SCHOLAR ROCK HOLDING CORPORATION The information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, the "Exchange Act" and are subject to the "safe harbor" created by those sections. In particular, statements contained in this Annual Report on Form 10-K that are not historical facts, including, but not limited to statements regarding our future expectations, plans and prospects, including without limitation, our expectations regarding the potential of the TGF? program, the potential of apitegromab as a therapy in SMA and the timeline for and progress in developing apitegromab, the potential of SRK-181 as a cancer immunotherapy and the timeline for and progress in developing SRK-181, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We urge you to consider the risks and uncertainties discussed in greater detail under the heading "Risk Factors" elsewhere in this Annual Report on Form 10-K in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. As a result of many factors, including those factors set forth under the heading "Risk Factors" elsewhere in this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on the discovery and development of innovative medicines for the treatment of serious diseases in which signaling by protein growth factors plays a fundamental role. As a global leader in TGF? superfamily biology, our novel understanding of the molecular mechanisms of growth factor activation enabled us to develop a proprietary platform for the discovery and development of monoclonal antibodies that locally and selectively target the precursor, or latent, forms of growth factors. By targeting the signaling proteins at the cellular level and acting in the disease microenvironment, we believe we may avoid the historical dose-limiting safety challenges associated with inhibiting growth factors for therapeutic effect. We believe our focus on biologically validated growth factors may facilitate a more efficient development path.
Based on this proprietary and scalable technology platform, we are building a growing portfolio of novel product candidates with the aim of transforming the lives of patients suffering from a wide range of serious diseases, including neuromuscular disorders, cancer, fibrosis and iron-restricted anemia. We have discovered and progressed the development of:
Apitegromab, an inhibitor of the activation of latent myostatin, for the
? treatment of SMA. We also believe apitegromab could have potential in the
treatment of other disorders where the inhibition of myostatin may be
beneficial.
? SRK-181, an inhibitor of the activation of latent TGF?1, for the treatment of
cancers that are resistant to anti-PD-(L)1 antibody therapies.
Potent and selective inhibitors of the activation of TGF? for the treatment of
fibrotic diseases. We are advancing multiple antibody profiles toward product
? candidate selection including antibodies that selectively inhibit the
activation of latent TGF?1 in the context of fibrotic extracellular matrix and
that avoid perturbing TGF?1 presented by cells of the immune system.
? Additional discovery and early preclinical programs related to the selective
modulation of growth factor signaling, including BMP6 and other growth factors.
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Our first product candidate, apitegromab, is a highly selective, fully human,
monoclonal antibody with a unique mechanism of action that results in inhibition
of the activation of the growth factor, myostatin, in skeletal muscle.
Apitegromab is being developed as a potential first muscle-targeted therapy for
the treatment of SMA. We are conducting SAPPHIRE, a pivotal Phase 3 clinical
trial to evaluate the efficacy and safety of apitegromab in patients with
nonambulatory Type 2 and Type 3 SMA (which is estimated to represent the
majority of the current prevalent SMA patient population in the
We have identified multiple other diseases for which the selective inhibition of the activation of myostatin may offer therapeutic benefit, including additional patient populations in SMA (such as Type 1 SMA and ambulatory SMA) and indications outside of SMA.
Our second product candidate, SRK-181, is being developed for the treatment of
cancers that are resistant to CPI therapies, such as anti-PD-1 or anti-PD-L1
antibody therapies. SRK-181 is a highly selective inhibitor of the activation of
latent TGF?1 that is being investigated in our Phase 1 DRAGON proof-of-concept
clinical trial in patients with locally advanced or metastatic solid tumors that
exhibit resistance to anti-PD-(L)1 antibodies. This two-part clinical trial
consists of a dose escalation portion (Part A) and a dose expansion portion
evaluating SRK-181 in combination with an approved anti-PD-(L)1 antibody therapy
(Part B). Part B commenced in 2021 and includes the following active cohorts:
urothelial carcinoma, cutaneous melanoma, non-small cell lung cancer, clear cell
renal cell carcinoma and head and neck squamous cell carcinoma. Initial clinical
data from Part A were presented in
Utilizing our innovative approach and proprietary platform, we have multiple early stage and preclinical programs directed against targets that are known to be important in serious diseases. We are discovering and generating highly selective and differentiated monoclonal antibodies against difficult targets by 1) applying our structural insights and antibody discovery expertise, 2) prioritizing human biology, and 3) embedding translational thinking early in the research and development process.
