(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 in-licensing and out-licensing agreements for the use of 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 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 when it comes to determining the transaction price and progress on the performance obligation in particular.
Strategic alliance with Pfizer Inc., United States, to co-develop and co-commercialize active ingredients in immuno-oncology and its termination effective June 30, 2023
The global strategic alliance agreement with Pfizer Inc., United States (Pfizer), to co-develop and co-commercialize the anti-PD-L1 antibody avelumab (approved in 2017 under the trade name Bavencio®), which was concluded on November 17, 2014, was terminated effective June 30, 2023. Since the termination agreement came into force, the Group has held the exclusive global rights for development, manufacturing and commercialization and has full control over Bavencio®. Under the termination agreement, 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.
The execution of the collaboration agreement was not structured through a separate vehicle. In the commercialization phase, the vast majority of the sales of Bavencio® was recorded as net sales where prior to the termination of the agreement, net sales were mathematically split evenly and the defined expense components were split evenly and the resulting net balance was recorded as expenses from profit share agreements (2023: € 143 million). In place of the aforementioned calculation, a 15% royalty on defined net sales of Bavencio® is included in cost of sales (see Note (10) “Cost of sales”).
The net sales recognized by the Group in connection with Bavencio® amounted to € 735 million in fiscal 2024 (2023: € 713 million). As in the previous year, the Group recognized a high double-digit million-euro amount in research and development expenses in fiscal 2024.
In-licensing agreement with Debiopharm International SA, Switzerland, on drug candidates for the treatment of head and neck cancer
On June 24, 2024, the Group announced the discontinuation of the clinical trials of the drug candidate xevinapant, which had been in-licensed from Debiopharm International SA, Switzerland, in fiscal 2021. The pivotal Phase III trial (TrilynX™) investigated xevinapant combined with chemoradiotherapy in patients with unresected locally advanced squamous cell carcinoma of the head and neck (LA SCCHN). Further Phase III and Phase Ib trials investigated various combinations with radiotherapy or chemoradiotherapy in related patient populations with LA SCCHN. The decision was based on a scheduled interim analysis of the TrilynX™ study, which found that it was unlikely to meet its primary endpoint.
The termination of the program led to an impairment loss of € 140 million on an intangible asset, which was reported in other operating expenses, as well as the recognition of a provision in a high double-digit million-euro amount for follow-on obligations, the addition of which was reported in research and development costs.
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 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 initially 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 for the rest of the world. Pimicotinib is an investigational, orally administered, highly selective and potent small-molecule antagonist of colony-stimulating factor-1 receptors. On November 12, 2024, the Group announced that the pivotal Phase III MANEUVER study had met its primary endpoint. The study demonstrated a significant improvement in the objective response rate in patients with tenosynovial giant cell tumor. It also provided statistically significant and clinically meaningful improvements in secondary endpoints, including stiffness and pain.
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.