cbi revenue recognition panel slides 031709 final
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Revenue Recognition under Collaborative Arrangements for Biotechnology
Companies
Shelly Mui-Lipnik
Tom Hess
Steven Love
Doug McCorkleMarch 17, 2009
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BIO AdvocacyBIO Advocacy
BIO world's largest biotechnology trade association Represents over 1,200 members globally
Large & Predominately small companies Members in healthcare, agricultural, industrial and environmental
sector Emerging Companies Section ≈ 650 companies
Capital formation advocacy: tax, financial services, accounting Tax: R&D/AMT in Lieu of bonus depreciation, Accelerated use of
NOLs in lieu of tax benefits Financial Services: SOX, Short Selling Accounting: Revenue recognition of collaborations, IFRS
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BIO Advocates on Revenue Recognition
ECS members highlight revenue recognition problems with JSCs Slowed approval of S-1s Questions regarding annual/quarterly filings JSCs included in collaborations Affymax and Curis examples
Current rules do not accurately reflect the underlying economics of collaborations Lack of clarity results in hodgepodge of general guidelines Financial statements become less reliable for investors Lack of clear guidance increases chances for restatements Shakes investor confidence & increases costs
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Collaborative Arrangements
BIO seeks clarity on accounting guidance on collaborations Collaborations are increasingly popular financing mechanism Long lead times, increasingly expensive and capital intensive nature to
bring a product to market Ongoing economic crisis resulting in credit crunch
BIO commissioned Glass-Lewis to perform independent study Focus on revenue recognition of collaborations in biotech industry Outlines state of current accounting, key findings, recommendations to
FASB/SEC, recommendations to biotechs
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BIO Revenue Recognition Study
Study Sample: 25 companies, small to mid- size public companies, no product
to market, average # ees (180), average market cap (480M) Common Collaborations: Up-front payments (54), Milestones
(47), Royalties/profit-sharing (47), JSC (38)Key findings:
Varying accounting methods are used for similar collaborations resulting in wide variations in timing of revenue recognition
Majority of companies defer and amortize revenue ranging from 18 months to more than 18 years
Revenue recognition related restatements shake investor confidence, neg. impact stock price, potential shareholder class-action suits, increase cost to capital, delay filings (public offerings)
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Affymax Collaboration
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Date: February 2006 for Japan license and June 2006 for worldwide license (combined is the “Arrangement”)
License: Hematide, a peptide-based erythropoiesis-stimulating agent (ESA) used to treat anemia
Milestones: up to $475 million
Development and commercialization:
United States:
Co-develop and co-commercialize in the renal (dialysis and pre-dialysis) and oncology indications
External development costs (no internal) shared 70% Takeda / 30% Affymax
Equal share of profits and losses during commercialization
Ex-United States:
Takeda responsible for all development and commercialization activities and costs
Affymax to receive royalties from Takeda on Hematide net sales
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Affymax/Takeda Collaboration
All development period obligations deemed to be a single unit of accounting
Obligations: license, development activities, active pharmaceutical ingredient (API) manufacturing and joint steering committee (JSC) participation
JSC obligation deemed to be significant and indefinite – as a result, the term of the entire single unit of accounting was indefinite
Revenue was recognized using the ‘zero profit proportional performance model’ (ZPPPM)
Input based measure used - direct costs deemed most appropriate
Representative of value delivered to Takeda
Closely reflected level of Affymax’s effort under the Arrangement
Revenue recognized equal to direct costs incurred…but not in excess of cash received or receivable
Overall Arrangement required to be profitable
ZPPPM required until earlier of (i) meeting the criteria for separate recognition of each element under EITF 00-21 or (ii) fulfillment of all obligations under the Arrangement
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Accounting for Collaboration
Amendment effective 1/1/08 provided Affymax the ability to opt-out of the obligation to participate in the JSC at any time beginning January 1, 2011
Amendment modified the JSC obligation such that the obligation is no longer indefinite
All other development period obligations are estimated to end prior to January 1, 2011
As a result, the performance of the development period is deemed to occur from inception of the Arrangement to January 1, 2011 (~4.5 years)
Development period revenue is being recognized ratably over the performance period using the Contingency-Adjusted Performance Model (CAPM)
The impact of any change in the development period estimate would be recorded as a change in estimate
Two contingent obligations potentially remain: API manufacturing for the commercial product and co-promotion activities
Excluded from the development period obligations as both are contingent on actions outside Affymax’s control (e.g., FDA approval of the new drug application)
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Impact of Amendment
Regeneron Collaboration
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Regeneron Collaboration Agreements
sanofi-aventis
Bayer HealthCare
sanofi-aventis
Upfront/milestone payments $130MM $95MM $85MM
Development costs paid by partner *
100% ~50% ~100%**
Profit split – Regeneron share
US 50% 100% 50%
Japan ~35% royalty 50% 35-45%
ROW 50% 50% 35-45%
Milestones remaining
Regulatory $400MM $90MM –
Sales – $135MM $250MM
* 50% repayment from profits ** plus $475MM of research funding over 5 years
Oncology Eye Disease Antibodies
Global collaboration to discover, develop, and commercialize therapeutic human antibodies
Sanofi-aventis funds $475 million of discovery research over five years through 2012
Sanofi-aventis funds ~ 100% of development costs for collaboration antibodies
Sanofi-Aventis Antibody Collaboration
Adolor Collaboration
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Date: December 2007
Focus: Delta opioid agonists for pain
Milestones: $232.5MM
Back End
United States
Profits/Losses shared 60% to Pfizer and 40% to Adolor
- US development expenses (external) to be shared in same proportion
Rest of World
Adolor to receive royalties on Pfizer net sales
Provisions for adding compounds and indications
Development Collaboration
Adolor: IND filings and clinical program through Phase 2a
Pfizer: Subsequent worldwide development and regulatory approvals
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Adolor/Pfizer Collaboration
Recent Benchmark Example Pain Compounds in Phase IIa
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Adolor/Pfizer Targacept/GSK Glenmark/Lilly
Transaction Date December 4, 2007 July 27, 2007 October 30, 2007
Pain Target Delta Opoid Receptor Neuronal Nicotinic
Receptor
Transient Receptor Potential
Vanilloid Sub-family 1 (TRPV1)
Lead Compound ADL5859 TC-2696 GRC 6211
Upfront Payment $30 Million +
$1.9 Million reimbursement for Phase
2a studies
$20 Million
Plus $15 Million
in Equity
$45 Million
Milestones
-Development
-Regulatory
-Commercial
Total
Not Disclosed
Not Disclosed
Not Disclosed____
$232.5 MM
Not Disclosed
Not Disclosed
Not Disclosed
$1.5 B
Not Disclosed
Not Disclosed
Not Disclosed
$215 MM
Back End US – 40/60 Profit Split
ROW Royalties
Undisclosed Double Digit
Royalty
~15% Royalty in the Territory
Territory Worldwide Worldwide North America, Europe, and
Japan
Cost Sharing 40/60 US
100% Pfizer in ROW
Targacept to fund through Phase
2 POC. Then 100% GSK if they
opt to take the compound
100% Lilly in Territory - no
mention of access to Lilly trial
data
Co-promote Option Yes – US Specialty Yes – US Specialty for first two
compounds
Yes – US
Adolor had the “option” to attend all JSC meetings!
