3. Revenues

General

Pieris has not generated revenues from product sales to date. Pieris has generated revenues from: (i) license and collaboration agreements, which include upfront payments for licenses or options to obtain licenses, payments for research and development services and milestone payments and (ii) government grants.

F.Hoffmann-La Roche Ltd. and Hoffmann- La Roche Inc.

In December 2015, the Company entered into a Research Collaboration and License Agreement (the “Roche Agreement”) with F.Hoffmann- La Roche Ltd. and Hoffmann- La Roche Inc., (“Roche”), for the research, development, and commercialization of Anticalin^®-based drug candidates against a predefined, undisclosed target in cancer immune therapy. The parties will jointly pursue a preclinical research program with respect to the identification and generation of Anticalin proteins that bind to a specific target for an initial period of 20 months, which may be extended by Roche for up to an additional 12 months. Roche has the ability to continue certain exclusivity rights for up to an additional 5 years following the end of the research program. Both Roche and the Company will participate in a joint research committee in connection with this agreement. Following the research program, Roche will be responsible for subsequent pre-clinical and clinical development of any product developed through the research plan and will have worldwide commercialization rights to any such product.

Roche has paid $6.5 million of an upfront payment for the research collaboration. Additionally, Roche will pay Pieris for research services provided by Pieris in conjunction with the research program. Roche will also pay Pieris for certain milestones relating to development, regulatory, and sales milestones as they are achieved. As of March 31, 2017 and March 31, 2016, deferred revenue, related to Roche collaboration, is $3.1 million and $6.0 million, respectively.

Pieris recorded $1.0 million and $1.2 million in revenue for the three months ended March 31, 2017 and March 31, 2016, respectively, related to the recognition of the upfront payment associated with the portion of the research services performed during the period as well as the value of research services provided by Pieris in connection with the ongoing research program.

 

The Company identified the research and commercial licenses, performance of R&D services, and participation in the joint research committee as deliverables under the Roche Agreement. For revenue recognition purposes, management has determined that there are two units of accounting at the inception of the agreement representing (i) the research and commercial licenses and the performance of R&D services which do not have standalone value, and (ii) the participation in the joint research committee.

In addition to the upfront payment, under the Roche Agreement, the Company is eligible to receive research funding, development and regulatory, and sales based milestone payments up to approximately $406.5 million, plus royalties on future sales of any commercial products. The total potential milestones are categorized as follows: development and regulatory milestones—$282.7 million; and sales milestones—$119.9 million. Management has determined that the development milestones are not substantive because they do not relate solely to past performance of the Company and the Company’s involvement in the achievement is limited to progress reports and other updates. Non-substantive milestones will be recognized when achieved to the extent the Company has no remaining performance obligations under the arrangement.

Les Laboratoires Servier and Institut de Recherches Internationales Servier

On January 4, 2017, Pieris entered into a License and Collaboration Agreement (“Collaboration Agreement”), and Non-Exclusive Anticalin Platform Technology Agreement (the “License Agreement” and together with the Collaboration Agreement, the “Agreements”) with Les Laboratoires Servier and Institut de Recherches Internationales Servier (collectively “Servier”) pursuant to which Pieris and Servier will initially pursue five bispecific therapeutic programs, led by the PRS-332 program (the “Lead Product”), a PD-1-targeting bispecific checkpoint inhibitor. Pieris and Servier will jointly develop PRS-332 and split commercial rights geographically, with Pieris retaining all commercial rights in the United States and Servier having commercial rights in the rest of the world. Each party is responsible for an agreed upon percentage of shared costs, as set forth in the budget for the joint development plan, and as further discussed below.

Four additional committed programs have been defined, which may combine antibodies from the Servier portfolio with one or more Anticalin proteins based on Pieris’ proprietary platform to generate innovative immuno-oncology bispecific drug candidates. The collaboration may be expanded by up to three additional therapeutic programs. Pieris has the option to co-develop and retain commercial rights in the United States for up to three programs beyond PRS-332 (“Co-Development Collaboration Products”), while Servier will be responsible for development and commercialization of the other programs worldwide (“Servier Worldwide Collaboration Products”). Each party is responsible for an agreed upon percentage of shared costs, as set forth in the budget for the collaboration plan, and further discussed below.

Co-Development Collaboration Products may be jointly developed, according to a collaboration plan, through marketing approval from the FDA or EMA. Servier Worldwide Collaboration Products may be jointly developed, according to a collaboration plan, through specified preclinical activities, at which point Servier becomes responsible for the further development of the collaboration product.

