The estimated future minimum noncancelable lease commitments under capital leases at December 31, 2013 were not material.

Facility Lease Obligations

As described above, based upon various factors, including the Company's involvement in the construction of the Buildings and its responsibility for directly paying for a substantial portion of tenant improvements, the Company is deemed, in substance, to be the owner of the landlord's Buildings in accordance with the application of FASB authoritative guidance. Consequently, in addition to capitalizing the tenant improvements, the Company capitalizes the landlord's costs of constructing these new facilities, offset by a corresponding lease obligation on the Company's balance sheet. The Company also recognizes, as additional facility lease obligation, reimbursements from the Company's landlord for tenant improvement costs that the Company incurred since, under FASB authoritative guidance, such payments that the Company receives from its landlord are deemed to be a financing obligation. The Company allocates a portion of its lease payments on these facilities between the Buildings and the land on which the Buildings are constructed, based on the initial estimated relative fair values of the land and Buildings. The land element of the lease is treated for accounting purposes as an operating lease.

With respect to Buildings A and B, monthly lease payments commenced in August 2009, the buildings were placed in service by the Company in September 2009, and the imputed interest rate applicable to the Company's facility lease obligation is approximately 11%. With respect to Building C, monthly lease payments commenced in January 2011, the building was placed in service by the Company in February 2011, and the imputed interest rate applicable to the Company's facility lease obligation is approximately 9%. In 2013, 2012, and 2011, the Company recognized $16.2 million, $16.0 million, and $15.6 million, respectively, of interest expense in connection with the Buildings A and B and the Building C facility lease obligations. At December 31, 2013 and 2012, the Buildings A and B facility lease obligation balance was $111.2 million and $112.0 million, respectively, and the Building C facility lease obligation balance was $49.1 million and $48.8 million, respectively.

The estimated future minimum noncancelable commitments under these facility lease obligations, as of December 31, 2013, are as follows:



December 31,	Buildings A and B		Building C		Total
2014	$	13,288	$	4,438	$	17,726
2015	13,545		4,562		18,107
2016	13,809		4,689		18,498
2017	14,079		4,818		18,897
2018	14,356		4,951		19,307
Thereafter	146,667		65,074		211,741
	$	215,744	$	88,532	$	304,276

Commencing in the second quarter of 2013, the Company began capitalizing the landlord's costs of constructing Buildings D and E, which totaled $25.0 million at December 31, 2013, and recognized a corresponding facility lease obligation. Rent expense in connection with the land element of these new facilities also commenced in the second quarter of 2013 and is recorded as a deferred liability until lease payments commence, which is expected to be in 2015. Rent payments will be based on the landlord's costs of construction and tenant allowances, and will include additional charges for utilities, taxes, and operating expenses.

b. Research Collaboration and Licensing Agreements

As part of the Company's research and development efforts, the Company enters into research collaboration and licensing agreements with related and unrelated companies, scientific collaborators, universities, and consultants. These agreements contain varying terms and provisions which include fees and milestones to be paid by the Company, services to be provided, and ownership rights to certain proprietary technology developed under the agreements. Some of the agreements contain provisions which require the Company to pay royalties, as defined, at rates that range from 1% to 16.5%, in the event the Company sells or licenses any proprietary products developed under the respective agreements.

As described in Note 4, the Company has contingent reimbursement obligations to its collaborators Sanofi and Bayer HealthCare once the applicable collaboration becomes profitable.

In December 2011, the Company and Genentech, a member of the Roche Group, entered into a Non-Exclusive License and Partial Settlement Agreement (the “Original Genentech Agreement”) that covered making, using, and selling EYLEA for the prevention of human eye diseases and disorders in the United States, and ended the litigation relating to those matters. Pursuant to the Original Genentech Agreement, the Company received a non-exclusive license to certain patents relating to VEGF receptor proteins, known as the Davis-Smyth patents, and other technology patents. The Original Genentech Agreement provided for the Company to make payments to Genentech based on U.S. sales of EYLEA commencing upon FDA approval of EYLEA in November 2011 through May 7, 2016. The Company made a one-time, non-refundable $60.0 million payment during 2012 upon cumulative U.S. sales of EYLEA reaching $400 million, and is obligated to pay royalties of 4.75% on cumulative U.S. sales of EYLEA between $400 million and $3 billion and 5.5% on any cumulative U.S sales of EYLEA over $3 billion. As the Company records net product sales of EYLEA, the Company is recognizing expense in connection with the Genentech Agreement using a blended mid-single digit royalty rate that reflects both the $60.0 million payment and the royalties payable on cumulative sales and that is based upon the Company's estimate of cumulative EYLEA sales through May 7, 2016.

