Note 3 — Revenue

 

Revenue represents recognized income from the GSK Agreement which requires the Company to provide multiple deliverables to GSK.  The GSK Agreement related to up to five target programs, the first of which was the NY-ESO SPEAR T-cell program. On September 7, 2017, and by way of an amendment agreement (the “Amendment”), GSK exercised its option to obtain an exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program.  The Amendment also specified the activities required to transition the NY-ESO SPEAR T-cell program to GSK. Transition of the program is targeted for completion during 2018.

 

The exercise of the NY-ESO option and the Amendment has been accounted for as a modification of an existing arrangement.  As of September 7, 2017, we have accounted for the modified arrangement as a multiple-element arrangement consisting of the following deliverables (i) an exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program, (ii) the transitional development program for the NY-ESO Spear T-cell during the transition period, (iii) additional transitional services, when and if required by GSK and reimbursed when performed and (iv) the development of, and option to obtain an exclusive license to a second target, PRAME.  As provided under the GSK Agreement, GSK continues to have the right to nominate three additional target peptides, excluding any targets on which work is already under way.  Management does not consider this to be a deliverable at September 7, 2017, because it represents a substantive option not priced at a significant and incremental discount.  After the transition, GSK will assume responsibility for all NY-ESO-related activities.

 

Upon modification, the non-contingent arrangement consideration was allocated between the separate deliverables using the Company’s best estimate of the relative selling price. In determining the best estimate, the Company considered internal pricing objectives it used in negotiating the GSK Agreement and the Amendment, together with internal data regarding the cost and margin of providing services for each deliverable taking into account the different stage of development of each development program.

 

Under the GSK Agreement, the Company received an upfront payment of $42.1 million in June 2014 and has achieved non-substantive development milestones of $49.3 million, of which $10.3 million were achieved in the nine months ended September 30, 2017.  Upon exercise of the NY-ESO option, the Company is entitled to receive an option exercise fee of £30 million (approximately $38 million), of which $26.6 million was received in September 2017 and the remainder is payable upon transition of the program to GSK, which is expected to occur during 2018.  The Company is entitled to further non-substantive milestone payments based on the achievement of development milestones by the Company relating to the NY-ESO SPEAR T-cell program.  In addition to the development milestone payments due in relation to the NY-ESO SPEAR T-cell program, the Company is also entitled to non-substantive milestone payments based on achievement of development milestones under the PRAME SPEAR T-cell program, the second target program nominated by GSK under the GSK Agreement.

 

The Company will also be entitled to further development and commercialization milestone payments based on achievement of specified milestones by GSK.  The Company is entitled to royalties from GSK on all GSK sales of TCR therapeutic products licensed under the GSK Agreement, varying between a mid-single-digit percentage and a low-double-digit percentage of net sales. Sales milestones also apply once any TCR therapeutic covered by the GSK Agreement is on the market.

 

The revenue allocated to the exclusive license to research, develop, and commercialize the Company’s NY-ESO SPEAR T-cell therapy program will be recognized as revenue upon commencement of the exclusive license, which occurs on completion of defined transition activities and transition of sponsorship of clinical programs to GSK.  The revenue allocated to the transitional development program for the NY-ESO Spear T-cells and the development of, and option to obtain an exclusive license to a second target, PRAME is recognized using the proportional performance model in revenue systematically over the period in which the Company is delivering services under the GSK Agreement, which is determined to be the estimated duration of the development activities to be performed by Adaptimmune under the GSK Agreement.

 

Management regularly reviews and monitors the performance of the GSK Agreement to determine the period over which the Company will be delivering services to GSK: and when a change in facts or circumstances occurs, the estimated is adjusted and the revenue is recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate is recognized as an adjustment to revenue in the period in which the change in estimate occurs.  Upon the exercise of the NY-ESO option, the estimate of the period over which the Company will be delivering services to GSK in relation to the NY-ESO Spear T-Cell development program has significantly reduced, resulting in an increase in revenue amortization of $17.5 million in September 2017.  Management estimates that all deferred revenue, totaling $42.6 million, will now be amortized within 12 months.

 

The GSK Agreement is effective until all payment obligations expire. The GSK Agreement can also be terminated on a collaboration program-by-collaboration program basis by GSK for lack of feasibility or inability to meet certain agreed requirements. Both parties have rights to terminate the GSK Agreement for material breach upon 60 days’ written notice or immediately upon insolvency of the other party. GSK has additional rights to terminate either the GSK Agreement or any specific license or collaboration program on provision of 60 days’ notice to us. The Company also has rights to terminate any license where GSK ceases development or withdraws any licensed TCR therapeutic in specified circumstances.