6.4 Life Sciences

To the extent that re-estimates of prior year gross-to-net variable consideration is significant in future periods, please represent to us that you will disclose herein the impact on your product sales and operating results and include in your financial statements the disclosure required by ASC 606-10-50-12A.

Please explain to us why adjustments to prior year estimates of gross-to-net variable consideration in the aggregate of up to [X]% of total revenues are not material to your financial statements taken as a whole. In this regard, [X]% of your total revenues for the first half of [year 2] equating to approximately $[X] million appears that it could at least be quantitatively material to operating loss and pre-tax loss for the first half of [year 2] and to your customer allowances liability at December 31, [year 1]. In addition, prior period adjustments of that magnitude could significantly impact trends and explanation thereof could be meaningful disclosure for investors.

You identify product revenue recognition as a critical accounting estimate. Given the magnitude of your net product sales and your gross-to-net adjustments as previously conveyed in your quarterly earnings conference calls, please address the following:

• Provide us a roll forward of the accrual of each gross-to-net adjustment type (whether reflected as an allowance against accounts receivable or a liability) that depicts the following for each annual period from [Date 1] to [Date 2] and for the six-month period from [Date 3] to [Date 4]:

  • Beginning balance;
  • Current provision related to sales made in current period;
  • Current provision related to sales made in prior periods;
  • Actual returns or credits in current period related to sales made in current period;
  • Actual returns or credits in current period related to sales made in prior periods; and
  • Ending balance.

Tell us the amount of and reason for significant fluctuations in the provision from period to period for each type of gross-to-net adjustment, and the amount and reason that changes in your estimates of these items had on your revenues and operations.

Please revise future filings to include all of the disclosures required by ASC 606-10-50, as applicable. For example, provide the qualitative and quantitative disclosure about the significant judgments and changes in judgments, including inputs and assumptions, related to your accounting for returns, rebates and discounts, as set forth in ASC 606-10-50-1(b), 50-17, and 50-20, a description of the payment terms under 50-12, and disaggregated revenue under 50-5.

[P]lease tell us how you concluded that the license was distinct and had standalone value under ASC 606-10-25-19 through 25-22, specifically addressing ASC 606-10-25-19(b.) In this regard, explain why your license was considered to have the ability to treat a condition, with no expectation that the company will undertake activities to change the functionality of the drug formula during the license period.

You state that the development and manufacturing services for the [X] agreements are viewed as a single performance obligation and therefore the upfront payments, future research and development reimbursement payments and any potential additional development milestone payments under each agreement will be deferred until the commencement of commercial manufacturing. Please address the following:

• Identify for us each of the promised goods or services in these agreements including the transfers of licenses and explain how you determined that you only had a single performance obligation under the guidance in ASC 606-10-25-14.
• With reference to ASC 606-10-25-23 to 25-26, explain to us why revenue is deferred until commencement of commercial manufacturing and how you considered that you have already transferred the licenses and begun providing development services.
• Explain to us whether you intend to recognize revenue over time or at a point in time, and why with reference to ASC 606-10-25-30 or 25-31, as applicable.

Please address the following as it relates to your determination that the performance obligations represented a single performance obligation since the license, clinical development and manufacturing and supply obligations were not distinct:

• [H]ow your statement . . . that [Customer X] was not granted any other rights to, or benefits from, the intellectual property is consistent with . . . the agreements. The agreements appear to give [X] the right to use [Product A] as necessary to . . . seek and obtain Regulatory Approval for the Licensed Product in the Field in the Territory.
• [W]hy the license and research and development services, either alone or combined, are not capable of being distinct from the manufacturing services pursuant to ASC 606-10-25-19a. In this respect, the subcontracting and sublicensing rights . . . and step-in rights in . . . the agreements appear to indicate there may be available resources outside of the company that could provide the research and development services and supplies. Refer also to Example 56, Case B in ASC 606-10-55-371 through 55-372. In this regard, we note in Case A that an approved drug is provided in the contract with manufacturing services, for which no other promised goods or services are included in the contract, which appears to be contrary to the company’s facts and circumstances.
• [W]hy the license and research and development services, either alone or combined, are not separately identifiable from the supply obligation and thus do not meet the criteria in ASC 606-10-25-19b. In this regard, it appears due to the subcontracting and sublicensing rights, the license and research and development services are not inter-related with the manufacturing services pursuant to ASC 606-10-25-21c. Refer also to Example 56, Case B, ASC 606-10-55-372A.

