Collaboration agreements

When is a collaboration partner a customer?

A customer is a party that has contracted to obtain goods or services that are an output of the company's ordinary activities in exchange for consideration. A partner that pays a biotech to perform research on a drug the partner will own, or buys a licence to commercialise it, is obtaining outputs and is a customer for those elements. Two companies that each contribute to a joint programme and share the risks and rewards of the outcome are participants, not customer and supplier. Many agreements contain both kinds of element, which are separated.

Collaboration agreements: sharing trial costs

Company A runs Phase III trials for a drug it co-owns with Company B, spending US$ 80 million in the year. Under the agreement, each bears 50% of development costs, so B reimburses A 40 million.

Profit is the same, but revenue and R&D expense differ, and investors compare both across companies. If B is a partner, the reimbursement reduces A's expense, or is shown as other income, under the company's policy. B records its 40 million share as its own R&D expense.

How is profit sharing after launch accounted for?

After approval, one party often sells the drug and shares the profit. The party that sells to the customers, wholesalers or hospitals, is usually principal and records the sales as revenue, with the partner's share of profit as an expense, often in cost of sales or a separate line. The partner records its share as income: revenue if it is consideration for a licence or services to a customer, or other income if it is a return on a shared risk. Co-promotion arrangements, where both sales forces promote the drug, are analysed the same way.

When do the parties have a joint arrangement?

If the agreement gives the parties joint control of the programme, requiring unanimous consent for decisions such as trial design, budgets and commercial strategy, it is a joint arrangement under IFRS 11. Without a separate vehicle, it is a joint operation: each party records its share of the assets, liabilities, revenue and costs. Joint steering committees with deadlock rules or casting votes need close reading to decide whether control is truly shared. See joint arrangements in mining for the same analysis in another industry.

What about upfront and milestone payments between partners?

Funding from governments and charities raises a similar question of whether the funder is a customer; see government funding for drug development. Payments for elements where the partner is a customer, such as a licence to commercialise in its territory, are revenue under IFRS 15, recognised as the licence or services are transferred. Payments that equalise contributions between partners, or buy into a shared programme, are not revenue; the receiving party usually records them as a reduction of its own costs or as other income, and the paying party as R&D or an intangible asset, depending on what it receives. See licensing deals and milestone payments.

How does US GAAP differ?

US GAAP has a specific topic, ASC 808 Collaborative Arrangements, which requires participants to present collaboration amounts by applying ASC 606 to customer elements and a consistent, reasonable policy to the rest, and to disclose the arrangements. Since 2020, payments from a collaborator that is not a customer cannot be presented as revenue from contracts with customers. IFRS has no equivalent standard, so the analysis relies on IFRS 15 and IFRS 11 and a disclosed policy. See pharma accounting.

This guide is general information. It is not tax or legal advice for your situation.