Cbi Revenue Recognition Panel Slides 031709 Final
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Cbi Revenue Recognition Panel Slides 031709 Final Cbi Revenue Recognition Panel Slides 031709 Final Presentation Transcript

    • Revenue Recognition under Collaborative Arrangements for Biotechnology Companies
    • Shelly Mui-Lipnik
    • Tom Hess
    • Steven Love
    • Doug McCorkle
    • March 17, 2009
  • BIO 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
  • View slide
  • 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
    View slide
  • 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
  • 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)
    • Affymax Collaboration
    • 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
    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
    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)
    Impact of Amendment
    • Regeneron Collaboration
  • Regeneron Collaboration Agreements * 50% repayment from profits ** plus $475MM of research funding over 5 years Oncology Eye Disease Antibodies 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
  • Sanofi-Aventis Antibody Collaboration
    • 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
    • Adolor Collaboration
    • 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
    Adolor/Pfizer Collaboration
  • Recent Benchmark Example Pain Compounds in Phase IIa 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.
    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.
  • 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
  • Best Practices: What Biotechs Can Do
    • Suggestions to Alleviate Collaboration Revenue
    • Recognition 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
  • 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
  • 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.
  • 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
  • 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
  • Discussion & Questions
    • Thomas P. Hess , Senior Vice President/Chief Financial Officer
    • Yaupon Therapeutics, Inc.
    • (484) 253-2292
    • [email_address]
    • Steven Love, Vice President/Chief Accounting Officer
    • Affymax, Inc.
    • (650) 812-8747
    • [email_address]
    • Douglas McCorkle, Vice President/Controller
    • Regeneron Pharmaceuticals, Inc.
    • (914) 345-7776
    • [email_address]
    • Shelly Mui-Lipnik , Director of Capital Formation & Financial Services Policy
    • Biotechnology Industry Organization (BIO)
    • (202) 312-9262
    • [email_address]