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Collaboration, License and Success Payment Agreements | 9 Months Ended
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Sep. 30, 2021
Collaboration License And Success Payment Agreements [Abstract] |
Collaboration License and Success Payment Agreements | 3. Collaboration, License and Success Payment Agreements Fred Hutch In 2018, the Company entered into a license agreement with Fred Hutchinson Cancer Research Center (“Fred Hutch”) pertaining to certain patent rights. In 2018, the Company also entered into a research and collaboration agreement (“Fred Hutch Collaboration Agreement”), focused on research and development of cellular immunotherapy products and the Company recognized $1.1 million and $1.0 million of research and development expenses in connection with the Fred Hutch Collaboration Agreement for the three months ended September 30, 2021 and 2020, respectively, and $3.1 million and $3.0 million for the nine months ended September 30, 2021 and 2020, respectively. In 2018, the Company also granted Fred Hutch rights to certain success payments. The potential payments for the Fred Hutch success payments are based on multiples of increased value ranging from 10 x to 50 x based on a comparison of the estimated per share fair value of the Series A convertible preferred stock, or any security into which such stock has been converted or for which it has been exchanged, relative to its original $1.83 per share issuance price. Upon the closing of the IPO, all shares of Series A convertible preferred stock then outstanding converted into an equivalent number of shares of common stock. The aggregate success payments to Fred Hutch are not to exceed $200.0 million, which would only occur upon a 50 times increase in value. Each threshold is associated with a success payment, ascending from $10.0 million at $18.29 per share to $200.0 million at $91.44 per share, payable if such threshold is reached during the measurement period. Any previous success payments made are credited against the success payment owed as of any valuation date, such that Fred Hutch does not receive multiple success payments in connection with the same threshold. The term of the success payment agreement ends on the earlier to occur of (i) the nine year anniversary of the date of the agreement and (ii) a change in control transaction. The following table summarizes the aggregate potential success payments, which are payable to Fred Hutch in cash or cash equivalents or, at the Company’s discretion, publicly-tradeable shares of the Company’s common stock:
Multiple of initial equity value at issuance |  | 10 x |  |  | 20 x |  |  | 30 x |  |  | 40 x |  |  | 50 x |
Per share common stock price required for payment |  | $ | 18.29 |  |  | $ | 36.58 |  |  | $ | 54.86 |  |  | $ | 73.15 |  |  | $ | 91.44 |
Aggregate success payment(s) (in millions) |  | $ | 10 |  |  | $ | 40 |  |  | $ | 90 |  |  | $ | 140 |  |  | $ | 200 |
The success payments will be owed if the per share fair value of the Company's common stock on the contractually specified valuation measurement dates during the term of the success payment agreement equals or exceeds the above outlined multiples. The valuation measurement dates are triggered by the following events: the one-year anniversary of the Company's IPO and each two-year anniversary of the Company's IPO thereafter, the closing of a change in control transaction, and the last day of the term of the success payment agreement, unless the term has ended due to the closing of a change of control transaction. The estimated fair value of the success payments to Fred Hutch as of September 30, 2021 and December 31, 2020 was $21.7 million and $8.0 million, respectively. The success payment liability is estimated at fair value at inception and at each subsequent reporting period and the expense is accreted over the service period of the Fred Hutch Collaboration Agreement. With respect to Fred Hutch success payment obligations, the Company recognized expense of $(0.8) million and $1.2 million for the three months ended September 30, 2021 and 2020, respectively, and $14.1 million and $3.8 million for the nine months ended September 30, 2021 and 2020, respectively. Expense associated with success payment obligations was recorded in research and development expense. Stanford In January 2019, the Company entered into a license agreement with The Board of Trustees of the Leland Stanford Junior University (“Stanford”) pertaining to certain patent rights. In October 2020, the Company entered into a research and collaboration agreement with Stanford (“Stanford Collaboration Agreement”), focused on research and development of cellular immunotherapy products. The Company recognized $0.8 million and $2.3 million of research and development expenses in connection with the Stanford Collaboration Agreement for the three and nine months ended September 30, 2021, respectively. As the Stanford Collaboration Agreement was entered into in October 2020, no expense was recognized for the three and nine months ended September 30, 2020. In October 2020, the Company also granted Stanford rights to certain success payments. The potential payments for the Stanford success payments are based on multiples of increased value ranging from 10x to 50x based on a comparison of the