Adolor is not obligated to attend- collaboration meetings.
Allows for recognition of the up front payment.
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Deal Structure for Revenue Recognition
Accounting for Upfront Payments
Collaboration signed December 2007 Two compounds in the clinic as of the collaboration date. Adolor is responsible for the development of each
compound through Phase II a and then Pfizer assumes all responsibilty.
Adolor’s project management projects that compound I & II will be completed in February 2010 (26 months).
Amortize the upfront over 26 months. Adjust if Phase II takes more/less time.
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Best Practices: What Biotechs Can Do
Determining the Accounting for the Collaborative Arrangement Ensure that Accounting/Financial Reporting review draft agreements
and/or term sheets and have adequate opportunity to propose changes
Do your homework• Research technical guidance• Research collaboration accounting by other companies• Consult with outside experts for guidance/feedback• Draft proposed accounting for internal and external auditor review
Involve external auditors early in the process• Obtain preliminary feedback on proposed accounting• Obtain suggested changes to draft agreement to alleviate issues
Consider SEC Consultation
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Best Practices: What Biotechs Can Do
Suggestions to Alleviate Collaboration RevenueRecognition Issues
Define an end date to the collaboration (if feasible) Use opt-out (or opt-in) clauses, where appropriate
• Joint Committees, especially Joint Steering Committee (JSC)• Development in future indications or of future drug candidates• Commercialization activities
Consider whether biotech’s collaborative obligations are deemed substantive. If not, document why.• JSC (if no opt-out provision)• Manufacturing preclinical and/or early stage clinical supplies • Co-marketing activities
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Best Practices: What Biotechs Can Do
Suggestions to Alleviate Collaboration Revenue Recognition Issues (continued) Provide biotech with rights to participate in collaboration activities
(not obligations)• Manufacturing clinical and/or commercial supplies• Co-promotion/co-marketing activities
Evaluate the nature of each milestone payment - is it substantive?• Proximity to up-front payment• Biotech’s activities/effort to achieve milestone (relative to payment
amount) • Note: Monitor EITF Issue No. 08-9, Milestone Method of Revenue
Recognition Monitor EITF Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables• Anticipated to be effective for new or materially modified arrangements
in fiscal years beginning on or after 12/15/09. (Earlier application would be permissable as of the beginning of a FY.)
• Would supersede EITF 00-21
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Best Practices: What Biotechs Can Do
External Communications regarding New Collaborative Arrangements Involve Investors Relations from both parties up front Prepare financial projections – Cash impact and financial statement
impact Plan adequate time for collaborator review and comments
• Initial Press Release• Wording in SEC Filings – 10-K; 10-Q; Annual Report to Shareholders
Reach out to the analysts, as appropriate.
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BIO Study: Recommendations for FASB & SEC
JSC participation should only be considered a deliverable if a company is incentivized to participate or is at a detriment for non-participation
Provide additional guidance for recognizing revenue when contracts include multiple deliverables
Revenue accounting should better reflect the economics of a collaboration
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Advocacy
BIO working with SEC & FASB to address revenue recognition Met with SEC on revenue recognition of JSCs (Fall 2007) Working through FASB’s comment process
Accounting for multiple arrangements EITFs 08-1, 08-9
Consolidation variable interest entities-->require all biotech’s losses to be reflected on pharmaceutical company’s financial statement FIN 46(R)
Monitoring IFRS impact on revenue recognition BIO & CFO/Tax VP committee meeting with FASB on 3/23/09
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Discussion & Questions
Thomas P. Hess, Senior Vice President/Chief Financial Officer
Yaupon Therapeutics, Inc.
(484) 253-2292
thess@yaupontherapeutics.com
Steven Love, Vice President/Chief Accounting Officer
Affymax, Inc.
(650) 812-8747
slove@affymax.com
Douglas McCorkle, Vice President/Controller
Regeneron Pharmaceuticals, Inc.
(914) 345-7776
douglas.mccorkle@regeneron.com
Shelly Mui-Lipnik, Director of Capital Formation & Financial Services Policy
Biotechnology Industry Organization (BIO)
(202) 312-9262
smui-lipnik@bio.org
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