6. Collaborative Research and Development Agreements

GlaxoSmithKline

In December 2008, we entered into a worldwide strategic alliance with GSK to discover, develop, and commercialize toll-like receptor (“TLR”) inhibitors. We received an initial payment of $10 million and agreed to conduct research and early clinical development in up to four programs. In 2011, we earned $15 million in milestone payments related to the initiation of Phase 1 and proof-of-mechanism clinical trials of DV1179 in systemic lupus erythematosus patients and expanded our collaboration with GSK to develop a TLR8 inhibitor. We are eligible to receive future development milestone payments which we have determined to be substantive milestones. GSK can exercise its exclusive option to license each program upon achievement of certain events, and we are eligible to receive contingent option exercise payments. If GSK exercises an option, GSK would carry out further development and commercialization of the corresponding products. We are eligible to receive tiered, up to double-digit royalties on sales of any products originating from the collaboration, and have retained an option to co-develop and co-promote one product under this agreement.

Revenue from the initial payment from GSK was deferred and is being recognized over the expected period of performance under the agreement which is estimated to be seven years. For the three months ended June 30, 2012 and 2011, we recognized revenue of $0.4 million in each period related to the initial payment. For the six months ended June 30, 2012 and 2011, we recognized revenue of $0.7 million in each period related to the initial payment. As of June 30, 2012 and December 31, 2011, deferred revenue relating to the initial payment was $4.9 million and $5.7 million, respectively. During the quarter ended June 30, 2011, we recorded $6 million in revenue from a milestone payment we received from GSK.

Absent early termination, the agreement will expire when all of GSK’s payment obligations expire. Either party may terminate the agreement early upon written notice if the other party commits an uncured material breach of the agreement. Either party may terminate the agreement in the event of insolvency of the other party. GSK also has the option to terminate the agreement without cause, upon prior written notice within a specified window of time dependent upon the stage of clinical development of the programs.

AstraZeneca

In September 2006, we entered into a three-year research collaboration and license agreement with AstraZeneca for the discovery and development of TLR9 agonist-based therapies for the treatment of asthma and chronic obstructive pulmonary disease. We received an upfront payment of $10 million. In 2008, we received a milestone payment of $4.5 million for the nomination of the first candidate drug, AZD1419, for asthma. The research term of this agreement was extended through July 2010.

In October 2011, we amended our agreement with AstraZeneca to provide that we will conduct initial clinical development of AZD1419. Under the terms of the amended agreement, AstraZeneca will fund all program expenses to cover the cost of development activities through Phase 2a, estimated to total approximately $20 million. We received an initial payment of $3 million to begin the clinical program. In December 2011, we agreed to advance AZD1419 into preclinical toxicology studies, which entitled us to receive a $2.6 million payment. If AstraZeneca chooses to advance the program following completion of Phase 2a, we will receive a $20 million milestone payment, and AstraZeneca will retain its rights to develop the candidate therapy and to commercialize the resulting asthma product. Additionally, we are eligible to receive potential future development payments, and upon commercialization, we are eligible to receive royalties based on product sales of any products originating from the collaboration. We have the option to co-promote in the United States products arising from the collaboration, if any. AstraZeneca has the right to sublicense its rights upon our prior consent.

Revenue from the 2011 amendment has been deferred and is being recognized as the development work is performed over the estimated performance period of approximately five years. For the three months ended June 30, 2012, we recognized revenue of $0.2 million related to the initial payment and $1.1 million from performance of research services. For the six months ended June30, 2012, we recognized revenue of $0.4 million related to the initial payment and $1.4 million from performance of research services. Revenues from the agreement were immaterial for 2011. As of June 30, 2012 and December 31, 2011, deferred revenue relating to the initial payment and performance of research services was $3.1 million and $4.9 million, respectively.

Absent early termination, the agreement will expire when all of AstraZeneca’s payment obligations expire. AstraZeneca has the right to terminate the agreement at any time upon prior written notice and either party may terminate the agreement early upon written notice if the other party commits an uncured material breach of the agreement.

National Institutes of Health (“NIH”) and Other Funding

In September 2008, we were awarded a five-year $17 million contract to develop our ISS technology using TLR9 agonists as vaccine adjuvants. The contract was awarded by NIAID to develop novel vaccine adjuvant candidates that signal through receptors of the innate immune system. The contract supports adjuvant development for anthrax as well as other disease models. NIAID is funding 100% of the total $17 million cost of our program under Contract No. HHSN272200800038C.

In July 2011, we were awarded a $0.6 million grant from the NIH to fund research in preclinical models of skin autoimmune inflammation.

In May 2012, we were awarded a $0.4 million grant from the NIH to fund research in screening for inhibitors of TLR8 for treatment of rheumatoid arthritis and $0.6 million grant to fund development of TLR8 inhibitors for treatment of autoimmune diseases.

During the three and six month periods the following revenue was recognized (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
NIAID Contract	$	750	$	570	$	1,740	$	1,116
All other NIH grants		132		320		229		663

Total NIH grant revenue recognized	$	882	$	890	$	1,969	$	1,779