(7) Collaboration and licensing agreements
Accounting and measurement policies
The Group primarily enters into material out-licensing agreements for intellectual property in the Healthcare business sector. 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, 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, the corresponding income from upfront payments, milestone payments and royalties is reported in other operating income (see Note (13) “Other operating income”).
The accounting and measurement policies for the in-licensing of intellectual property are presented in Note (19) “Other intangible assets”.
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. The agreements with Pfizer Inc., United States (Pfizer), in the field of immuno-oncology is the most significant collaboration. The immuno-oncology collaboration with GlaxoSmithKline plc, United Kingdom, on the drug candidate bintrafusp alfa was ended amicably, effective September 30, 2021.
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 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 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;
- 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
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®. 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, which was recognized in the income statement until the end of 2019. 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.
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 net sales from the commercialization of Bavencio® while the Group and Pfizer evenly split the net amount of sales less defined expense components. Net sales generated with Bavencio® amounted to € 373 million in the year under review (2020: € 156 million). In fiscal 2021, the Group recognized a high double-digit million euro amount in research and development expenses (2020: low triple-digit million euro amount) and profit transfer expenses of € 159 million (2020: € 63 million). The Group also realized other operating income of € 50 million from the achievement of two approval milestones in fiscal 2021 (2020: no other operating income from the achievement of milestones).
End of strategic alliance with GlaxoSmithKline plc, United Kingdom, to co-develop and co-commercialize active ingredients in immuno-oncology
On February 5, 2019, the Group had 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). In fiscal 2019, the Group received an upfront payment of € 300 million, which was recognized as deferred income on the balance sheet and presented under other liabilities. The Group recognized 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 was used to recognize these payments. According to the collaboration agreement, each company bore one half of the development expenses in the development period.
In the third quarter of 2021, it was amicably decided with GSK to end the agreement on bintrafusp alfa effective September 30, 2021. The decision was based on the clinical study data gathered by that time, and in particular the results of the INTR@PID Lung 037 study on the first-line treatment of patients with non-small cell lung cancer, which failed to reproduce the promising results of previous studies.
As in the previous year, the Group had recognized research and development costs in a low triple-digit million euro amount in fiscal 2021. This included a mid double-digit million euro amount in expenses for the recognition of provisions for follow-on obligations, which were recognized as a result of the termination of the collaboration in the third quarter of 2021. Furthermore, other operating income of € 123 million was recognized in fiscal 2021 from the reversal in profit or loss of the remainder of the upfront payment that was received from GSK and deferred in 2019 (2020: € 85 million).
Out-licensing of the rights to a drug candidate in the area of osteoarthritis to Novartis AG, Switzerland, in the previous year
On October 1, 2020, the Group entered into 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 in the previous year. There was no further effect on the net assets, financial position, and results of operations in fiscal 2021.
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.
Out-licensing agreement with MoonLake Immunotherapeutics AG, Switzerland, on a drug candidate for the treatment of several inflammatory diseases
On May 3, 2021, the Group announced the conclusion of an out-licensing agreement on sonelokimab (M1095) with the newly founded MoonLake Immunotherapeutics AG, Switzerland (MoonLake). Sonelokimab is an investigational anti-IL-17 A/F Nanobody® that neutralizes both IL-17A and IL-17F in patients with moderate to severe chronic plaque-type psoriasis. MoonLake will assume full responsibility for the research, development, and commercialization of sonelokimab. Under the agreement, the Group will receive an upfront cash payment in a double-digit million euro amount and an equity interest of almost 10% in MoonLake. Depending on the achievement of certain development and sales milestones, the Group is also entitled to future milestone payments up to a mid triple-digit million euro amount, as well as royalties depending on future net sales. The equity instruments received were measured at their fair value on initial recognition. The income from the out-licensing of intellectual property in a low double-digit million euro amount was reported in other operating income.