(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 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”).
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 represent 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 € 611 million in the year under review (2021: € 373 million). The Group recognized a high double-digit million euro amount in research and development expenses in fiscal 2022, as in the previous year, as well as profit transfer expenses of € 255 million (2021: € 159 million). The Group also realized other operating income of € 50 million in the previous year. This resulted from the achievement of two approval 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 the third quarter of 2021, it was amicably decided with GSK that the agreement on bintrafusp alfa would end 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.
The Group recognized research and development costs in a low triple-digit million euro amount in the previous year. 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 the previous year from the reversal in profit or loss of the remainder of an upfront payment that was received from GSK and deferred in 2019.
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 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 low 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 in the previous year.