9. Collaboration and Licensing Agreements

Following is a summary description of the material revenue arrangements, including arrangements that generated revenue in the period ended December 31, 2018, 2017, and 2016. The revenue reported for each agreement has been adjusted to reflect the adoption of ASC 606 for each period presented.

Novartis

In June 2016, the Company entered into a Collaboration and License Agreement (Novartis Agreement) with Novartis Institutes for BioMedical Research, Inc. (Novartis), to develop and commercialize bispecific and other Fc engineered antibody drug candidates using the Company’s proprietary XmAb® technologies and drug candidates. Pursuant to the Novartis Agreement:

The Company granted Novartis certain exclusive rights to research, develop and commercialize XmAb14045 and XmAb13676, two development stage products that incorporate the Company’s bispecific Fc technology;

The Company will apply its bispecific technology in up to four target pair antibodies identified by Novartis (each a Global Discovery Program); and

The Company will provide Novartis with a non-exclusive license to certain of its Fc technologies to apply against up to ten targets identified by Novartis.

The Company received a non-refundable upfront payment under the Novartis Agreement of $150 million in July 2016 and is eligible to receive up to $2.1 billion in future development, regulatory and sales milestones in total for all programs that could be developed under the Novartis Agreement. In December 2018, Novartis notified the Company it was terminating its rights with respect to the XmAb13676 program, which will be effective June 2019. Under the Agreement, Novartis is responsible to fund its share of XmAb13676 development costs through June 2020.

Under the Novartis Agreement, the Company granted Novartis a worldwide co-exclusive license with the Company to research, develop and manufacture XmAb14045. The Company also granted Novartis an exclusive license to commercialize XmAb14045 in all worldwide territories outside the U.S.

The Company and Novartis will co-develop XmAb14045 worldwide and share development costs. The Company may elect to opt-out of the development of XmAb14045 by providing notice to Novartis. If the Company elects to opt-out, Novartis will receive the Company’s U.S. rights to XmAb14045 and the Company will receive low double-digit royalties on U.S. net sales in addition to the royalties on net sales outside the U.S.

Pursuant to the Novartis Agreement, the Company will apply its bispecific technology to up to four target pair antibodies selected, if available for exclusive license to Novartis and not subject to a Company internal program. The Company will apply its bispecific technology to generate bispecific antibody candidates from starting target pair antibodies provided by Novartis for each of the four Global Discovery Programs and return the bispecific product candidate to Novartis for further testing, development and commercialization. Novartis has the right to substitute up to four of the original selected target pair antibodies during the research term provided that Novartis has not filed and received acceptance for an Investigational New Drug Application (IND) with the Company provided bispecific candidate. The research term is five years from the date of the Novartis Agreement.

We completed delivery of a Global Discovery Program in 2017 and delivery of a second Global Discovery Program in 2018.

Novartis will assume full responsibility for development and commercialization of each product candidate under each of the Global Discovery Programs.

Under the Novartis Agreement, the Company has the right to participate in the development and commercialization of one of the Global Discovery Programs prior to filing an IND for the Global Discovery Program. If the Company elects to participate in development, it will assume responsibility for 25% of the worldwide development costs for the program and 50% of commercialization costs and will receive 50% of the U.S. profits on net sales of the product.

Under the Novartis Agreement, the Company also granted Novartis a non-exclusive research license to use certain of the Company’s Fc technologies, specifically Cytotoxic, Xtend and Immune Inhibitor, to research, develop, commercialize and manufacture antibodies against up to ten targets selected by Novartis, if available for non-exclusive license and not subject to a Company internal program. Novartis will assume all research, development and commercialization costs for products that are developed from application of the Fc technologies.

The Company evaluated the Novartis Agreement under the new revenue recognition standard ASC 606 and concluded that Novartis is a customer. The Company identified the following performance obligations that it deemed to be distinct at the inception of the contract:

License to certain rights to Xencor’s XmAb14045 and XmAb13676;

Develop four bispecific drug candidates against four targets identified by Novartis; and

License to Xencor’s Fc technologies for up to 10 targets identified and selected by Novartis.

The Company considered the licenses as functional intellectual property as Novartis has the right to access its technology and such technology is functional to Novartis at the time that the Company provides access. Under the Novartis Agreement, Novartis has substitution rights under each discovery program provided it has not advanced to filing an IND. The Company’s obligation to provide services related to the discovery programs, and Novartis’ right to substitute programs is limited to the five-year period from the date of the Novartis agreement.

