(7) Collaboration and licensing agreements
Accounting and measurement policies
Out-licensing agreements
The Group concludes material out-licensing agreements for intellectual property in the Healthcare business sector in particular. In the vast majority of cases, the granting of a license constitutes a distinct performance obligation that must usually be recognized at a point in time. Due to the uncertainty of development results and regulatory events, the recognition of contingent consideration usually does not take place until the result in question has materialized. In principle, sales-based and usage-based royalties are recognized only after the contract partner makes the corresponding sales or uses the intellectual property. As out-licensing transactions in the Healthcare business sector do not form part of ordinary activities, the corresponding income from upfront payments, milestone payments, and royalties is reported in other operating income (see Note (13) “Other operating income”).
Collaboration agreements
In addition to out-licensing agreements for selling intellectual property, the Group enters into collaboration agreements in the Healthcare business sector in which the Group works with partners to develop pharmaceutical drug candidates and, if regulatory approval is granted, to commercialize them. Because the partner companies do not have customer characteristics, these collaboration agreements do not fall directly within the scope of IFRS 15 and the associated income from upfront payments, milestone payments, and royalties is shown under other operating income. Reimbursements of research and development costs made between the collaboration partners are recognized on a net basis in research and development costs. The two most significant collaborations are the agreements with GlaxoSmithKline plc, United Kingdom, (GSK) and Pfizer Inc., United States, (Pfizer) in the field of immuno-oncology.
The Group recognizes the consideration received in the course of collaboration agreements for bundled obligations arising from granting rights to intellectual property as well as other goods and services promised as income over a period of time, in line with industry practice. Income is caught up cumulatively upon receipt of uncertain future milestone payments attributable to contractual obligations which have already been fulfilled. This refers especially to milestone payments subsequent to regulatory approval. Furthermore, collaboration agreements in the Healthcare business sector typically allocate the sales generated in specific markets, or with specific products, to the respective collaboration partners in the event of a successful approval; in turn, specific income and expense items are carried by the collaboration partners according to predefined allocation ratios. Under these circumstances, the Group recognizes the sales from the commercialization of products to third-party customers, if the Group takes on the role of a principal within the meaning of IFRS 15. Expenses resulting from payments made to collaboration partners in connection with profit share agreements are recognized in other operating expenses.
Joint arrangements in the Performance Materials business sector
The Group is a contract partner in two joint arrangements in the Performance Materials business sector. In both cases, the Group has joint control with the respective partner. Although they are legally separate from the partners, these joint arrangements are classified as joint operations in line with IFRS 11.B31. The Group and the contract partner ensure their contractually agreed access to the production outputs by preventing third party access. Assets, liabilities, income, and expenses from these joint arrangements allocated to the Group are accounted for in accordance with the IFRS applicable to the respective assets, liabilities, income and expenses.
Significant discretionary decisions and sources of estimation uncertainty
Collaboration and licensing agreements
As part of the accounting treatment of collaboration and licensing agreements, significant discretionary decisions have to be made in the following areas:
- Classification of joint arrangements as joint operations or joint ventures,
- Identification of an appropriate income recognition method, and
- Determination of the appropriate timing of income recognition.
Estimates are to be made especially when it comes to determining the transaction price and progress on the performance obligation.
Strategic alliance with GlaxoSmithKline plc, United Kingdom, to co-develop and co-commercialize active ingredients in immuno-oncology
On February 5, 2019, the Group entered into a global agreement in the field of immuno-oncology with a subsidiary of GSK to co-develop and co-commercialize the drug candidate Bintrafusp alfa (formerly M7824). The bifunctional fusion protein, Bintrafusp alfa, is currently an investigational candidate for several types of cancer. The overriding objective of the strategic alliance is to share the risks of development and commercialization. The execution of the collaboration agreement is not being structured through a separate vehicle.
After fulfilling the agreed conditions, the Group received an upfront payment of € 300 million in fiscal 2019, which was recognized as deferred income on the balance sheet and reported in other liabilities. In addition, the Group can receive future payments of up to € 2.5 billion (2019: up to € 2.9 billion) for achieving certain milestones related to approval and commercialization. The Group recognizes the upfront payment as income over time in accordance with the fulfillment of performance obligations existing on the basis of contractual agreements. A cost-based method is used to recognize these payments.
The Group and GSK are jointly responsible for the development and potential commercialization further down the line. According to the collaboration agreement, during the development period each company bears one half of the development expenses. While the Group would realize the net sales in the United States and GSK in all other countries in the event of regulatory approval, the partners would evenly split the net results of net sales less defined expense components.
In fiscal 2020, the Group recognized research and development costs amounting to a low three-digit million euro figure (2019: double-digit million euro figure). In addition, the Group recognized € 85 million of the upfront payment collected within other operating income (2019: € 92 million) If the percentage of completion had been 10% higher, this would have increased other operating income and profit before tax by € 30 million (while a 10% lower percentage of completion would have meant a reduction of € 30 million).
On January 20, 2021, the Group announced the discontinuation of the INTR@PID Lung 037 clinical study on the first-line treatment of patients with non-small cell lung cancer following the review of clinical data by the independent data monitoring committee. The impact of this adjusting event is included in these consolidated financial statements in a low double-digit million euro amount.
Strategic alliance with Pfizer Inc., United States, to jointly co-develop and co-commercialize active ingredients in immuno-oncology
On November 17, 2014, the Group formed a global strategic alliance with Pfizer to co-develop and co-commercialize the anti-PD-L1 antibody avelumab. Avelumab received its first regulatory approvals in 2017 under the trade name Bavencio®. This antibody is also being studied in multiple broad-based clinical trials as a potential treatment for further tumor types as a single agent as well as in combination with a wide array of approved or still investigational active ingredients. The overriding objective of the strategic alliance is to share the development risks and to expand the two companies’ presence in immuno-oncology. The execution of the collaboration agreement is not being structured through a separate vehicle.