estimated per share fair value of the Series A convertible preferred stock, or any security into which such stock has been converted or for which it has been exchanged, relative to its original $1.83 per share issuance price. At the closing of the IPO, all shares of Series A convertible preferred stock then outstanding converted into an equivalent number of shares of common stock. The aggregate success payments to Stanford are not to exceed $200.0 million, which would only occur upon a 50 times increase in value. Each threshold is associated with a success payment, ascending from $10.0 million at $18.29 per share to $200.0 million at $91.44 per share, payable if such threshold is reached during the measurement period. Any previous success payments made are credited against the success payment owed as of any valuation date, so that Stanford does not receive multiple success payments in connection with the same threshold. The term of each success payment agreement ends on the earlier to occur of (i) the nine year anniversary of the date of the agreement and (ii) a change in control transaction. The following table summarizes the aggregate potential success payments, which are payable to Stanford in cash or cash equivalents or, at the Company’s discretion, publicly-tradeable shares of the Company’s common stock:
Multiple of initial equity value at issuance |  | 10 x |  |  | 20 x |  |  | 30 x |  |  | 40 x |  |  | 50 x |
Per share common stock price required for payment |  | $ | 18.29 |  |  | $ | 36.58 |  |  | $ | 54.86 |  |  | $ | 73.15 |  |  | $ | 91.44 |
Aggregate success payment(s) (in millions) |  | $ | 10 |  |  | $ | 40 |  |  | $ | 90 |  |  | $ | 140 |  |  | $ | 200 |
The success payments will be owed if the per share fair value of the Company's common stock on the contractually specified valuation measurement dates during the term of the success payment agreement equals or exceeds the above outlined multiples. The valuation measurement dates are triggered by the following events: the one-year anniversary of the Company's IPO and each two-year anniversary of the Company's IPO thereafter, the closing of a change in control transaction, and the last day of the term of the success payment agreement, unless the term has ended due to the closing of a change of control transaction. The estimated fair value of the success payments to Stanford as of September 30, 2021 and December 31, 2020 was $23.1 million and $8.9 million, respectively. The success payment liability is estimated at fair value at inception and at each subsequent reporting period and the expense is accreted over the service period of the Stanford Collaboration Agreement. With respect to Stanford success payment obligations, the Company recognized expense of $1.0 million for the three months ended September 30, 2021 and $5.2 million for the nine months ended September 30, 2021, which was recorded in research and development expense. As the rights to success payments were granted to Stanford in October 2020, no expense was recognized for the three and nine months ended September 30, 202 0. GSK In 2019, the Company entered into a Collaboration and License Agreement, amended in June 2020 (“the GSK Agreement”) with GlaxoSmithKline Intellectual Property (No. 5) Limited and Glaxo Group Limited (together, “GSK”) for potential T cell therapies that apply the Company’s platform technologies and cell therapy innovations with T cell receptors (“TCRs”) or chimeric antigen receptors (“CARs”) under distinct collaboration programs. The GSK Agreement has defined two initial collaboration targets and allows GSK to nominate seven additional targets through July 2024. The Company is expected to perform research and development services for each selected target up until a defined point (the “GSK Option Point”), at which time GSK will decide whether or not to exercise an option to obtain a license from the Company (“License Option”) and take over the future development and commercialization. For each selected target, both parties will determine whether it will be developed under a Proof of Concept (“PoC”) Development Program or Component Development Program. For a PoC Development Program, the Company is expected to conduct both preclinical and clinical development for the target and present clinical trial data to GSK in connection with their evaluation of whether to exercise the License Option. For a Component Development Program, the Company is obligated to perform preclinical studies only. Along with the research activities, the Company appoints three representatives to the joint steering committee (“JSC”) and is responsible for the manufacture of all compounds and products necessary for its research and development activities. The Company received a non-refundable upfront payment of $45.0 million under the GSK Agreement. The Company is entitled to certain payments upon the achievement of specified development and sales milestones (for each selected target that is already within GSK’s pipeline and meets certain criteria, the Company is eligible to receive up to an aggregate of approximately $400.0 million, and for each selected target that is not already within GSK’s pipeline and meets certain criteria, the Company is eligible to receive up to an aggregate of approximately $900.0 million) and tiered royalties on a per-product basis