On January 18, 2021, Eli Lilly and Company (“Lilly”) agreed to pay the Company a $40.0 million, non-refundable upfront payment, and purchased 706,834 common shares at a stated price per share of $28.295, for an aggregate purchase price of $20.0 million. The Company and Lilly agreed to collaborate with respect to the discovery and research of bispecific antibodies utilizing the Company’s proprietary Biclonics® bispecific technology platform. The collaboration encompasses up to three (3) independent programs directed to the generation of T-cell re-directing bispecific antibodies that bind CD3 and a tumor associated antigen target selected by Lilly to be the subject of each program.

The objective of each program is to develop a lead compound that Lilly would be able to continue to develop through clinical trials. Lilly agreed to fund the research activities the Company conducts for each program under an agreed research plan and budget. Lilly receives an exclusive, worldwide, royalty-bearing, sublicensable license, under certain patent rights and know-how to exploit certain compounds and products directed to designated targets in combination with targeting CD3, or directed to such designated target(s) alone as a monospecific antibody or monospecific antibody drug conjugate, subject to rights granted by Merus to third parties under one or more existing third party agreements. Merus retains all rights not granted to Lilly. Lilly has certain rights to replace selected targets, including the right to substitute a target selection after initial selection for a period of time. The Company may be entitled to further milestones and royalties in the future dependent on development and commercialization of any resulting product.

The initial term of the arrangement includes a three-year research term for the Company to perform research and development activities, subject to two extension terms of six months at Lilly’s discretion. While the arrangement may be terminated in its entirety or on a program-by-program basis at will by Lilly, there are no direct costs or penalties to Lilly to terminate the arrangement prior to the end of the initial term.

At inception of the arrangement, the Company identified a single performance obligation comprised of a combined delivery of a license and related activities, including research activities associated with a product candidate against the first target and the activities of the joint steering committee. The Company also identified two other combined performance obligations relating to options exercisable by Lilly to select a second and third target to advance a second and third product candidate against the selected targets through discovery and research.

The transaction price at inception was comprised of fixed consideration of $43.5 million that was derived from the $40.0 million upfront payment and $20.0 million share purchase proceeds, net of the fair value of shares of the shares delivered to Lilly of $16.5 million, and variable consideration associated with the funding of research services for the product candidate against the first target at inception. All other consideration under the arrangement was determined to be variable consideration and fully constrained at inception.

The fixed consideration was allocated equally amongst the three performance obligations and the variable consideration associated with each target was allocated to the performance obligation of each respective target. The equal allocation of the fixed consideration was based on the estimated standalone selling price of each performance obligation as each was materially the same.

On February 12, 2021, the Company and Lilly completed the initial exchange of fixed consideration and transfer of common shares. The Company initially deferred $43.5 million allocated to the performance obligations to be recognized as revenue over time using a cost-to-cost measure of progress toward the development of a lead compound for each respective target, anticipated to be recognized as revenue within the initial research term, along with research funding. Development milestones, commercialization milestones and royalties are variable consideration, fully constrained, to be included in the transaction price for each performance obligation and recognized in future periods in accordance with the Company’s revenue recognition policy. The revenue recognized relating to each combined performance obligation is presented in the notes according to the source of consideration received (upfront, reimbursement revenue, milestone), reflective of their differing timing of receipt.

During the year ended December 31, 2022, Lilly substituted one of the target programs. The program timeline is expected to extend beyond the original research term. Under the current research plan, for the program to be completed in collaboration with Merus, Lilly would be required to extend the research term to 2025, subject to its discretion. Lilly exercised the first six month extension in October 2023. The program timeline is expected to extend beyond this first extension, and such an extension into 2025 would result in a fee of $0.5 million. As a result of the program substitution in 2022, the Company increased the transaction price for one of the programs by $0.5 million during the year ended December 31, 2022.

As of September 30, 2023, research activities were on-going, and no milestones have been achieved.

On January 23, 2017, the Company completed the sale of shares and exchange of a license with Incyte Corporation (“Incyte”). The Company initially deferred $152.6 million of the transaction price allocated to the license and related performance obligation as deferred revenue, to be recognized as revenue over time as the primary benefit of the license to Incyte is access to the Company’s intellectual property covering its Biclonics® technology platform for the generation of potential product candidates. Development milestones, commercialization milestones and royalties are variable consideration, fully constrained, to be recognized in future periods in accordance with the Company’s revenue recognition policy. Cost reimbursements for research services are recognized as they are performed over time as these are considered a separate performance obligation.

