Note 8 — Contingencies and commitments

 

Leases

 

Future minimum lease payments under operating leases at December 31, 2016 are presented below (in thousands):

 

 

The Company leases property under operating leases expiring through 2027. Lease expenses amounted to $2,255,000, $841,000, $610,000 and $287,000 for the year ended December 31, 2016, six months ended December 31, 2015 and years ended June 30, 2015, and 2014, respectively, which is included within research and development and general and administrative expenses in the Company’s consolidated statement of operations.

 

In July 2015, the Company entered into a long-term lease agreement, with an early termination option at 123 months, for offices and research facilities in Philadelphia, U.S.  In October 2016, the lease commenced upon completion of construction. The related lease commitments are included in the table above.

 

In September 2015, the Company entered into an agreement for a 25-year lease, with early termination options, for a research and development facility in Oxfordshire, U.K.  In October 2016, the Company entered into the lease for that facility following the completion of construction. The related lease commitments are included in the table above.

 

Capital commitments

 

At December 31, 2016, the Company had commitments for capital expenditure totaling $8,093,000, which the Company expects to incur within one year.

 

Purchase commitments for clinical materials, clinical trials and contract manufacturing

 

At December 31, 2016, the Company had non-cancellable commitments for purchase of clinical materials, executing and administering clinical trials, and for contract manufacturing of $50,972,000, of which the Company expects to pay $34,164,000 within one year, $8,443,000 in one to three years, $6,796,000 in three to five years, and $1,569,000 after five years.  The timing of these payments varies depending on the rate of progress of development and clinical trial enrollment rates. Our subcontracted costs for clinical trials and contract manufacturing were $23,565,000, $8,585,000, $8,818,000 and $5,886,000 for the year ended December 31, 2016, six months ended December 31, 2015 and years ending June 30, 2015 and 2014, respectively.

 

Bellicum Pharmaceuticals Inc, Co-Development and Co-Commercialization Agreement

 

On December 16, 2016, the Company entered into a Co-Development and Co-Commercialization Agreement with Bellicum Pharmaceuticals, Inc. (“Bellicum”) in order to facilitate a staged collaboration to evaluate, develop and commercialize next generation T-cell therapies.

 

Under the agreement, the Company will evaluate Bellicum’s GoTCR technology (inducible MyD88/CD40 co-stimulation, or iMC) with our SPEAR T-cells for the potential to create enhanced T-cell therapeutics. Depending on results of the initial preclinical proof-of-concept phase, the agreement may progress to a two-target co-development and co-commercialization phase. To the extent necessary, and in furtherance of the parties’ proof-of-concept and co-development efforts, the parties granted each other a royalty-free, non-transferable, non-exclusive license covering their respective technologies for purposes of facilitating such proof—of-concept and co-development efforts. In addition, as to covered therapies developed under the agreement, the parties granted each other a reciprocal exclusive license for the commercialization of such therapies.

 

With respect to any joint commercialization of a covered therapy, the parties agreed to negotiate in good faith the commercially reasonable terms of a co-commercialization agreement. The parties also agreed that any such agreement shall provide for, among other things, equal sharing of the costs of any such joint commercialization and the calculation of profit shares as set forth in the agreement.

 

The agreement will expire on a country-by-country basis once the parties cease commercialization of the T-cell therapies covered by the agreement, unless earlier terminated by either party for material breach, non-performance or cessation of development, bankruptcy/insolvency, or failure to progress to co-development phase.

 

Merck Combination Agreement

 

On October 27, 2016, the Company entered into a clinical trial collaboration agreement with Merck (known as MSD outside the United States and Canada), for the assessment of our NY-ESO SPEAR T-cell therapy in combination with Merck’s PD-1 inhibitor, KEYTRUDA® (pembrolizumab), in patients with multiple myeloma. Under the terms of the agreement, each of Merck and the Company will manufacture and supply its relevant compound for use in the combination study. The agreement will last until the earlier of delivery of the final study report or study completion. Either party may terminate the agreement for material breach, patient safety, regulatory action preventing supply of compound or withdrawal of regulatory approval for one of the combination study compounds. Merck may also terminate the agreement where it believes its compound is being used in an unsafe manner.