ranging from low to high single digits for targets that are already within GSK’s pipeline and meet certain criteria, or from high single digit to low teens for all other targets. The Company is also entitled to potential milestone payments based on validating the Company’s technology in a clinical setting up to an aggregate of approximately $200.0 million. Royalties and milestones are paid once per target, even if there is more than one Lyell innovation applied to a T cell therapy directed to that target. Any amounts received from GSK are generally non-refundable unless the Company terminates a collaboration target for safety or feasibility reasons and the funding received from GSK exceeds the costs incurred for the terminated target. In connection with the GSK Agreement, in May 2019, the Company also entered into a Stock Purchase Agreement with GSK (the “GSK Stock Purchase Agreement”), pursuant to which the Company agreed to sell 30,253,189 shares of Series AA convertible preferred stock at a price of $6.78 per share. As of the issuance date, the estimated fair value of the Series AA convertible preferred stock was $4.84 per share, compared with the purchase price per share of $6.78. The difference of $58.6 million between the estimated fair value of the stock as of the issuance date and the purchase price was deemed to be additional consideration for the GSK Agreement. As a result, the total upfront payment for accounting purposes allocated to the GSK Agreement was $103.6 million. Research and Development Services The GSK Agreement was deemed to be within the scope of ASC 606 because GSK engaged the Company to initially provide research and development services, which are outputs of its ongoing activities, in exchange for consideration. The Company identified the following two distinct performance obligations: (i) research and development services related to the two initial collaboration targets, inclusive of the JSC participation and the manufacture of compounds necessary for providing the research and development services and (ii) a material right for GSK to nominate seven additional collaboration targets for which the Company will perform research and development services until the GSK Option Point. To allocate revenue among the performance obligations, the Company determined standalone selling prices (“SSP”) of each obligation. For the research and development services, the SSP was calculated using a cost-plus margin approach. For the material right, the SSP was calculated by reference to the underlying research and development services expected to be provided and the corresponding expected consideration. All amounts included in the transaction price are allocated to performance obligations proportionate to their SSPs. As of September 30, 2021, the transaction price was deemed to be $103.6 million, consisting of the upfront payment of $45.0 million under the GSK Agreement and the $58.6 million allocated from the GSK Stock Purchase Agreement. Other than the upfront payment and the amounts allocated from the GSK Stock Purchase Agreement, all other contingent consideration that may be earned under the GSK Agreement is subject to uncertainties including but not limited to target addition, research and investigational new drug enabling studies, initiation of clinical trials, and other related achievements. Consequently, the transaction price currently does not include any such contingent consideration that, if included, could result in a probable significant reversal of cumulative revenue when related uncertainties become resolved. The Company will re-evaluate the transaction price at each reporting period. If and when contingent consideration is included in the transaction price, it will be allocated to the two performance obligations proportionate to their SSPs and a cumulative catch up in revenue will be recorded for the portion of the services already completed. The remaining amounts will be deferred and recognized as the services are rendered. The research and development services are transferred as the services are performed, with cost used as the measure of progress compared to total estimated cost to complete. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. The determination of the percentage of completion requires the Company to estimate the costs to complete the project. The Company makes a detailed estimate of the costs to complete, which is reassessed every reporting period based on the latest project plan and discussions with project teams. If a change in facts or circumstances occurs, the estimate will be adjusted, and the revenue will be 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 would be recognized as an adjustment to revenue in the period in which the change in estimate occurs. The Company recognized revenue related to the research and development services for the two initial targets of $2.6 million and $1.1 million for the three months ended September 30, 2021 and 2020, respectively, and $7.7 million and $5.4 million for the nine months ended September 30, 2021 and 2020, respectively. Changes in deferred revenue during the nine months ended September 30, 2021 were as follows (in thousands):
Deferred revenue balance at December 31, 2020 |  | $ | 95,161 |
Revenue recognized during the period previously recorded in deferred revenue |  |  | (7,697 | )
