At the inception of each agreement that includes milestone payments, we
evaluate whether each milestone is substantive and at risk to both parties on
the basis of the contingent nature of the milestone. This evaluation includes an
assessment of whether (a) the consideration is commensurate with either (1) the
entity's performance to achieve the milestone, or (2) the enhancement of the
value of the delivered item(s) as a result of a specific outcome resulting from
the entity's performance to achieve the milestone, (b) the consideration relates
solely to past performance and (c) the consideration is reasonable relative to
all of the deliverables and payment terms within the arrangement. We evaluate
factors such as the scientific, regulatory, commercial and other risks that must
be overcome to achieve the respective milestone, the level of effort and
investment required to achieve the respective milestone and whether the
milestone consideration is reasonable relative to all deliverables and payment
terms in the arrangement in making this assessment.
Non-refundable development and regulatory milestones that are expected to be achieved as a result of our efforts during the period of substantial involvement are considered substantive and are recognized as revenue upon the achievement of the milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive because we do not contribute effort to the achievement of such milestones are generally achieved after the period of substantial involvement and are recognized as revenue upon achievement of the milestone, as there are no undelivered elements remaining and no continuing performance obligations, assuming all other revenue recognition criteria are met.
Under our development and commercialization license agreements, we receive royalty payments based upon its licensees' net sales of covered products. Generally, under these agreements we are to receive royalty reports and payments from its licensees approximately one quarter in arrears, that is, generally in the second month of the quarter after the licensee has sold the royalty bearing product or products. We recognize royalty revenues when it can reliably estimate such amounts and collectability is reasonably assured. As such, we generally recognizes royalty revenues in the quarter reported to us by our licensees, or one quarter following the quarter in which sales by our licensees occurred.
Our right-to-test agreements provide collaborators the right to (a) test our TAP technology for a defined period of time through a research, or right-to-test, license, (b) take options, for a defined
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period of time, to specified targets and (c) upon exercise of those options, secure or "take" licenses to develop and commercialize products for the specified targets on established terms. Under these agreements, fees may be due to us (i) at the inception of the arrangement (referred to as "upfront" fees or payments), (ii) upon taking an option with respect to a specific target (referred to as option fees or payments earned, if any, when the option is "taken"), (iii) upon the exercise of a previously taken option to acquire a development and commercialization license(s) (referred to as exercise fees or payments earned, if any, when the development and commercialization license is "taken"), or (iv) some combination of all of these fees.