12. Commitments and Contingencies
The Company is involved in compound development and commercialization collaborations. The Company developed a risk-sharing research and development model with pharmaceutical and biotechnology companies to advance compounds to commercialization. Through collaborative arrangements based on this model, the Company works with its collaborators by sharing the risks and potential rewards associated with the development and commercialization of drugs with its collaborators. As of December 31, 2011, the Company's four main collaborations were with Janssen Pharmaceutica, N.V., or Janssen (an affiliate of Johnson & Johnson), Ranbaxy Laboratories, Ltd., or Ranbaxy, Alza Corporation, or Alza, and Takeda Pharmaceuticals Company Limited, and relate to, respectively: the JNJ-Q2 and MuDelta compounds; a statin compound, or PPD-10558; the product Priligy; and the product Nesina.
As of December 31, 2011, the Company had three collaborations that involve potential future expenditures. The first is its collaboration with Alza for Priligy. In connection with this collaboration, the Company has an obligation to pay a royalty to Eli Lilly and Company of 5% on annual net sales of the compound in excess of $800.0 million. As of December 31, 2011, the Company is not obligated to pay any ongoing costs of development for this compound.
The second collaboration involving future expenditures is in respect of the two compounds in-licensed from Janssen: JNJ-Q2 and MuDelta. On April 18, 2011, Janssen announced that in connection with a broad strategic review of its portfolio of infectious disease programs, it will be redirecting its research and development efforts toward antivirals and vaccines, and will not be investing in the development of new antibacterial therapies. As a result, Janssen elected not to exercise its option to continue the development of the JNJ-Q2 compound. On April 19, 2011, the Company announced it had acquired full exclusive license rights to develop and commercialize the JNJ-Q2 compound under its existing development and license agreement with Janssen. On November 1, 2011, the Company announced it had acquired full exclusive license rights to develop and commercialize the MuDelta compound under its existing development and license agreement with Janssen. The Company acquired these rights as a result of Janssen's decision not to exercise its option under the agreement to continue development of MuDelta.
The Company plans to continue evaluating other partnering and funding opportunities for both the JNJ-Q2 and MuDelta compounds. The Company may be obligated to pay Janssen, for both the JNJ-Q2 and MuDelta compounds, individually, up to $50.0 million in regulatory milestone payments and, if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties would be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.
The third collaboration involving future expenditures is with Ranbaxy for a statin compound, PPD-10558. In December 2006, the Company entered into an exclusive license agreement with Ranbaxy for rights to PPD-10558. In December 2011, the Company announced preliminary results from the Phase II trial of PPD-10558. Based on these results, the Company has discontinued further spending on the PPD-10558 program and plans to terminate the license agreement with Ranbaxy in accordance with the terms of the agreement. The Company will owe Ranbaxy a $1.0 million development milestone payment upon completion of the Phase II final study report, which the Company believes will occur in the second quarter of 2012.
The Company currently maintains insurance for risks associated with the operation of its business. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability and product liability.
The Company might be a party to various claims and legal proceedings in the normal course of business. As of December 31, 2011, there are no outstanding claims that management believes will have a material effect upon the Company's financial condition, results of operations or cash flows.