The Company determined the transaction price at inception is the $150 million upfront payment to be allocated to the performance obligations. The Novartis Agreement includes variable consideration for potential future milestones and royalties that were contingent on future success factors for development programs. The Company used the “most likely” method to determine the variable consideration. None of the development, regulatory or sales milestones or royalties were included in the transaction price. The Company will re-evaluate the transaction price in each reporting period as uncertain events are resolved or other changes in circumstances occur.

The Company determined the transaction price at inception of the Novartis Agreement and allocated it to the various performance obligations using the standalone selling price which is comparable to the relative selling price methodology used in the original accounting treatment for the transaction.

The transaction price of $150 million was allocated to the performance obligations as follows:

$27.1 million to certain rights to the XmAb14045 Program;

$31.4 million to certain rights to the XmAb13676 Program;

$20.05 million to each of the four Global Discovery Programs; and

$11.3 million to the Fc licenses.

Under ASC 606, revenue is recognized at the time that the Company’s performance obligation for each Global Discovery is completed upon delivery of each discovery program to Novartis. The Company delivered a discovery program to Novartis in 2017 and recognized $20.05 million of revenue in the period of delivery. In the third quarter of 2018, the Company delivered a second discovery program to Novartis and is recognizing an additional $20.04 million of revenue.

Under ASC 606 the entire amount of revenue allocated to the Fc licenses is being recognized at inception of the Novartis Agreement, the second quarter of 2016.

During the year ended December 31, 2018, 2017 and 2016, the Company recognized $20.0 million, $20.1 million and $69.9 million of revenue respectively. As of December 31, 2018 there is a receivable of $2.1 million and $40.1 million in deferred revenue related to the arrangement.

Amgen Inc.

In September 2015, the Company entered into a research and license agreement (the Amgen Agreement) with Amgen Inc. (Amgen) to develop and commercialize bispecific antibody product candidates using the Company’s proprietary XmAb® bispecific Fc technology. Under the Amgen Agreement, the Company granted an exclusive license to Amgen to develop and commercialize bispecific drug candidates from the Company’s preclinical program that bind the CD38 antigen and the cytotoxic T-cell binding domain CD3, (the CD38 Program). The Company also agreed to apply its bispecific technology to five previously identified Amgen provided targets (each a Discovery Program). The Company received a $45 million upfront payment from Amgen and is eligible to receive up to $600 million in future development, regulatory and sales milestones in total for programs in development and is eligible to receive royalties on any global net sales of products.

Pursuant to the Amgen Agreement, the Company applied its bispecific technology to five Discovery Programs antibody molecules provided by Amgen that bind Discovery Program targets and returned the bispecific product candidates to Amgen for further testing, development and commercialization. The initial research term was three years from the date of the Amgen Agreement, but Amgen, at its option, may request an extension of one year. In May 2018, Amgen notified the Company that it was electing to extend the term of the research term for one year. Pursuant to the Amgen Agreement, Amgen and the Company will agree upon a detailed plan for services to be provided by the Company during the extended research term. The Company will receive research funding for the additional services provided during the extended research term.

Amgen will assume full responsibility for development and commercialization of product candidates under each of the Discovery Programs.

The Company evaluated the Amgen Agreement under ASC 606 and determined that it is a customer and that delivery of the CD38 Program and each of the five Discovery Programs represent the performance obligations under the contract.

The Company determined the transaction price at inception is the $45 million upfront payment to be allocated to the performance obligations. The Amgen Agreement includes variable consideration for potential future milestones and royalties that were contingent on future success factors for development programs. The Company used the “most likely” method to determine the variable consideration. In the fourth quarter of 2017, the Company received a $10 million development milestone related to the CD38 program, now AMG424, and this payment was included in the transaction price as uncertainty associated with it has been resolved. In the fourth quarter of 2018, the Company received a $0.5 million preclinical milestone related to one of the discovery programs. No other development, regulatory or sales milestones or royalties were included in the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

In allocating the transaction price determined at inception, the Company determined that ASC 606 provides the use of a standalone selling price for the transaction.

The transaction price of $55.5 million was allocated to the performance obligations as follows:

$23.75 million to the CD38 Program and

$6.25 million to each of the five Discovery Programs

Under ASC 606, the amount of revenue recognized for the CD38 program is recognized at the inception of the contract when delivery of the CD38 Program and materials was transferred to Amgen. The $10 million milestone revenue was recognized in the period that the uncertainty regarding the event is resolved, i.e., when the milestone event occurred.

The Company completed performance obligations for the five discovery programs in 2016 when all five of the Discovery Programs were delivered to Amgen. Pursuant to ASC 606 the Company recognized $31.25 million of revenue for delivery of the five discovery programs in 2016. In the fourth quarter of 2018, a $0.5 million milestone payment was received in connection with a preclinical development of a discovery program.