 

MD Anderson Strategic Alliance

 

On September 26, 2016, the Company announced that it had entered into a multi-year strategic alliance with The University of Texas MD Anderson Cancer Center (“MD Anderson”) designed to expedite the development of T-cell therapies for multiple types of cancer.  The Company and MD Anderson will collaborate in a number of studies including clinical and preclinical development of the Company’s SPEAR T-cell therapies targeting NY-ESO, MAGE-A10 and future clinical stage first and second generation SPEAR T-cell therapies such as MAGE-A4 across a number of cancers, including bladder, lung, ovarian, head and neck, melanoma, sarcoma, esophageal and gastric cancers.

 

Under the terms of the alliance agreement, the Company has committed funding of at least $19,644,000 to fund studies under the alliance agreement. Payment of this funding is contingent on mutual agreement to study orders, in order for any study to be included under the alliance, and the performance of set milestones by MD Anderson.

 

 The Company will make payments to MD Anderson as certain milestones are achieved and these costs will be expensed to research and development as MD Anderson renders the services under the strategic alliance.  The timing and amount of future payments is uncertain.

 

The alliance agreement may be terminated by either party for material breach by the other party. Individual studies may be terminated inter alia for material breach, health and safety concerns or where the institutional review board, the review board at the clinical site with oversight of the clinical study, requests termination of any study. Where any legal or regulatory authorization is finally withdrawn or terminated, the relevant study will also terminate automatically.

 

Universal Cells Research, Collaboration and License Agreement

 

On November 25, 2015, the Company entered into a Research, Collaboration and License Agreement relating to gene editing and HLA-engineering technology with Universal Cells, Inc. (“Universal Cells”). The Company paid an upfront license and start-up fee of $2.5 million to Universal Cells in November 2015 and a milestone payment of $3.0 million in February 2016.  Further milestone payments of up to $44 million are payable if certain development and product milestones are achieved. Universal Cells

 

would also receive a profit-share payment for the first product, and royalties on sales of other products utilizing its technology.  The upfront and start-up fee was expensed to research and development when incurred.

 

ThermoFisher License Agreement

 

In 2012, the Company entered into a series of license and sub-license agreements with Life Technologies Corporation, part of ThermoFisher Scientific, Inc. (“ThermoFisher”) that provide the Company with a field-based exclusive license under certain intellectual property rights owned or controlled by ThermoFisher.  The Company paid upfront license fees of $1.0 million relating to the license and sublicense agreements and has an obligation to pay minimum annual royalties (in the tens of thousands of U.S. dollars prior to licensed product approval and thereafter at a level of 50% of running royalties in the previous year), milestone payments and a low single-digit running royalty payable on the net selling price of each licensed product. The upfront payment made in 2012 was expensed to research and development when incurred. Subsequent milestone payments have been recognized as an intangible asset due to the technology having alternative future use in research and development projects at the time of the payment.  The minimum annual royalties have been expensed as incurred.

 

On June 16, 2016, the Company entered into a supply agreement with ThermoFisher for the supply of the Dynabeads® CD3/CD28 technology. The Dynabeads® CD3/CD28 technology is designed to isolate, activate and expand human T-cells, and is being used in the manufacturing of the Company’s affinity enhanced T-cell therapies.  The supply agreement runs until December 31, 2025. Under the supply agreement the Company is required to purchase its requirements for CD3/CD28 magnetic bead product exclusively from ThermoFisher for a period of 5 years and there are also minimum purchasing obligations, which are included within ‘Purchase commitments for clinical materials, clinical trials and contract manufacturing’ set forth above. ThermoFisher has the right to terminate the supply agreement for material breach or insolvency.