At inception, Servier is granted the following licenses: (i) development license for the Lead Product, (ii) commercial license for the Lead Product, (iii) individual research licenses for each of the four collaboration programs, and (iv) individual non-exclusive platform technology licenses for each of the Lead Product and four collaboration programs. Upon achievement of certain development activities, specified by the collaboration for each Collaboration Product, Servier will be granted a development license and a commercial license. For the Lead Product and Co-Development Collaboration Products, the licenses granted are with respect to the entire world except for the United States. For Servier Worldwide Collaboration Products, the licenses granted are with respect to the entire world.

The Agreements will be managed on an overall basis by a joint executive committee (“JEC”) formed by an equal number of members from the Company and Servier. Decisions by the JEC will be made by consensus, however, in the event of a disagreement, each party will have final-decision making authority as it relates to the applicable territory in which such party has commercialization rights for the applicable product. In addition to the JEC, the Collaboration Agreement, also requires the participation of both parties on: (i) a joint steering committee (“JSC”), (ii) a joint development committee (“JDC”), (iii) a joint intellectual property committee (“JIPC”), and (iv) a joint research committee (“JRC”). The responsibilities of these committees vary, depending on the stage of development and commercialization of each of the Lead Product and collaboration programs.

For the Lead Product and Co-Development Collaboration Products, Pieris and Servier are responsible for an undisclosed amount of the shared costs required to develop the products through commercialization. In the event that Pieris fails to exercise their option to co-develop the Co-Development Collaboration Products, and Servier has the right to continue with development alone.

 

Under the Agreements, the Company received an upfront, non-refundable payment of €30.0 million (approximately $32.0 million). In addition, the Company is eligible to receive development and regulatory and sales-based milestone payments. The total potential milestones are categorized as follows: development and regulatory milestones – up to €569.0 million; and sales milestones – up to €515.0 million. The initial research collaboration term, as it relates to the collaboration programs, shall continue for three years from the effective date, and may be mutually extended for two one-year terms consecutively applied. The term of the Agreements ends upon the expiration of all Servier’s payment obligations under such Agreement.

The Company accounted for the Agreements, as a multiple element arrangement under ASC 605-25. The arrangement with Servier contains the following initial deliverables: (i) five non-exclusive platform technology licenses, (ii) development license for the Lead Product, (iii) commercial license for the Lead Product, (iv) research and development services for the Lead Product, (v) participation on each of the committees, (vi) four research licenses for collaboration programs, and (vii) research and development services for the collaboration programs. Additionally, as the development and commercial licenses on the collaboration programs may be granted at discount in the future, the Company determined that discounts should be included as an element of the arrangement at inception.

Management considered whether any of the deliverables could be considered separate units of accounting. The Company determined that the licenses granted at the inception of the arrangement did not have standalone value from the research and development services to be provided for the Lead Product and collaboration programs, over the term of the Agreements, due to the specific nature of the intellectual property and knowledge required to perform the services. The Company determined that the participation on the various committees did have standalone value as the services could be performed by an outside party.

As a result, management concluded that there were fourteen units of accounting at the inception of the agreement: (i) combined unit of accounting representing a non-exclusive platform technology license, commercial license, development license and research and development services for the Lead Product, (ii) four units of accounting each representing a combined non-exclusive platform technology license, research license, and research and development services for each collaboration program, (iii) one unit of accounting representing the participation of the various governance committees, and (iv) four units of accounting representing the discounts on the development and commercial licenses granted for the collaboration programs upon the achievement of specified preclinical activities.

The Company determined that neither VSOE nor TPE is available for any of the units of accounting identified at the inception of the arrangement. Accordingly, the selling price of each unit of accounting was developed using management’s BESP. The Company developed their best estimate of selling price for licenses by applying a risk adjusted, net present value, of estimate of future potential cash flow approach, which included the cost of obtaining research and development services at arm’s length from a third-party provider, as well as internal full time equivalent costs to support these services.

The Company developed the BESP for committee participation by using management’s best estimate of the anticipated participation hours multiplied by a market rate for comparable participants.

 

The Company developed the best estimate of selling price for the discounts granted on the licenses by probability weighting multiple cash flow scenarios using the income approach.

Allocable arrangement consideration at inception is comprised of the upfront fee of €30.0 million (approximately $32.0 million) and was allocated among the separate units of accounting using the relative selling price method as follows (i) combined unit of accounting for the Lead Product: (ii) four units of accounting for the collaboration programs, (iii) one unit of accounting representing participation in each of the committees, and (iv) four units of accounting representing the discount on development and commercial licenses granted in the future.