As it relates to your determination that revenue from the combined performance obligation should be recognized at a point in time upon the supply of the drug, please address the following:

• Your response states that you intend to recognize revenue at the point in time in which [Customer X] achieves control over batches supplied. However, you also state that you will recognize revenue as product is delivered to [X] based on the quantity supplied compared to the forecasted quantity of the drug to be supplied over the term of the agreements, which would appear to be an over time measurement. Please clarify this apparent inconsistency. Please also explain how you intend to estimate the forecasted quantity of the drug to be supplied over the term of the agreements and how this estimate would be deemed to be a reasonable measure of progress considering the guidance in ASC 606-10-25-36.
• Your response [to the initial comment letter] states that [the company] will “start satisfying its performance obligation only upon supply of the drug after issuance of regulatory marketing approvals.” Explain how you considered the contract duration guidance in ASC 606-10-25-3 which states that the guidance in this Topic should be applied to the duration of the contract (that is, the contractual period) in which the parties to the contract have present enforceable rights and obligations. In this regard, it would appear that the enforceable rights and obligations under these contracts began at their effective dates . . . . Accordingly, it is unclear to us why an over time measurement of your performance obligation would not be recognized over the entire contractual period.
• Explain how you considered the guidance in ASC 606-10-25-27(c) in determining whether your performance obligation is being satisfied over time. In this regard, address the following:

  • Clarify whether your performance under the contracts [creates] an asset with alternative future use. In this regard, explain whether you are contractually restricted from developing [Compound A] for your or any other entity’s benefit as long as the [X] agreements are in effect.
  • Explain whether you have an enforceable right to payment for performance completed to date under the contracts. In this regard, it would appear that you would have the full right to the non-refundable upfront payments (at a minimum) even in the event that the drug does not receive regulatory approval and enter the commercialization phase.

We acknowledge your . . . determination that the performance obligations represented a single performance obligation since they were not distinct. Please tell us the following information so we may further evaluate your response:

• [W]hy you did not identify the research and development services, which appear to be required under the contract to get [Product A] through regulatory approval, as a separate performance obligation. . . .
• [W]hy the license and research and development services, either alone or combined, are not capable of being distinct from the manufacturing services pursuant to ASC 606-10-25-19a. In this respect, the subcontracting rights under . . . the agreement appear to indicate that there may be available resources outside the company that could provide the research and development services and supplies. Refer also to Example 56, Case B in ASC 606-10-55-371 through 55-372.
• [W]hy the license and research services, either alone or combined, are not separately identifiable from the manufacturing obligation and thus do not meet the criteria in ASC 606-10-25-19b. In this regard, it appears due to the subcontracting rights, the license and research services are not inter-related with the manufacturing services pursuant to ASC 606-10-25-21c. Refer also to Example 56, Case B, ASC 606-10-55-372A.
• [I]f you will be compensated separately for any research and development services, such as the technical development activities discussed in . . . the agreement, how you intend to account for those payments.
• [I]f you will be compensated separately for the supply of goods under the Supply agreement beyond the upfront fee and milestone payments received, and if so, whether or not the compensation includes a normal profit margin.
• [W]hy control has transferred upon manufacturing the vials for [Customer A] pursuant to ASC 606-10-25-23.
• [H]ow you intend to estimate the expected vials to be produced during the contract term of the supply agreement and how the estimate would be deemed to be a reasonable measure of progress pursuant to ASC 606-10-25-36.

Regarding the [agreement], for which you determined the total transaction price to be $[X] million, please provide us your analysis of the accounting for the agreement which explains why you did not recognize any portion of the consideration for the license upon transfer of the license at inception of the agreement. Address:

• If you concluded the license was distinct from the other obligations and why or why not,
• If you concluded the license was a right to use license or a right to access license and why,
• The standalone selling prices determined for each performance obligation and how you determined such,
• Why you did not recognize the guaranteed minimum royalty payments as fixed consideration upon transfer of the license at inception of the agreement, and
• Why you combined the license with the services to arrange for supplies.

[Y]ou disclose that if you are unable to reasonably estimate royalty revenue or if you do not have access to the information, you record royalty revenue when the information needed for a reliable estimate becomes available. Please tell us how this policy complies with the requirement in ASC 606-10-55-65 to reflect royalties upon the later of subsequent sale or the satisfaction of the performance obligation to which the royalty has been allocated. In your response, tell us when the information needed for a reliable estimate becomes available in comparison to the period of actual sale.

We note you have identified certain complementary products as separate performance obligations that are satisfied over the [X-] year warranty period. Please address the following:

You disclose . . . that . . . you entered into a collaboration agreement . . . to accelerate the development of your groundbreaking AI foundation models for biology and chemistry using your supercomputer . . . . Please tell us the following:

• [T]he terms of the collaboration agreement, the accounting treatment thereof, and why disclosure is not required in the filing, including the financial statements[.]
• [W]hy none of the proceeds from the . . . private placement are required to be allocated to the concurrent collaboration agreement under ASC 606-10-25-9.

