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Cbi Revenue Recognition Panel Slides 031709 Final


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Cbi Revenue Recognition Panel Slides 031709 Final

  1. 1. <ul><li>Revenue Recognition under Collaborative Arrangements for Biotechnology Companies </li></ul><ul><li>Shelly Mui-Lipnik </li></ul><ul><li>Tom Hess </li></ul><ul><li>Steven Love </li></ul><ul><li>Doug McCorkle </li></ul><ul><li>March 17, 2009 </li></ul>
  2. 2. BIO Advocacy <ul><li>BIO world's largest biotechnology trade association </li></ul><ul><li>Represents over 1,200 members globally </li></ul><ul><ul><li>Large & Predominately small companies </li></ul></ul><ul><li>Members in healthcare, agricultural, industrial and environmental sector </li></ul><ul><li>Emerging Companies Section ≈ 650 companies </li></ul><ul><ul><li>Capital formation advocacy: tax, financial services, accounting </li></ul></ul><ul><ul><li>Tax: R&D/AMT in Lieu of bonus depreciation, Accelerated use of NOLs in lieu of tax benefits </li></ul></ul><ul><ul><li>Financial Services: SOX, Short Selling </li></ul></ul><ul><ul><li>Accounting: Revenue recognition of collaborations, IFRS </li></ul></ul>
  3. 3.
  4. 4. BIO Advocates on Revenue Recognition <ul><li>ECS members highlight revenue recognition problems with JSCs </li></ul><ul><li>Slowed approval of S-1s </li></ul><ul><li>Questions regarding annual/quarterly filings </li></ul><ul><li>JSCs included in collaborations </li></ul><ul><li>Affymax and Curis examples </li></ul><ul><li>Current rules do not accurately reflect the underlying economics </li></ul><ul><li>of collaborations </li></ul><ul><li>Lack of clarity results in hodgepodge of general guidelines </li></ul><ul><li>Financial statements become less reliable for investors </li></ul><ul><li>Lack of clear guidance increases chances for restatements </li></ul><ul><li>Shakes investor confidence & increases costs </li></ul>
  5. 5. Collaborative Arrangements <ul><li>BIO seeks clarity on accounting guidance on collaborations </li></ul><ul><li>Collaborations are increasingly popular financing mechanism </li></ul><ul><li>Long lead times, increasingly expensive and capital intensive nature to bring a product to market </li></ul><ul><li>Ongoing economic crisis resulting in credit crunch </li></ul><ul><li>BIO commissioned Glass-Lewis to perform independent study </li></ul><ul><li>Focus on revenue recognition of collaborations in biotech industry </li></ul><ul><li>Outlines state of current accounting, key findings, recommendations to FASB/SEC, recommendations to biotechs </li></ul>
  6. 6. BIO Revenue Recognition Study <ul><li>Study Sample: </li></ul><ul><ul><li>25 companies, small to mid- size public companies, no product to market, average # ees (180), average market cap (480M) </li></ul></ul><ul><ul><li>Common Collaborations: Up-front payments (54), Milestones (47), Royalties/profit-sharing (47), JSC (38) </li></ul></ul><ul><li>Key findings: </li></ul><ul><ul><li>Varying accounting methods are used for similar collaborations resulting in wide variations in timing of revenue recognition </li></ul></ul><ul><ul><li>Majority of companies defer and amortize revenue ranging from 18 months to more than 18 years </li></ul></ul><ul><ul><li>Revenue recognition related restatements  shake investor confidence, neg. impact stock price, potential shareholder class-action suits, increase cost to capital, delay filings (public offerings) </li></ul></ul>
  7. 7. <ul><li>Affymax Collaboration </li></ul>
  8. 8. <ul><li>Date: February 2006 for Japan license and June 2006 for worldwide license (combined is the “Arrangement”) </li></ul><ul><li>License: Hematide, a peptide-based erythropoiesis-stimulating agent (ESA) used to treat anemia </li></ul><ul><li>Milestones: up to $475 million </li></ul><ul><li>Development and commercialization: </li></ul><ul><ul><li>United States: </li></ul></ul><ul><ul><li>Co-develop and co-commercialize in the renal (dialysis and pre-dialysis) and oncology indications </li></ul></ul><ul><ul><li>External development costs (no internal) shared 70% Takeda / 30% Affymax </li></ul></ul><ul><ul><li>Equal share of profits and losses during commercialization </li></ul></ul><ul><ul><li>Ex-United States: </li></ul></ul><ul><ul><li>Takeda responsible for all development and commercialization activities and costs </li></ul></ul><ul><ul><li>Affymax to receive royalties from Takeda on Hematide net sales </li></ul></ul>Affymax/Takeda Collaboration
