Merck 2014 Annual Report Download - page 184

179CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
(5) JOINT ARRANGEMENTS
OF MATERIAL SIGNIFICANCE
Strategic alliance with Pfizer Inc., USA, to co-develop and
co-commercialize active ingredients in immuno-oncology
On November 17, 2014 the Group announced that it had entered
into a global strategic alliance with Pfizer Inc., USA, (Pfizer) to
develop and commercialize the anti- PD-L1 antibody avelumab
(also known as MSB0010718C). This antibody is currently in clin-
ical development by the Biopharmaceuticals division in a Phase I
trial as a potential treatment for various tumor types. A Phase II
study in patients with Merkel cell carcinoma was initiated in July
2014. The compound will be developed as a single agent as well as
in various combinations with Pfizer’s and the Group's broad port-
folio of approved and investigational pipeline candidates. As part
of the strategic alliance, the two companies will also combine re-
sources and expertise to advance Pfizer’s anti-PD-1 antibody into
Phase I trials with the potential to co-develop and co- commercialize
this asset in the future. The overriding objective of the strategic
alliance is to share the risks of development and to accelerate the
two companies’ presence in immuno-oncology.
According to the collaboration agreement, during the develop-
ment period the two partners will equally share the development
expenses. In a potentially later commercialization phase, the
Group will recognize the vast majority of sales from the anti-
PD-L1 antibody while the net result of the sales and certain
defined expense components will be shared equally among Pfizer
and the Group.
The implementation of the collaboration agreement will not
be structured through a separate vehicle. This means that the assets,
and obligations for the liabilities attributable to the contractual
arrangement are owned by the two contracting companies.
Decisions about the relevant activities require unanimous consent
in accordance with the collaboration agreement. Therefore, the
accounting rules governing joint operations pursuant to IFRS 11
are applied and the Group records the assets, liabilities, revenues
and expenses attributable to the collaboration in accordance with
the respectively valid IFRS.
Under the terms of the agreement, Pfizer made an upfront
cash payment of US$850 million (€678.3 million) to the Group
after the closing. Pfizer also committed to make development and
commercial milestone payments of up to US$2 billion to the Group.
Based on the collaboration agreement, the Group and Pfizer will
also co-promote Xalkori® (crizotinib), a drug for the treatment of
non small cell lung cancer in the United States and certain other
major markets, over a multi-year period. During co-promotion of
the product, the Group will receive from Pfizer cost reimburse-
ments and a share of the profits. The fair value of the right was
determined by an independent external appraiser by applying the
multi-period excess earnings method (MEEM) and amounts to
US$369 million (€294.4 million). The entitlement to the right was
capitalized on the date it was granted and will be amortized over
the term of the agreement.
On the date of the closing of the collaboration agreement,
both the upfront payment received and the value of the right to
co-promote Xalkori® were recognized in the balance sheet as
deferred income within other liabilities. Both amounts will be
recognized as income over the expected period in which the Group
is to meet certain obligations during the development phase and
will be disclosed under royalty, license and commission income.
More information on the exercise of management judgments and
estimation uncertainties can be found in Note [7].
Apart from the aforementioned accounting impact, the agree-
ment had no material effect on the net assets, financial position
and results of operations in the reporting period.
Agreement with Threshold Pharmaceuticals Inc., USA, to
co-develop and commercialize evofosfamide
In February 2012, the Biopharmaceuticals division entered into
a global agreement with Threshold Pharmaceuticals, Inc., USA,
(Threshold) to co- develop and commercialize evofosfamide (also
known as TH-302), a chemical molecule for use in oncology. Evo-
fosfamide is currently being investigated in two Phase III clinical
trials in patients with advanced unresectable or metastatic soft
issue sarcoma and advanced pancreatic cancer.
Under the terms of the agreement, the Group received co-
development rights as well as exclusive global commercialization
rights. Threshold has an option to co-commercialize the compound
in the United States. In fiscal 2012, the Group made an upfront
payment in the amount of €18.7 million and since then has made
additional milestone payments for development activities in the
amount of € 64.0 million.
The Group bears 70 % of worldwide
development costs for evofosfamide. The assets, liabilities, income
and expenses in connection with the agreement are recognized by
the Group in accordance with the relevant IFRSs.