The amounts allocated to the combined unit of accounting for the Lead Product and four units of accounting for the collaboration programs will be recognized on a proportional performance basis as the activities are conducted over the life of the arrangement. The term of the performance at inception of the agreement for the Lead Product and each of the co-developed collaboration programs may be through approval of certain regulatory bodies; a period which could be many years. The term of the performance at inception of the agreement for each of the other collaboration programs for which Servier obtained world-wide rights is approximately two to three years. The amounts allocated to the participation on each of the committees will be recognized ratably over the anticipated performance period over the entirety of the arrangement with Servier. The amounts allocated to the discounts of the development and commercial licenses granted in the future will be recognized upon delivery of each of the licenses assuming no other performance obligations.

Additionally, the Company evaluated payments required to be made between both parties as a result of the shared development costs of the Lead Product and Co-Development Collaboration Products. The Company will classify payments made as research and development expenses and will classify payments received as a reduction in research and development expenses, in the period they are incurred.

Under the agreement the Company is eligible to receive various development and regulatory and sales milestones. Management determined that certain of the development and regulatory milestones which may be received under the Servier Agreements are substantive when the Company is involved in the development and commercialization of the applicable product. Payments related to the achievement of such milestones, if any, will be recognized as revenue when the milestone is achieved. Total potential substantive development and regulatory milestones are up to €163.0 million. Development and regulatory milestones are deemed non-substantive if they are based solely on the performance of another party. Non-substantive milestones will be treated as contingent revenue and will be recognized when achieved to the extent the Company has no remaining performance obligations under the arrangement. Milestone payments earned upon the achievement of sales events will be recognized when earned. Total potential non-substantive development and regulatory milestones are up to €406.0 million and sales milestones are up to €515.0 million.

The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.

Pieris recorded $0.3 million in revenue for the three months ended March 31, 2017, with respect to the Agreements with Servier. Research and development expense incurred by the Company in relation to its performance under the agreement for the three months ended March, 31, 2017 was $0.5 million. As of March 31, 2017, there is $2.9 million and $28.9 million of deferred revenue and non-current deferred revenue, respectively, related to the Company’s collaboration with Servier.

ASKA Pharmaceutical Co. Ltd.

On February 27, 2017 the Company entered into an Exclusive Option Agreement (the “Agreement”) with ASKA Pharmaceutical Co., Ltd. (“ASKA”) to grant ASKA an option to acquire (1) a non-exclusive license to certain intellectual property rights associated with the Pieris’ Anticalin platform (“Licensed Platform IP”) and (2) an exclusive license to certain intellectual property rights specifically related to Pieris’ PRS-080 Anticalin protein (“Licensed Product IP”) in order to develop, manufacture, import, sale, export, and offer for sale and export any pharmaceutical formulation containing PRS-080, the Company’s pegylated Anticalin protein targeting hepcidin (“Licensed Product”) in Japan and certain other Asian territories (“Licensed Territory”).

ASKA has paid $2.75 million of an upfront option payment. Pieris is obliged to use commercially reasonable efforts to complete the Phase 2a Study for PRS-080 and to submit to ASKA in writing the final results of the study when available. Upon receipt, ASKA will have 60 days to evaluate the results of the Phase 2a Study (“Evaluation Period”). ASKA agreed to notify Pieris in writing its decision to exercise its option to acquire rights to the Licensed Product. In consideration of the licenses granted as part of the Agreement, ASKA will pay an undisclosed license fee. If the Phase 2a Study meets the applicable success criteria and ASKA fails to provide notification that it will exercise its option, ASKA shall pay the Company an undisclosed fee within thirty days of the end of the Evaluation Period (the “Break-Up Fee”). If ASKA exercises the option, ASKA and the Company will enter into a definitive arrangement governing the future development and commercialization activities.

Pieris has an obligation to use all reasonable commercial efforts to complete the Phase 2a Study for the Licensed Product and to submit to ASKA in writing the final results of said study. Failure to do so would result in a significant contractual penalty. The completed Phase 2a Study represents a deliverable under the arrangement. As the arrangement only contains one deliverable, there is only one unit of accounting to be considered at the inception of the contract. The total allocable arrangement consideration at inception is $2.75 million and this is allocated to the single unit of accounting. The Company noted that while the completion of the Phase 2a trial requires the completion of a number of actions, the finalization of the data and evaluation of results is of such significance that the value of the Phase 2a Study Results is realized at this point. As a result, the Company will recognize revenue for this unit of accounting upon delivery of the Phase 2a Study Results to ASKA. Therefore, no revenue in connection with this arrangement was recognized in the three months ended March 31, 2017. As of March 31, 2017, there is $2.75 million of non-current deferred revenue related to the Company’s option agreement with ASKA.