  9. 9. <ul><li>All development period obligations deemed to be a single unit of accounting </li></ul><ul><ul><li>Obligations: license, development activities, active pharmaceutical ingredient (API) manufacturing and joint steering committee (JSC) participation </li></ul></ul><ul><li>JSC obligation deemed to be significant and indefinite – as a result, the term of the entire single unit of accounting was indefinite </li></ul><ul><li>Revenue was recognized using the ‘zero profit proportional performance model’ (ZPPPM) </li></ul><ul><ul><li>Input based measure used - direct costs deemed most appropriate </li></ul></ul><ul><ul><ul><li>Representative of value delivered to Takeda </li></ul></ul></ul><ul><ul><ul><li>Closely reflected level of Affymax’s effort under the Arrangement </li></ul></ul></ul><ul><ul><li>Revenue recognized equal to direct costs incurred…but not in excess of cash received or receivable </li></ul></ul><ul><ul><li>Overall Arrangement required to be profitable </li></ul></ul><ul><li>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 </li></ul>Accounting for Collaboration
  10. 10. <ul><li>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 </li></ul><ul><li>Amendment modified the JSC obligation such that the obligation is no longer indefinite </li></ul><ul><ul><li>All other development period obligations are estimated to end prior to January 1, 2011 </li></ul></ul><ul><li>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) </li></ul><ul><li>Development period revenue is being recognized ratably over the performance period using the Contingency-Adjusted Performance Model (CAPM) </li></ul><ul><ul><li>The impact of any change in the development period estimate would be recorded as a change in estimate </li></ul></ul><ul><li>Two contingent obligations potentially remain: API manufacturing for the commercial product and co-promotion activities </li></ul><ul><ul><li>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) </li></ul></ul>Impact of Amendment
  11. 11. <ul><li>Regeneron Collaboration </li></ul>
  12. 12. 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
  13. 13. Sanofi-Aventis Antibody Collaboration <ul><li>Global collaboration to discover, develop, and commercialize therapeutic human antibodies </li></ul><ul><li>Sanofi-aventis funds $475 million of discovery research over five years through 2012 </li></ul><ul><li>Sanofi-aventis funds ~ 100% of development costs for collaboration antibodies </li></ul>
  14. 14. <ul><li>Adolor Collaboration </li></ul>
  15. 15. <ul><li>Date: December 2007 </li></ul><ul><li>Focus: Delta opioid agonists for pain </li></ul><ul><li>Milestones: $232.5MM </li></ul><ul><li>Back End </li></ul><ul><li>United States </li></ul><ul><li>Profits/Losses shared 60% to Pfizer and 40% to Adolor </li></ul><ul><li>- US development expenses (external) to be shared in same proportion </li></ul><ul><li>Rest of World </li></ul><ul><li>Adolor to receive royalties on Pfizer net sales </li></ul><ul><li>Provisions for adding compounds and indications </li></ul><ul><li>Development Collaboration </li></ul><ul><ul><li>Adolor: IND filings and clinical program through Phase 2a </li></ul></ul><ul><ul><li>Pfizer: Subsequent worldwide development and regulatory approvals </li></ul></ul>Adolor/Pfizer Collaboration
  16. 16. 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 <ul><li>Milestones </li></ul><ul><li>Development </li></ul><ul><li>Regulatory </li></ul><ul><li>Commercial </li></ul><ul><li>Total </li></ul>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
  17. 17. <ul><li>Adolor had the “option” to attend all JSC meetings! </li></ul><ul><li>Adolor is not obligated to attend- collaboration meetings. </li></ul><ul><li>Allows for recognition of the up front payment. </li></ul>Deal Structure for Revenue Recognition
  18. 18. Accounting for Upfront Payments <ul><li>Collaboration signed December 2007 </li></ul><ul><li>Two compounds in the clinic as of the collaboration date. </li></ul><ul><li>Adolor is responsible for the development of each compound through Phase II a and then Pfizer assumes all responsibilty. </li></ul><ul><li>Adolor’s project management projects that compound I & II will be completed in February 2010 (26 months). </li></ul><ul><li>Amortize the upfront over 26 months. </li></ul><ul><li>Adjust if Phase II takes more/less time. </li></ul>
  19. 19. Best Practices: What Biotechs Can Do <ul><li>Determining the Accounting for the Collaborative Arrangement </li></ul><ul><li>Ensure that Accounting/Financial Reporting review draft agreements and/or term sheets and have adequate opportunity to propose changes </li></ul><ul><li>Do your homework </li></ul><ul><ul><li>Research technical guidance </li></ul></ul><ul><ul><li>Research collaboration accounting by other companies </li></ul></ul><ul><ul><li>Consult with outside experts for guidance/feedback </li></ul></ul><ul><ul><li>Draft proposed accounting for internal and external auditor review </li></ul></ul><ul><li>Involve external auditors early in the process </li></ul><ul><ul><li>Obtain preliminary feedback on proposed accounting </li></ul></ul><ul><ul><li>Obtain suggested changes to draft agreement to alleviate issues </li></ul></ul><ul><li>Consider SEC Consultation </li></ul>