Since inception, we have incurred significant operating losses. Our net losses
were
continue development activities for apitegromab, including the conduct of the
? extension phase of our Phase 2 TOPAZ clinical trial, our Phase 3 SAPPHIRE
pivotal clinical trial in SMA, our open-label extension study of apitegromab
and the associated drug supply;
? continue research and development activities for SRK-181, including the conduct
of our Phase 1 DRAGON proof of concept clinical trial;
? continue to discover, validate and develop additional product candidates
through the use of our proprietary platform;
? maintain, expand and protect our intellectual property portfolio;
? hire additional research, development and business personnel; and
? continue to build the infrastructure to support our operations as a public
company.
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To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If we successfully complete clinical development and obtain regulatory approval for apitegromab, SRK-181 or any of our future product candidates, we may generate revenue in the future from product sales. In addition, if we obtain regulatory approval for apitegromab, SRK-181 or any of our future product candidates, we expect to incur significant expenses related to developing our commercialization capabilities to support product sales, marketing and distribution activities.
Restructuring
In
COVID-19 Pandemic
In
Financial Operations Overview
Revenue
No revenues have been recorded from the sale of any commercial product. Revenue
generation activities have been limited to collaborations, containing research
services and the issuance of a license. The Gilead Collaboration Agreement was
executed on
2019. Under the Gilead Collaboration Agreement, Gilead had exclusive options to
license worldwide rights to product candidates that emerged from three of our
TGF? programs (each a "Gilead Program"). Each option could have been exercised
by Gilead at any time from the Effective Date through a date that was 90 days
following the expiration of the Research Collaboration Term for a given Gilead
Program (no later than
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Revenue associated with the research and development and license performance
obligations relating to the Gilead Programs was recognized as revenue using an
input method as the research and development services were provided over the
research term, which was during the period
Operating Expenses
Research and Development
Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts, preclinical studies, manufacturing, and clinical trials under our research programs, which include:
? employee-related expenses, including salaries, benefits and equity-based
compensation expense for our research and development personnel;
? expenses incurred under agreements with third parties that conduct research and
development and preclinical activities on our behalf;
? expenses incurred under agreements related to our clinical trials, including
the costs for investigative sites and CROs, that conduct our clinical trials;
? manufacturing process-development, manufacturing of clinical supplies and
technology-transfer expenses;
? consulting and professional fees related to research and development
activities;
? costs of purchasing laboratory supplies and non-capital equipment used in our
internal research and development activities;
? costs related to compliance with clinical regulatory requirements; and
? facility costs and other allocated expenses, which include expenses for rent
and maintenance of facilities, insurance, depreciation and other supplies.
Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Nonrefundable advance payments for research and development goods and services to be received in the future from third parties are deferred and capitalized. The capitalized amounts are expensed as the related services are performed.
A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis after a clinical product candidate has been identified. However, we do not allocate our internal research and development expenses, consisting primarily of employee related costs, depreciation and other indirect costs, on a program-by-program basis as they are deployed across multiple projects.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, as well as the associated clinical trial material requirements. We expect research and development costs for our product candidates to continue to be substantial for the foreseeable future as the development programs progress. However, we do not believe that it is possible at this time to
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accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
The successful development of apitegromab, SRK-181 and any future product candidates is uncertain. Accordingly, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of apitegromab, SRK-181 and any future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
? the scope, progress, outcome and costs of our preclinical development
activities, clinical trials and other research and development activities;
? establishing an appropriate safety profile;
? successful enrollment in and completion of clinical trials;
? whether our product candidates show safety and efficacy in our clinical trials;
? receipt of marketing approvals from applicable regulatory authorities, if any;
? establishing commercial manufacturing capabilities or making arrangements with
third-party manufacturers;
? obtaining and maintaining patent and trade secret protection and regulatory
exclusivity for our product candidates;
? significant and changing government regulation;
? commercializing the product candidates, if and when approved, whether alone or
in collaboration with others; and
? continued acceptable safety profile of the products following any regulatory
approval.
A change in the outcome of any of these variables with respect to the development of apitegromab, SRK-181 or any of our future product candidates could significantly change the costs and timing associated with the development of that product candidate.
General and Administrative
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and equity-based compensation expenses for personnel in executive, finance, business development, investor relations, legal, information technology and human resources functions. Other significant general and administrative expenses include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting, consulting services, and corporate expenses.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest expense incurred on our debt facility, including amortization of debt discount and debt issuance costs, partially offset by interest income earned on our cash, cash equivalents and marketable securities.
