The NetSuite Accountant

Biotech Comparables | Collaborator vs. Customer

Paul Giese Oct 16, 2018 7:05:00 AM
Paul Giese

When starting to assess whether your biotech collaboration falls under ASC 606, you first must determine whether the counter-party is a collaborator or a customer. Under ASC 606, a customer is defined as:

…a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.”

In a simple collaboration agreement, a small biotech's output would be to provide research activities associated with a drug program to large pharma. Large pharma would provide consideration generally in the form of an upfront cash payment, development milestones and royalty payments.

However, if the counter-party in the arrangement participates in and shares the risks and benefits from the given activities, the counter-party would be considered a collaborator and the arrangement would fall under ASC 808. Building on the earlier example, if small biotech provides a license for IP to large pharma to manufacture and both parties shared in the research costs, this arrangement would fall under ASC 808.

Under ASC 808, the guidance states that transactions between the collaborators could be in the scope of ASC 606 if the counter-party meets the definition of a customer under ASC 606 for at least some aspects of the arrangement (i.e. each individual performance obligation). In the above example, the consideration provided for the license would be recognized under ASC 606 and the shared research costs would be treated under ASC 808.

Momenta Theraputics has the following disclosure in their Q2 2018 10-Q:

With respect to consideration other than cost sharing payments received from a collaboration partner, the Company has applied an accounting policy to analogize to other accounting guidance concerning revenue recognition, specifically Topic 606. Payments received from a collaboration partner to which this policy applies may include upfront payments in respect of a license of intellectual property, development milestones, profit share payments, and sales-based milestones. The Company classifies the payments received or made under the cost sharing provisions of the arrangement as a component of research and development or general and administrative expense, respectively, to reflect the joint risk sharing nature of the payment received or made.

Essentially, Momenta's accounting policy is that upfront payments, development milestones, profit share payments and sales-based milestones under a collaboration agreement are treated as if they were under ASC 606.Cost sharing payments are treated as a reduction of R&D or G&A expense. Mersana's agreement with Mylan and CSL are both considered collaboration agreeements under ASC 808 but the payments are treated as if under ASC 606.

If considered under ASC 606, companies will need to determine how to recognize the revenue for these payments. If you conclude that your collaboration payments are to be recognized under an input (or cost-to-cost) method model, you can benefit from intheBlk's revenue model. Check out our product page and contact us to see a demo today.

Topics: Revenue Recognition