Deferred revenue balance at September 30, 2021 |  | $ | 87,464 |
Exercise of the License Option In April 2021, GSK exercised the License Option on NY-ESO-1 TCR with Gen-R, a Component Development Program, and will assume sole responsibility for future development and commercialization of the program at its own cost and expense. The Company is entitled to the remaining development and sales milestones up to an aggregate of approximately $400.0 million as well as the tiered royalties on future sales of all such products covered by the license granted pursuant to the License Option. The exercise of the License Option was accounted for as a separate license contract for revenue recognition purposes. The Company identified one performance obligation, which was the license delivered to GSK upon the exercise of the License Option and transfer of information and data associated with the license. The Company concluded that the development milestone payments are solely dependent on GSK’s performance and achievement of the specified events and are deemed to be not probable until such development milestones are actually achieved. Therefore, the remaining development milestones are fully constrained and excluded from the transaction price until the respective milestone is achieved. The Company also concluded that sales milestones and royalties relate predominantly to the license granted to GSK. Therefore, they also have been excluded from the transaction price and will be recognized when the related sales occur. At the end of each reporting period, the Company will update its assessment of whether an estimate of variable consideration is constrained and update the estimated transaction price accordingly. As of September 30, 2021, there were no contract assets or contract liabilities related to the license contract. None of the costs to obtain or fulfill the contract were capitalized. No license revenue was recognized for the three and nine months ended September 30, 2021. PACT In June 2020, the Company entered into an agreement (the "PACT Agreement”) with PACT Pharma, Inc. (“PACT”) to jointly develop and test a next generation personalized anti-cancer T cell therapy against solid tumors. The Company paid PACT an upfront non-refundable payment of $50.0 million upon execution of the PACT Agreement. In November 2020, the parties agreed to suspend research and development activity under the PACT Agreement, and neither party would be required to conduct any further work under the development plan (including manufacturing development) nor incur any financial obligations (including milestone payments) that might otherwise arise, for as long as the parties continued to negotiate in good faith to resolve the issues that have arisen between them relating to the PACT Agreement. In June 2020 in connection with the entry into the PACT Agreement, the Company also entered into a stock purchase agreement with PACT (“PACT SPA”), pursuant to which the Company purchased 17,806,901 shares of PACT Series C-1 convertible preferred stock at a purchase price of $2.81 per share. As of the purchase date, the estimated fair value of the Series C-1 convertible preferred stock was $2.05 per share, and the difference between the estimated fair value of the preferred stock as of the purchase date and the purchase price of $13.6 million was deemed to be additional consideration for the PACT Agreement and recognized as research and development expense. As a result, the total upfront payment paid in connection with the PACT Agreement was $63.6 million and was included in research and development expense. The remaining $36.4 million associated with the PACT Series C-1 convertible preferred stock was recorded in other investments. In February 2021, the Company filed a demand for arbitration seeking, among other things, rescission of the PACT Agreement and the PACT SPA and recovery of the consideration paid thereunder. An arbitration hearing has been scheduled to occur in March 2022. NCI License Agreement In December 2020, the Company entered into a license agreement with National Cancer Institute ("NCI") to access certain intellectual property for the development of treatment of human cancers. In connection with this agreement, the Company paid $100,000 upfront, and a prorated annual maintenance payment for 2020 of approximately $3,100, for total consideration of approximately $103,100, which was recorded in research and development expense for the year ended December 31, 2020. The Company is also required to pay NCI annual maintenance payments which, may be credited against earned royalties. Under the agreement, the Company may also be required to make certain prespecified development milestone payments up to an aggregate of $3.1 million, and prespecified commercial milestone payments up to a maximum aggregate of $12.0 million for all licensed products. In June 2021, the Company entered into an amendment to the license agreement with NCI to include additional intellectual property and one additional inventor. In connection with this amendment, the Company paid $25,000 upfront, which was recorded in research and development expense. Under the amendment, the Company may also be required to pay prespecified additional development milestone payments that total $75,000.

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