  20. 20. Best Practices: What Biotechs Can Do <ul><li>Suggestions to Alleviate Collaboration Revenue </li></ul><ul><li>Recognition Issues </li></ul><ul><li>Define an end date to the collaboration (if feasible) </li></ul><ul><li>Use opt-out (or opt-in) clauses, where appropriate </li></ul><ul><ul><li>Joint Committees, especially Joint Steering Committee (JSC) </li></ul></ul><ul><ul><li>Development in future indications or of future drug candidates </li></ul></ul><ul><ul><li>Commercialization activities </li></ul></ul><ul><li>Consider whether biotech’s collaborative obligations are deemed substantive. If not, document why. </li></ul><ul><ul><li>JSC (if no opt-out provision) </li></ul></ul><ul><ul><li>Manufacturing preclinical and/or early stage clinical supplies </li></ul></ul><ul><ul><li>Co-marketing activities </li></ul></ul>
  21. 21. Best Practices: What Biotechs Can Do <ul><li>Suggestions to Alleviate Collaboration Revenue Recognition </li></ul><ul><li>Issues (continued) </li></ul><ul><li>Provide biotech with rights to participate in collaboration activities (not obligations) </li></ul><ul><ul><li>Manufacturing clinical and/or commercial supplies </li></ul></ul><ul><ul><li>Co-promotion/co-marketing activities </li></ul></ul><ul><li>Evaluate the nature of each milestone payment - is it substantive? </li></ul><ul><ul><li>Proximity to up-front payment </li></ul></ul><ul><ul><li>Biotech’s activities/effort to achieve milestone (relative to payment amount) </li></ul></ul><ul><ul><li>Note: Monitor EITF Issue No. 08-9, Milestone Method of Revenue Recognition </li></ul></ul><ul><li>Monitor EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables </li></ul><ul><ul><li>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.) </li></ul></ul><ul><ul><li>Would supersede EITF 00-21 </li></ul></ul>
  22. 22. Best Practices: What Biotechs Can Do <ul><li>External Communications regarding New Collaborative </li></ul><ul><li>Arrangements </li></ul><ul><li>Involve Investors Relations from both parties up front </li></ul><ul><li>Prepare financial projections – Cash impact and financial statement impact </li></ul><ul><li>Plan adequate time for collaborator review and comments </li></ul><ul><ul><li>Initial Press Release </li></ul></ul><ul><ul><li>Wording in SEC Filings – 10-K; 10-Q; Annual Report to Shareholders </li></ul></ul><ul><li>Reach out to the analysts, as appropriate. </li></ul>
  23. 23. BIO Study: Recommendations for FASB & SEC <ul><li>JSC participation should only be considered a deliverable if a company is incentivized to participate or is at a detriment for non-participation </li></ul><ul><li>Provide additional guidance for recognizing revenue when contracts include multiple deliverables </li></ul><ul><li>Revenue accounting should better reflect the economics of a collaboration </li></ul>
  24. 24. Advocacy <ul><li>BIO working with SEC & FASB to address revenue recognition </li></ul><ul><li>Met with SEC on revenue recognition of JSCs (Fall 2007) </li></ul><ul><li>Working through FASB’s comment process </li></ul><ul><ul><li>Accounting for multiple arrangements </li></ul></ul><ul><ul><ul><li>EITFs 08-1, 08-9 </li></ul></ul></ul><ul><ul><li>Consolidation variable interest entities-->require all biotech’s losses to be reflected on pharmaceutical company’s financial statement </li></ul></ul><ul><ul><ul><li>FIN 46(R) </li></ul></ul></ul><ul><ul><li>Monitoring IFRS impact on revenue recognition </li></ul></ul><ul><li>BIO & CFO/Tax VP committee meeting with FASB on 3/23/09 </li></ul>
  25. 25. Discussion & Questions <ul><li>Thomas P. Hess , Senior Vice President/Chief Financial Officer </li></ul><ul><li>Yaupon Therapeutics, Inc. </li></ul><ul><li>(484) 253-2292 </li></ul><ul><li>[email_address] </li></ul><ul><li>Steven Love, Vice President/Chief Accounting Officer </li></ul><ul><li>Affymax, Inc. </li></ul><ul><li>(650) 812-8747 </li></ul><ul><li>[email_address] </li></ul><ul><li>Douglas McCorkle, Vice President/Controller </li></ul><ul><li>Regeneron Pharmaceuticals, Inc. </li></ul><ul><li>(914) 345-7776 </li></ul><ul><li>[email_address] </li></ul><ul><li>Shelly Mui-Lipnik , Director of Capital Formation & Financial Services Policy </li></ul><ul><li>Biotechnology Industry Organization (BIO) </li></ul><ul><li>(202) 312-9262 </li></ul><ul><li>[email_address] </li></ul>