Effective May 17, 2013, the Company entered into an Amended and Restated Non-Exclusive License and Settlement Agreement with Genentech (the "Amended Genentech Agreement"), which amended the Original Genentech Agreement to now include all sales of EYLEA worldwide and ended the litigation relating to those matters. Under the Amended Genentech Agreement, the Company received a worldwide non-exclusive license to the Davis-Smyth patents, and certain other patents, owned or co-owned by Genentech for the prevention or treatment of eye diseases and eye disorders in a human through administration of EYLEA to the eye. Under the Amended Genentech Agreement, the Company is obligated to make payments to Genentech based on sales of EYLEA in the United States, and EYLEA manufactured in the United States and sold outside the United States, through May 7, 2016 using the same milestone and royalty rates as in the Original Genentech Agreement. EYLEA is sold outside the United States by affiliates of Bayer HealthCare under the Company's license and collaboration agreement. All payments to Genentech under the Original Genentech Agreement and the Amended Genentech Agreement have been or will be made by the Company. Bayer HealthCare will share in all such payments based on the proportion of ex-U.S. EYLEA sales to worldwide EYLEA sales and determined consistent with the license and collaboration agreement.

Also on May 17, 2013, the Company entered into a Non-Exclusive License and Settlement Agreement (the "ZALTRAP Settlement Agreement") with Genentech and Sanofi under which the Company and Sanofi received a worldwide non-exclusive license to the Davis-Smyth patents, and certain other patents, in all indications for human use other than the prevention or treatment of eye diseases and eye disorders through administration to the eye. Under the terms of the ZALTRAP Settlement Agreement, payments are required to be made to Genentech based on sales of ZALTRAP in the United States and of ZALTRAP that is manufactured in the United States and sold outside the United States through May 7, 2016. A payment of $19 million is required to be made upon cumulative relevant sales of ZALTRAP reaching $200 million. In addition, royalty payments are required to be made to Genentech based upon 4.5% of cumulative relevant sales of ZALTRAP between $400 million and $1 billion and 6.5% of any cumulative relevant sales of ZALTRAP over $1 billion. All payments to Genentech under the ZALTRAP Settlement Agreement will be made by Sanofi, and the Company will share in all such payments.

The Company recognizes royalty expense based on product sales of its commercial productsunder various licensing agreements, including, for EYLEA sales both inside and outside of the United States, the Genentech agreements described above. For the years ended December 31, 2013, 2012, and 2011, royalties on product sales totaled $128.1 million, $59.5 million, and $3.2 million, respectively.

In July 2008, the Company and Cellectis S.A. (“Cellectis”) entered into an Amended and Restated Non-Exclusive License Agreement (the “Cellectis Agreement”). The Cellectis Agreement resolved a dispute between the parties related to the interpretation of a license agreement entered into by the parties in December 2003 pursuant to which the Company licensed certain patents and patent applications from Cellectis. Pursuant to the Cellectis Agreement, in July 2008, the Company made a non-refundable $12.5 million payment to Cellectis (the “Cellectis Payment”) and agreed to pay Cellectis a low single-digit royalty based on revenue received by the Company from any future licenses or sales of the Company's VelociGene or VelocImmune products and services. No royalties are payable to Cellectis with respect to the Company's VelocImmune license agreements with AstraZeneca and Astellas or the Company's antibody collaboration with Sanofi. Moreover, no royalties are payable to Cellectis on any revenue from commercial sales of antibodies from the Company's VelocImmune technology.