(7) Collaboration and licensing agreements
Accounting and measurement policies
Out-licensing agreements
The Group primarily enters into material out-licensing agreements for intellectual property in the Healthcare business sector. The granting of a license typically 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, contingent consideration is typically recognized when the event in question has occurred. Sales-based and usage-based royalties are recognized when 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 and the licensees do not constitute customers within the meaning of IFRS 15, the corresponding income from upfront payments, milestone payments, and royalties is reported in other operating income (see Note (13) “Other operating income”).
In-licensing agreements
The accounting and measurement policies for the in-licensing of intellectual property are presented in Note (19) “Other intangible assets”.
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.
As the partner companies do not have customer characteristics, these collaboration agreements do not fall directly within the scope of IFRS 15, and any income from upfront payments, milestone payments, and royalties is reported 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 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 the performance period in line with industry practice. Income is caught up cumulatively upon receipt of uncertain future milestone payments attributable to contractual obligations that have already been fulfilled. This refers in particular to milestone payments subsequent to regulatory approval. Furthermore, collaboration agreements in the Healthcare business sector typically allocate the net sales generated in specific markets, or with specific products, to the respective collaboration partners in the event of a successful approval; in turn, defined income and expense items are carried by the collaboration partners according to fixed allocation ratios. Under these circumstances, the Group recognizes the net 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 reported under “Other operating 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:
- 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 Pfizer Inc., United States, to jointly co-develop and co-commercialize active ingredients in immuno-oncology and its termination effective June 30, 2023
On November 17, 2014, the Group formed a global strategic alliance with Pfizer Inc., United States (Pfizer), to co-develop and co-commercialize the anti-PD-L1 antibody avelumab. From 2017, avelumab was approved for the treatment of several cancer indications under the trade name Bavencio®. The overriding objective of the strategic alliance was to share the development risks and to expand the two companies’ presence in immuno-oncology. The execution of the collaboration agreement was not 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, which was recognized in the income statement until the end of 2019.
According to the collaboration agreement, each company bore one half of the development expenses during the development period. In the commercialization phase, the Group recognized the majority of net sales from the commercialization of Bavencio® while the Group and Pfizer evenly split the net amount of sales less defined expense components up until the termination of the agreement. The net sales recognized by the Group in connection with Bavencio® amounted to € 713 million in fiscal 2023 (fiscal 2022: € 611 million). The Group recognized a high double-digit million-euro amount in research and development expenses in fiscal 2023, as in the previous year, in addition to profit transfer expenses of € 143 million up until the termination of the agreement (2022: € 255 million).
On March 27, 2023, the Group announced the termination of the alliance agreement with Pfizer on the co-development and co-commercialization of Bavencio® with effect from June 30, 2023.
Since the termination agreement came into force on June 30, 2023, the Group has held the exclusive global rights for development, manufacturing, and commercialization and has full control over Bavencio®. Pfizer’s previous even split of the net amount of sales less defined expense components was replaced by a 15% royalty on defined net sales of Bavencio® that is reported in the cost of sales (see Note (10) “Cost of sales”). While the Group and Pfizer will continue to run their respective clinical studies on Bavencio®, the Group will control all future research and development activities. The Group will also have sole responsibility for manufacturing the product and serving the supply chain.
In-licensing agreement with Debiopharm International SA, Switzerland, on drug candidates for the treatment of head and neck cancer
On March 1, 2021, the Group announced its entry into an in-licensing agreement with Debiopharm International SA, Switzerland (Debiopharm), for the exclusive rights for the development and global commercialization of the drug candidate xevinapant (Debio 1143) and for the development of preclinical follow-on compounds. Xevinapant is currently being investigated in a Phase III study for patients with untreated high-risk locally advanced squamous cell carcinoma of the head and neck in combination with platinum-based chemotherapy and standard fractionation intensity-modulated radiotherapy.
The Group made upfront payments of € 188 million in conjunction with the agreement. Moreover, Debiopharm received a right to future milestone payments of up to € 710 million in total, dependent on the achievement of certain development and sales milestones, plus royalties on future net sales. The transaction became effective in April 2021. The upfront cash payment resulted in the recognition of an intangible asset not yet available for use in the amount of € 118 million, an asset under other financial assets for claims for reimbursement in respect of Debiopharm, and a prepayment for future development activities.
In-licensing agreement with Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, on drug candidates for the treatment of metastatic colorectal cancer
On October 30, 2023, the Group announced the conclusion of an in-licensing agreement with Jiangsu Hengrui Pharmaceuticals Co. Ltd., China (Hengrui), including an exclusive worldwide license (excluding China) to develop, manufacture and commercialize the PARP1 inhibitor HRS-1167 and a corresponding option for SHR-A1904, an antibody-drug conjugate.
The Group agreed to make an upfront cash payment of € 160 million for acquired rights and future development activities to be performed by the seller. Additional milestone payments will be due on the achievement of certain development, approval, and commercialization milestones. The agreement also includes tiered royalties on potential net sales. The acquisition of the rights resulted in the recognition of an intangible asset not yet available for use in the amount of € 147 million.
In-licensing agreement with Abbisko Therapeutics Co. Ltd., China, on drug candidates for the treatment of tenosynovial giant cell tumor
On December 4, 2023, the Group announced the conclusion of an in-licensing agreement with Abbisko Therapeutics Co. Ltd., China (Abbisko), including an exclusive license to commercialize pimicotinib in China, Hong Kong, Macau, and Taiwan as well as an exclusive commercialization option in the rest of the world. Pimicotinib is an orally administered, highly selective and potent small-molecule antagonist of colony stimulating factor-1 receptor (CSF-1R).
The Group agreed to make an upfront cash payment of US$ 70 million (€ 64 million) for acquired rights and future development activities to be performed by the seller. An option fee will also be payable to Abbisko if the option is exercised. Abbisko will receive additional payments for the achievement of certain regulatory and commercial milestones as well as tiered royalties on net sales by the Group. The acquisition of the rights resulted in the recognition of an intangible asset not yet available for use in the amount of € 45 million.