You state . . . that . . . you entered into a collaboration agreement with [Entity A] pursuant to which you granted [A] an exclusive right to develop and commercialize [Compound B], excluding the [Territory C], and a co-exclusive license in the U.S. to develop and commercialize [Compound B]. You state . . . that the agreement contains four material components. Please address the following:

• Tell us how you applied [ASC 808] to determine that part of the agreement should not be accounted for under ASC 606. In this respect, tell us why the collaborative partner is not considered a customer within the unit of account under [ASC 808] that would be required to be accounted for under ASC 606.
• For the portion of the agreement you believe is outside ASC 606, clarify what authoritative literature you are using or what methodology you are using to account for the non–ASC 606 portion. Refer to ASC 808-10-45-3.
• Explain why the entire $[X] million was allocated to the components accounted for under ASC 606 and why some of the amount was not required to be allocated to the other material components of the agreement.
• Please clarify the nature of the transition date discussed . . . , why that date determines if you are the principal for the product sales, and if at that point, reimbursements will also be recorded as revenue. Clarify how the fact pattern compares to Example 3 in ASC 808-10-55-11 through 55-14 and provide any authoritative support.

[Y]ou entered into the [collaboration agreement with Entity X] to jointly develop and commercialize [Product A]. You state that you identified two performance obligations, consisting of the delivery of the licenses and your participation on joint steering and other collaboration committees. Your accounting policy . . . states that for collaboration arrangements with multiple performance obligations, such as granting a license and performing research and development activities, you allocate the upfront and milestone payments under a relative standalone selling price method. It is not clear why amounts for research and development in the [collaboration agreement with X] are not considered a performance obligation nor why . . . you record cost reimbursement payments to you from [X] as a reduction of research and development expense rather than as revenue. It appears to us that your separation, measurement, allocation and classification of amounts related to the [collaboration agreement with X] is inconsistent with your accounting policy . . . and with your accounting for your agreement with [Entity Y]. Please provide us an analysis with reference to authoritative literature supporting your accounting for the [collaboration agreement with X]. Also, provide us proposed revised accounting policy disclosure to be included in future filings addressing this inconsistency or tell us why revised disclosure is not necessary.

Please provide us the following terms governing the [X] collaboration, as well as your consideration of providing additional disclosure pursuant to ASC 606-10-50:

With regard to the $[X] million non-refundable, upfront license fee received in the [collaboration agreement with Entity A] and the estimates made in accounting for the agreement, please tell us:

• [M]ore specifically what you mean by “Therefore, there was significant judgment applied in determining a reasonable, rational method of recognizing revenue under the [collaboration agreement with A], with the Company considering the guidance in ASC 606 Revenue from Contracts with Customers,” and whether and, if so, to what extent you analogized to ASC 606 or other literature and, if not, the basis in the accounting literature for the accounting you applied to separate, allocate, measure and recognize amounts within the collaborative arrangement,
• [T]he amount allocated to each of [Compound B] and [Compound C] and your consideration of disclosing the amount allocated to each of [Compound B] and [Compound C] separately,
• [H]ow you determined the five years over which you will complete development activities for [Compound B] when we note the FDA accepted a New Drug Application . . . ,
• [Y]our basis in the accounting literature for recognizing milestone payments when achieved addressing regulatory milestones separately from sales milestones,
• [W]hy you record reimbursement for [X]% of your development activity expenses incurred as a reduction to research and development costs rather than as part of the transaction price for purposes of recording revenue given your accounting for research and development activities as a performance obligation that you recognize using the proportional performance method,
• [T]he basis in the accounting literature for presenting . . . the co-promote loss as negative revenue rather than as an expense, and
• [T]he breakout showing the amount and type of regulatory versus sales milestone related to the $[X] million in milestone payments upon [Compound B] regulatory approvals and first commercial sale events in certain major markets and an additional $[X] million in milestone payments upon [Compound C] regulatory approvals and first commercial sale events in certain major markets.

We note you considered the nature of the remittance of the net pre-tax profits to [Entity A] and ultimately concluded that an accounting policy of recording these net costs as a component of Other operating expense, net is a “reasonable, rational, and consistently applied accounting policy election” which accurately reflects the nature of these costs. Please address with more specificity why your characterization of the amounts [A] shares with you as Net Revenue and the amounts you share with them as Other operating expense, net is a consistently applied policy election.

Based on your response, it appears that you are applying ASC 808-10 to the 50-year collaboration Agreement entered into in [year X]. In this regard, please describe to us the extent you have considered ASC 808-10-15-6, which sets forth, in part, that “participants shall reevaluate whether an arrangement continues to be a collaborative arrangement whenever there is a change in either the roles of the participants in the arrangement or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor.”

Please address the following comments with regard to your accounting and disclosures for the License and Research Collaboration Agreement with [Company A].

• Please expand your future filings to describe all material terms of the agreement, including the specific amount for the upfront payments, and the development and [commercialization] milestone payments. For the tiered royalty arrangement, please disclose the royalty term and quantification of the royalty rate, or a range no greater than 10 percentage points per tier.
• Please provide us an analysis, and revise your future filings if necessary, of the components you have identified under this agreement that would fall under ASC 808 Collaborative Arrangements and the components under ASC 606 Revenue from Contracts with Customers. In your analysis, tell us how you have considered the unit of account guidance under ASC 808-10-15-5B.