In the third quarter of 2018, the Company and Amgen agreed upon additional scope of work to be performed by the Company; the work has been completed in 2018.

During the years ended December 31, 2018, 2017 and 2016, the Company recognized $0.6 million, $10.0 million and $31.2 million in revenue, respectively, under this arrangement. As of December 31, 2018 there was no deferred revenue related to the arrangement.

Novo Nordisk A/S

In December 2014, the Company entered into a Collaboration and License Agreement with Novo Nordisk A/S (Novo). Under the terms of the agreement, the Company granted Novo a research license to use certain Company technologies during a two-year research term. The Company received an upfront payment of $2.5 million and research funding of $1.6 million per year over the research term. This agreement was terminated by Novo in 2016.

There was no revenue recognized for the year ended December 31, 2018 and 2017. For the year ended in December 31, 2016, the total revenue recognized under this agreement was $2.7 million. As of December 31, 2018 the Company has no deferred revenue related to the agreement.

MorphoSys Ag

In June 2010, the Company entered into a Collaboration and License Agreement with MorphoSys AG (MorphoSys), which was subsequently amended in March 2012. The agreement provided us an upfront payment of $13 million in exchange for an exclusive worldwide license to the Company’s patents and know‑how to research, develop and commercialize our XmAb5574 product candidate (subsequently renamed MOR208) with the right to sublicense under certain conditions. Under the agreement, the Company agreed to collaborate with MorphoSys to develop and commercialize XmAb5574/MOR208. If certain developmental, regulatory and sales milestones are achieved, the Company is eligible to receive future milestone payments and royalties.

In June 2017, MorphoSys initiated a Phase III clinical trial under the arrangement for which the Company received a milestone payment of $12.5 million. The Company recognized the payment as revenue in the period that the milestone event occurred.

The Company recognized $12.5 million of revenue for the year end December 31, 2017. There were no revenues recognized under this arrangement for the years ended December 31, 2018 and 2016. As of December 31, 2018, the Company has no deferred revenue related to this agreement.

Alexion Pharmaceuticals, Inc.

In January 2013, the Company entered into an option and license agreement with Alexion Pharmaceuticals, Inc. (Alexion). Under the terms of the agreement, the Company granted to Alexion an exclusive research license, with limited sublicensing rights, to make and use our Xtend technology to evaluate and advance compounds against six different target programs during a five‑year research term under the agreement, up to completion of the first multi‑dose human clinical trial for each target compound.

Under the agreement, the Company received an upfront payment of $3.0 million and also an annual maintenance fee of $0.5 million during the research term of the agreement. In addition, the Company is eligible to receive contractual milestones for certain development, regulatory and commercial achievements. If licensed products are successfully commercialized, the Company is also entitled to receive royalties based on a percentage of net sales of such products sold by Alexion, its affiliates or its sub licensees, which percentage is in the low single digits. Alexion’s royalty obligations continue on a product‑by‑product and country‑by‑ country basis until the expiration of the last‑to‑expire valid claim in a licensed patent covering the applicable product in such country.

In December 2016, Alexion achieved a Phase 3 clinical development milestone for ALXN1210.

In the third quarter of 2018, Alexion completed certain regulatory submission filings for ALXN1210 and the Company received $9 million in milestone payments. In the fourth quarter of 2018, Alexion completed certain regulatory submission filings for ALXN 1210 and also received FDA marketing approval for ALXN 1210, now Ultomiris, and the Company received $11 million in milestone payments.

The Company determined Alexion to be a customer and the license of the Company’s Xtend intellectual property is functional intellectual property, distinct and is the only performance obligation under the agreement. The upfront fee, the net present value of the annual maintenance fees, the option exercise fee and milestone payments of $36.5 million already received represent the total transaction price at inception. The option exercise fee does not provide a discount on future services and does not grant a material right. Under ASC 606 the upfront payment and the present value of the annual licensing fees are recognized at inception of the agreement when Alexion was provided access to the technology.

The total revenue recognized under this arrangement was $20.0 million and $5.0 million for the years ended December 31, 2018 and 2016, respectively. There was no revenue recognized for the year ended December 31, 2017. As of December 31, 2018 there is no deferred revenue related to this agreement.

Boehringer Ingelheim International GmbH

In 2007 the Company entered into a Research Licensee and Collaboration Agreement with Boehringer Ingelheim International GmbH (BI). Under the agreement, the Company provided BI with a three‑year research license to one of the Company’s technologies and commercial options. BI elected to exercise two commercial licenses from compounds identified during the research term and one compound is currently in clinical development. No revenue related to this arrangement was recognized in 2018, 2017 or 2016. There is no deferred revenue related to this agreement at December 31, 2018.

