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ARRAY BIOPHARMA, INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2012, 2011 and 2010
The Company is entitled to receive, for each drug for which Celgene exercises an option, potential
milestone payments of $200 million if certain discovery, development and regulatory milestones are
achieved and an additional $300 million if certain commercial milestones are achieved. In November
2010, the Company earned and subsequently received a $10 million milestone payment upon securing
an Investigational New Drug (IND) application for one of the programs. The Company is also entitled to
receive royalties on net sales of any drugs.
In June 2009, the agreement was amended to substitute a new discovery target in place of an existing
target and Celgene paid the Company $4.5 million in consideration for the amendment. The option term
for this target will expire on or before June 2016, and the option term for the other targets will expire on the
earlier of completion of Phase 1 or Phase 2a trials for the applicable drug or September 2014. In
September 2009, Celgene notified the Company that it was waiving its rights to one of the discovery
targets under the collaboration, leaving Celgene the option to select two of the remaining three targets.
In January 2012, the agreement was further amended to continue drug discovery activities the Company
was conducting on one of the existing targets. Celgene paid the Company $1.5 million during the second
half of fiscal 2012 as compensation for the additional research and the Company recognized $1.3 million
of this payment as Collaboration Revenue during the year ended June 30, 2012.
The Company regularly reviews and adjusts the estimated period of the discovery obligations to
determine the period over which the up-front fee and milestone payments will be recognized under the
Celgene Agreement. Upon execution of the agreement, the Company estimated that the discovery
obligations under the agreement would continue through September 2014 and accordingly began
recognizing as revenue the up-front fees received from the date of receipt through September 2014.
During the quarter ended September 30, 2011, the Company estimated that the remaining period for its
discovery obligations under the agreement was likely to be through June 2013. Therefore, beginning in
the second quarter of fiscal 2011 the Company began recognizing the remaining unamortized balance of
the up-front fee through this shorter period on a straight-line basis.
Throughout the majority of fiscal 2012, research activities associated with the up-front fee were
suspended while the Company's drug discovery activities were directed toward the additional funded
research discussed above. Consequently, the Company also suspended recognition of the related
deferred revenue balance for the up-front fee and recognized $878 thousand in License and Milestone
Revenue in fiscal 2012 relating to this fee.
The Company recognized $4.7 million, $14.8 million and $13.9 million in revenue related to the up-front
fee and milestone payments during the years ended June 30, 2012, 2011 and 2010, respectively.
The Company also reviews and adjusts as appropriate the allocation of research and development
expenses under our agreement with Celgene based on the likelihood that Celgene will continue funding
development of the programs for which Celgene has an option under the agreement. The Company
initially concluded that we would successfully discover compounds that would be nominated and reach
the Phase 1 milestone in two of the four programs. Accordingly, upon execution of the agreement, the
Company began reporting costs associated with the Celgene collaboration as 50% to Cost of Revenue,
with the remaining 50% to Research and Development Expenses for Proprietary Programs. In the second
quarter of fiscal 2011, the Company concluded that Celgene is likely to continue funding two of the
remaining three programs by paying the Phase 1 milestone. Accordingly, beginning October 1, 2010, the
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ARRAY BIOPHARMA, INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2012, 2011 and 2010
Company began reporting costs associated with the Celgene collaboration as 66.7% to Cost of Revenue,
with the remaining 33.3% to Research and Development Expenses for Proprietary Programs. During the
third quarter of fiscal 2012, research was active on only one of the remaining programs and management
concluded the program will reach the Phase 1 milestone. Consequently, the Company recorded all costs
for the Celgene programs as Cost of Revenue for the six months ended June 30, 2012.
Celgene can terminate any drug development program for which it has not exercised an option at any
time, provided that it gives the Company prior notice. In this event, all rights to the program remain with
Array and the Company would no longer be entitled to receive milestone payments for further
development or regulatory milestones that it could have achieved had Celgene continued development of
the program. Celgene may terminate the agreement in whole, or in part with respect to individual drug
development programs for which Celgene has exercised an option, upon six months' written notice to
Array. In addition, either party may terminate the agreement, following certain cure periods, in the event of
a breach by the other party of its obligations under the agreement.
Genentech, Inc.
In addition to its ongoing agreements with Genentech, the Company entered into an additional oncology
partnership for the development of each company's small-molecule Checkpoint kinase 1 (Chk-1)
program in August 2011. The partnered drugs include Genentech's compound GDC-0425 and the
Company's compound ARRY-575. Under the terms of the agreement, Genentech acquired a license to
the Company's compound ARRY-575 and is responsible for all research, clinical development and
commercialization activities of the partnered drugs. The Company received an up-front payment of
$28.0 million during the first quarter of fiscal 2012 and is eligible to receive payments of up to
$685.0 million based on the achievement of clinical and commercial milestones under the agreement.
The Company will also receive up to a double-digit royalty on sales of any drugs resulting from the
partnership.
Pursuant to the accounting guidance for revenue recognition for multiple element arrangements, the
Company determined that it is obligated to deliver two non-contingent deliverables related to the
agreement that meet the separation criteria under the guidance and therefore these deliverables are
treated as separate units of accounting. The two deliverables are (1) the delivery of specified clinical
materials for GDC-0575 (ARRY-575) for use in future clinical trials and (2) the transfer of the license and
related technology with ongoing regulatory services to assist in filing the IND application and providing
supporting data.
This agreement also includes a contingent deliverable whereby Genentech could, at its sole option,
require the Company to perform chemical and manufacturing control (CMC) activities for additional drug
product or improved processes. This CMC option is not considered a deliverable because the scope,
likelihood and timing of the potential services are unclear. Certain critical terms of the services have not
yet been negotiated, including the fee that we would receive for the service and Genentech could elect to
acquire the drug materials without the Company's assistance either by manufacturing them in-house or
utilizing a third-party vendor. Therefore, no portion of the $28.0 million up-front payment has been
allocated to the contingent CMC services that the Company may be obligated to perform in the future.
The first non-contingent deliverable required the Company to prepare specified clinical materials for
delivery to Genentech, and the Company completed this delivery in December 2011, by the date
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