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31, Change
2022 2021 $ %
Revenue $ 33,193 $ 18,816 $ 14,377 76.4 %
Operating expenses:
Research and development 124,444 108,468 15,976 14.7 %
General and administrative 43,119 40,269 2,850 7.1 %
Total operating expenses 167,563 148,737 18,826 12.7 %
Loss from operations (134,370) (129,921) (4,449) 3.4 %
Other income (expense), net (132) (1,878) 1,746 (93.0) %
Net loss $ (134,502) $ (131,799) $ (2,703) 2.1 %
Revenue
Revenue was
Operating Expenses
Research and Development
Research and development expense was
Year Ended December 31, Change
2022 2021 $ %
External costs by program:
Apitegromab $ 48,044 $ 38,141 $ 9,903 26.0 %
SRK-181 12,462 13,999 (1,537) (11.0) %
Other early programs and unallocated costs 6,175 7,378 (1,203) (16.3) %
Total external costs 66,681 59,518 7,163 12.0 %
Internal costs:
Employee compensation and benefits 41,370 32,487 8,883 27.3 %
Facility and other 16,393 16,463 (70) (0.4) %
Total internal costs 57,763 48,950 8,813 18.0 %
Total research and development expense
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The increase in research and development expense was primarily attributable to the following:
? An increase in our external research and development costs of
which primarily consisted of:
o clinical trial costs, particularly the conduct of our Phase 3 SAPPHIRE clinical
trial;
o greater purchases of pembrolizumab (to be used in conjunction with SRK-181 in
Part B of the Phase 1 DRAGON clinical trial) in the prior year; and
o unallocated costs, which is mostly related to prior year expense associated
with the purchase of our customized antibody display library from Specifica;
primarily driven by an increase in employee compensation and benefits costs.
? These costs include salaries, bonus, payroll taxes, benefits, temporary
support, non-cash equity-based compensation expense, including for
modifications of certain equity awards, as well as severance expense associated
with the
Total research and development expenses are expected to continue to be substantial, driven by employee compensation costs and development costs associated with our clinical stage programs as we continue to advance our product candidates, including apitegromab through our Phase 3 SAPPHIRE clinical trial, the extension phase of our Phase 2 TOPAZ clinical trial in SMA, and our open-label extension study for apitegromab, and SRK-181, through our Phase 1 DRAGON clinical trial.
General and Administrative
General and administrative expense was
Other Income (Expense), Net
The change in other income (expense), net was primarily attributable to an
increase in interest income earned due to higher average interest rates and
higher balances in our cash, cash equivalents and marketable securities,
partially offset by an increase in interest expense related to the Loan and
Security Agreement, due to higher interest rates and a higher principal balance
as Tranche 2 was received in
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any product revenue and have incurred
significant operating losses and negative cash flows from our operations. We
have funded our operations to date primarily with proceeds from the sale of our
convertible preferred stock and units in private placements before our IPO, and
sale of our common stock through our IPO, to Gilead in an exempt private
placement, through multiple secondary public offerings and through an
at-the-market ("ATM") sale, as well as payments from our research collaborations
and the Loan and Security Agreement entered into in
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The following table provides information regarding our total cash, cash
equivalents and marketable securities at December 31, 2022 and December 31, 2021
(in thousands):
December 31, December 31,
2022 2021
Cash and cash equivalents $ 103,275 $ 212,835
Marketable securities 212,086 40,159
Total cash, cash equivalents and marketable securities
During the year ended
In
In
In
In
In June and
In
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Cash Flows
The following table provides information regarding our cash flows for the years
ended
Year Ended December 31,
2022 2021
Net cash used in operating activities $ (132,694) $ (126,789)
Net cash (used in) provided by investing activities (171,698) 134,315
Net cash provided by financing activities 194,832 44,951
Net (decrease) increase in cash, cash equivalents and restricted cash
$ (109,560) $ 52,477
Net cash used in operating activities was
Net cash used in operating activities was
Net cash used in investing activities was
Net Cash Provided by Financing Activities
Net cash provided by financing activities was
Funding Requirements
We expect our expenses to continue to be substantial as we continue the research and development for, continue and initiate later stage clinical trials for, continue to develop and optimize our manufacturing processes for, and seek marketing approval for, our product candidates, including apitegromab and SRK-181, and any of our future product candidates. In addition, if we obtain marketing approval for apitegromab, SRK-181 or any of our future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to continue to incur costs associated with operating as a public company.
We expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into 2025. However, we will require additional capital in order to complete clinical development and commercialization for each of our current programs. We have based this estimate on
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assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
the costs and timing of developing our product candidates, apitegromab and
SRK-181, including our Phase 3 SAPPHIRE clinical trial for apitegromab in SMA,
? the extension phase of our Phase 2 TOPAZ clinical trial for apitegromab in SMA,
the open-label extension study for apitegromab and the Phase 1 DRAGON clinical
trial for SRK-181, and the costs and timing of conducting future preclinical
studies and clinical trials;
the costs of future manufacturing of apitegromab, SRK-181 and any other product
? candidates; including impacts from the COVID-19 pandemic and its impact at our
contract manufacturers;
the scope, progress, results and costs of discovery, preclinical development,
? laboratory testing and clinical trials for other potential product candidates
we may develop, if any;
? the costs of identifying and developing, or in-licensing or acquiring,
additional product candidates and technologies;
? the costs, timing and outcome of regulatory review of our product candidates;
? our ability to establish and maintain collaborations on favorable terms, if at
all;
the achievement of milestones or occurrence of other developments that trigger
? payments under any collaboration agreements, license agreements, or other
agreements we might have at such time;
? the costs of seeking marketing approvals for our product candidates that
successfully complete clinical trials, if any;
the costs and timing of future commercialization activities, including product
? sales, marketing, manufacturing and distribution, for any of our product
candidates for which we receive marketing approval;
? the amount of revenue, if any, received from commercial sales of our product
candidates, should any of our product candidates receive marketing approval;
the costs of preparing, filing and prosecuting patent applications, obtaining,
? maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
? our headcount growth and associated costs as we expand our business operations
and research and development activities;
? the costs of supporting our infrastructure and facilities, including equipment
and physical infrastructure to support our research and development; and
? the costs of operating as a public company.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, common stockholder ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of a common stockholder. Additional debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.
If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to
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grant licenses on terms that may not be favorable to us. Market volatility or other factors could also adversely impact our ability to access capital as and when needed. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Critical Accounting Estimates
This management's discussion and analysis is based on our consolidated financial
statements, which have been prepared in accordance with
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this report, we believe that the following accounting estimates are those most critical to the judgments used in the preparation of our consolidated financial statements. They involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our finance condition or result of operations.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. In certain instances, we prepay for services to be provided in the future. These amounts are expensed as the services are performed.
We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us
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reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred.
The accrued research and development expenses at the end of each year are generally paid during the following year and therefore the same estimates and assumptions do not continue to exist each year, although, as described above, the method and procedures to develop those estimates and assumptions are generally consistent.
Revenue Recognition
No revenues have been recorded from the sale of any commercial product. Revenue
generation activities have been limited to collaborations, containing research
services and the issuance of a license. Prior to
Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer.
Identification of the Contract(s) with the Customer
We account for a contract with a customer that is within the scope of ASC 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party's rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable.
Identification of the Performance Obligations
Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own and whether the required expertise is readily available. Arrangements that include rights to additional goods or services that are exercisable at a customer's discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights.
Determination of the Transaction Price
We estimate the transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, we evaluate the amount of the
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potential payments and the likelihood that the payments will be received. We utilize either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price.
We evaluate whether development, regulatory, and commercial milestone payments are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue and earnings in the period of adjustment.
For sales-based royalties, including milestone payments based on the level of sales, we determine whether the sole or predominant item to which the royalties relate is a license. When the license is the sole or predominant item to which the sales-based royalty relates, we recognize revenue at the later of: (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any sales-based royalty revenue resulting from our arrangement.
Allocation of Transaction Price
We allocate the transaction price based on the estimated standalone selling price. We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Estimating costs for research and development programs is subjective as we estimate the costs anticipated to successfully complete the research performance obligations. As the research is novel, efforts to be successful may be significantly different than the estimated costs at the beginning of the contract. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation.
Recognition of Revenue
We utilize judgment to determine whether the performance obligation is satisfied over time or at a point in time. We determine the appropriate method of measuring progress performance obligations satisfied over time for purposes of recognizing revenue, such as by using an input method based on costs incurred compared to the costs expected to be incurred in the future to satisfy the performance obligation. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The estimated remaining costs is highly subjective, as the research is novel, therefore efforts to be successful may be significantly different than the estimated costs made at the balance sheet date. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.
We receive payments from customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional.
As it relates to the Gilead Collaboration Agreement, the Company recognized the revenue related to the research and development services based on a cost input method over the research term for each respective Gilead Program. We evaluated the measure of progress each reporting period and, if necessary, adjusted the measure of performance and
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related revenue recognition. The estimate of remaining costs was highly subjective, as the research was novel, and efforts to be successful may have been significantly different than the estimated costs made at each balance sheet date.
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that, other than Recently Issued Accounting Pronouncements as disclosed in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.
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