CSL Limited

In February 2009, the Company entered into a research license and commercialization agreement with CSL Limited (CSL). Under the agreement, the Company provided CSL with a research license to our Fc Cytotoxic technology and options to non-exclusive commercial licenses. CSL elected to exercise one commercial license for a compound, CSL362.

In 2013 CSL sublicensed CSL362 (now called talacotuzumab) to Janssen Biotech Inc. (Janssen Biotech). In March 2017, CSL, through its sub-licensee, Janssen Biotech, initiated a Phase 3 clinical trial for CSL362 and the Company received a milestone payment of $3.5 million.

There was no revenue recognized for the years ended December 31, 2018 and 2016. Total revenue recognized for the year ended December 31, 2017 was $3.5 million. As of December 31, 2018, there is no deferred revenue related to this agreement.

Merck Sharp & Dohme Corp.

In July 2013, the Company entered into a License Agreement with Merck Sharp & Dohme Corp (Merck). Under the terms of the agreement, the Company provided Merck with a non‑exclusive commercial license to certain patent rights to our Fc domains to apply to one of their compounds. The agreement provided for an upfront payment of $1.0 million and annual maintenance fees totaling $0.5 million.

In February 2018, Merck provided notice that it is terminating the agreement. The Company did not recognize any revenue for each of the years ended December 31, 2018, 2017 and 2016. As of December 31, 2018, there is no deferred revenue related to this agreement.

INmune Bio, Inc.

In October 2017, the Company entered into a License Agreement with INmune Bio, Inc. (INmune). Under the terms of the agreement, the Company provided INmune with an exclusive license to certain rights to a proprietary protein, XPRO1595. Under the agreement the Company received an upfront payment of $100,000, a 19% fully-diluted equity interest in INmune and an option to acquire additional shares of INmune. The Company is eligible to receive a percentage of sublicensing revenue received for XPRO1595 and also royalties in the mid-single digit percent on the sale of approved products.

The equity interest in INmune constituted 1,585,000 shares of common stock and the option is to purchase an additional 10% of the fully diluted interest in INmune for $10 million.

In 2018, INmune filed a registration statement on a Form S-1 with the Securities and Exchange Commission (SEC) which was declared effective by the SEC as of December 19, 2018.

Under ASC 606, the Company determined that the performance obligation under the agreement was the license to XPRO1595 and performance occurred at the effective date of the agreement. The total consideration under the agreement was determined to be $100,000 as the equity interest and the option had an insignificant fair value. The Company recognized $100,000 as revenue related to the agreement for the year ended December 31, 2017, and did not recognize any revenue related to the agreement for the year ended December 31, 2018. There is no deferred revenue as of December 31, 2018 related to this agreement.

Revenue earned

The $40.6 million, $46.2 million and $109.0 million of revenue recorded for the years ended December 31, 2018, 2017 and 2016, respectively, was earned principally from the following licensees (in millions):


	Year Ended
	December 31,
	2018		2017		2016
			(As Revised)		(As Revised)
Amgen	$	0.6	$	10.0	$	31.2
Alexion		20.0		—		5.0
CSL		—		3.5		—
MorphoSys		—		12.5		—
Novo Nordisk		—		—		2.7
Novartis		20.0		20.1		69.9
Other		—		0.1		0.2
Total	$	40.6	$	46.2	$	109.0

The below table summarizes the disaggregation of revenue recorded for the years ended December 31, 2018, 2017 and 2016 (in millions):


	Year Ended
	December 31,
	2018		2017		2016
			(As Revised)		(As Revised)
Research collaboration	$	20.1	$	20.1	$	34.2
Milestone		20.5		26.0		5.0
Licensing		—		0.1		69.8
Total	$	40.6	$	46.2	$	109.0

A portion of our revenue is earned from collaboration partners outside the United States. Non‑U.S. revenue is denominated in U.S. dollars. A breakdown of our revenue from U.S. and Non‑U.S. sources for the years ended December 31, 2018, 2017 and 2016 is as follows (in millions):


	Year Ended
	December 31,
	2018		2017		2016
			(As Revised)		(As Revised)
U.S. Revenue	$	40.6	$	30.2	$	106.3
Non-U.S. Revenue		—		16.0		2.7
Total	$	40.6	$	46.2	$	109.0

Remaining Performance Obligations and Deferred Revenue

Our only remaining performance obligations are the Global Discovery Programs under the Novartis Agreement. As of December 31, 2018 and 2017, we have deferred revenue of $40.1 million and $60.1 million, respectively. We classified the deferred revenue as current liabilities as our obligations to perform services are due on demand when requested by Novartis under the Agreement.