Upon entry into the agreement in 2014, Pfizer made an upfront cash payment of US$ 850 million (€ 678 million) to the Group. Pfizer also committed to making further payments of up to US$ 2 billion to the Group subject to the achievement of defined development and commercial milestones. Based on the collaboration agreement, the Group was also granted the right to co-commercialize Xalkori® (crizotinib) with Pfizer for multiple years. Both the upfront payment and the value of the right to co-commercialize Xalkori® were recognized in the income statement until the end of fiscal 2019 and reported in other operating income. The residual book value of the intangible asset as of December 31, 2020 amounted to € 10 million (December 31, 2019: € 45 million).
According to the collaboration agreement, during the development period each company bears one half of the development expenses. In the commercialization phase, the Group recognizes the majority of sales from the commercialization of Bavencio® while the Group and Pfizer evenly split the net amount of sales less defined expense components. Net sales from the commercialization of Bavencio® amounted to € 156 million in the year under review (2019: € 103 million). As in the previous year, the Group recognized research and development costs in a low three-digit million euro amount in fiscal 2020, as well as profit share expenses in the amount of € 63 million (2019: € 42 million). The Group also realized other operating income of € 281 million in the previous year. This resulted from the achievement of three approval milestones as well as the recognition in the income statement of both the upfront payment and the value of the right to co-commercialize Xalkori®. For further information, please refer to Note (13) “Other operating income”.
Restructuring of the collaboration with F-star Delta Ltd., United Kingdom, in the field of immuno-oncology in the previous year
In June 2017, the Group announced a strategic collaboration with F-star Delta Ltd, United Kingdom, (F-star) for the development and commercialization of bispecific immuno-oncology antibodies. In 2019, the existing licensing and collaboration agreement with F-star was restructured due to the reprioritization of resources and programs, meaning that all rights to the original drug candidate FS118 reverted to F-star. The option to acquire F-star Delta Ltd. was terminated. In the course of the realignment, the Group in-licensed an innovative bispecific antibody and, in addition, holds an option to in-license a further bispecific antibody from F-star’s antibody platform. Both bispecific antibodies were handled under the previous collaboration. As a result of the aforementioned changes, impairment losses totaling € 72 million were recognized in 2019 for an intangible asset and the reverted option.
Out-licensing of the rights to a drug candidate in the area of osteoarthritis to Novartis AG, Switzerland
On October 1, 2020, the Group concluded an agreement with Novartis AG, Switzerland, (Novartis) on the out-licensing of M6495, a Phase II-ready drug candidate for the treatment of osteoarthritis. The Group received an upfront payment of € 50 million and is entitled to potential additional payments of up to € 400 million subject to the achievement of certain sales and development milestones, as well as royalties on future net sales. Novartis will assume full responsibility for the development and commercialization of M6495. The income from the out-licensing of intellectual property in the amount of € 27 million was reported in other operating income.
Out-licensing of the rights to the investigational therapy atacicept to Vera Therapeutics, Inc., United States
On November 9, 2020, the Group concluded an agreement with the biotechnology company Vera Therapeutics, Inc., United States, (Vera Therapeutics) on the out-licensing of the rights for the investigational therapy atacicept. Vera Therapeutics will initiate a Phase IIb study with atacicept in IgA nephropathy (IgAN). As part of the agreement, the Group received a 10% equity interest in Vera Therapeutics and the right to future milestone payments totaling up to € 605 million depending on the achievement of certain development and sales milestones, as well as royalties on future net sales. On initial recognition, the equity instruments received had a fair value of € 11 million. Vera Therapeutics will assume full responsibility for the development and commercialization of the atacicept program in all indications. The income from the out-licensing of intellectual property in the amount of € 27 million was reported in other operating income. This included a payment received in December 2020 for the achievement of a development milestone.
Collaboration with Artios Pharma Limited, United Kingdom, in the area of DNA repair mechanisms
On December 3, 2020, the Group and Artios Pharma Limited, United Kingdom (Artios) announced the conclusion of a global strategic cooperation in the area of DNA repair mechanisms. The aim of the collaboration is the development of therapies for the personalized treatment of cancers. Under the terms of the agreement, the partners will use Artios’s platform to jointly identify multiple target molecules and lead structures. The Group has the option of acquiring control over the exclusive worldwide rights to develop and commercialize selected drug candidates resulting from the collaboration. In exchange, Artios will receive an upfront payment as well as near-term payments totaling US$ 30 million. If the Group chooses to exercise the option, Artios will receive up to US$ 860 million for each of the products commercialized by the Group in addition to staggered royalty payments on future net sales.
Arrangements in the Performance Materials business sector
Upon acquiring Versum Materials, Inc., United States, (Versum), the Group became an equal 50% partner in Hydrochlor, LLC, United States, (Hydrochlor) under a joint arrangement with Linde plc, Ireland. Hydrochlor was founded with the aim of supplying hydrogen chloride exclusively to the two partner companies. Also upon acquiring Versum, the Group became a partner under an agreement with Showa Denko K.K., Japan. The aim of the agreement is to manufacture a supplier product to supply to the two partner companies exclusively. Even though both agreements are legally separate from the respective partner companies, each agreement was classified as a joint operation since the respective arrangements are designed to provide output to the contract partners and each agreement is the sole source of funding for settling liabilities.