In January 2022, the Company announced that Incyte elected to opt-out of its ex-U.S. development of MCLA-145, from the parties joint collaboration agreement executed in 2017. At inception of the collaboration, for the designated product candidate (MCLA-145), the Company retained the exclusive right to develop and commercialize products and product candidates in the United States, while Incyte obtained the exclusive right to develop and commercialize products and product candidates arising from such program outside the United States. For MCLA-145, the parties conducted and shared equally the costs of mutually agreed global development activities. Incyte’s opt-out of ex-U.S. rights to MCLA-145 provides the Company the exclusive right to develop and commercialize potential MCLA-145 products globally. Under the collaboration, Incyte continued to support the program for a limited time while ex-U.S. activities transitioned to the Company. Incyte will retain a right to a residual royalty of up to 4% on sales of future commercialization of MCLA-145, if approved.

During the three months ended September 30, 2023, the Company recognized a $2.5 million milestone from Incyte related to the initiation of a Phase 1 study with respect to a novel target pair program and a $1.0 million milestone from Incyte related to candidate nomination. During the nine months ended September 30, 2023, the Company has recognized $6.0 million in milestones from Incyte.

In April 2014, the Company granted Ono Pharmaceutical Co., Ltd. (“Ono”) an exclusive, worldwide, royalty-bearing license, with the right to sublicense, research, test, make, use and market a limited number of bispecific antibody candidates based on the Company’s Biclonics® technology platform against two undisclosed targets directed to a particular undisclosed target combination.

On March 14, 2018, the Company granted Ono an exclusive, worldwide, royalty-bearing license, with the right to sublicense, research, test, make, use and market a limited number of bispecific antibody candidates based on the Company’s Biclonics® technology platform against two undisclosed targets directed to a particular undisclosed target combination. Ono agreed to pay the Company an upfront, non-refundable payment of €0.7 million. In addition, the Company was entitled to €0.3 million intended to compensate the Company for research services already completed upon entering into the agreement, and €0.2 million to be paid to the Company over time for full-time equivalent funding. The Company is entitled to research and development milestones in addition to potential royalties on future sales of any bispecific antibody candidate that may be approved. The Company identified performance obligations for: (1) provision of a license for the target combination, and (2) research and development services. The Company concluded that Ono would be able to develop and benefit from the license, independent of the research and development services. Certain of the research and development services are capable of being performed by third parties with an appropriate sub-license, and are recognized over time as these services are delivered. Milestone payments are fully constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue recognition policy.

Amounts related to the provision of the licenses were amortized over the intended period of use. There were no development or commercialization milestones achieved during the three months or nine months ended September 30, 2023.

In January 2018, the Company granted Simcere Pharmaceuticals Group (“Simcere”) an exclusive license to develop and commercialize up to three bispecific antibodies in China to be produced by Merus utilizing the Company’s Biclonics® technology platform (the “Simcere Agreement”). The Company received an upfront, non-refundable payment of $2.75 million, relating to three separate research programs.

At inception of the arrangement, the Company identified three performance obligations comprised of the combined delivery of a license and performance of research and development activities with respect to each program. The Company performed research and development activities to achieve candidate nomination. The Company concluded that these activities were not distinct from the underlying license for each program as Simcere would not be able to benefit from the license apart from research and development activities at this phase of development.

The transaction price under the arrangement comprised fixed consideration of $2.75 million. The transaction price was allocated to each separate performance obligation on a relative standalone fair value basis. The Company deferred the portion of the upfront payment allocated to the three performance obligations as deferred revenue, to be recognized over time. Compensation for research and development services prior to candidate nomination are allocated to each program performance obligation and also recognized over time. Development milestone payments allocated to each of the program performance obligations are constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue recognition policy.

The Company has achieved three milestones under this agreement and has received an aggregate of $1.8 million in milestone payments. In January 2022, the Company and Simcere terminated the Simcere Agreement, effective March 30, 2022.

The following tables provide amounts by year indicated and by line item included in the Company's accompanying condensed consolidated financial statements attributable to transactions arising from its collaboration arrangements. The dollar amounts in the tables below are in thousands.


	Incyte			Lilly			Other			Total
CONTRACT ASSETS
Accounts receivable
Balance at January 1, 2023	$	—		$	—		$	1,068		$	1,068
Billings		10,779			3,497			68			14,344
Cash receipts		(9,779	)		(3,497	)		(1,142	)		(14,418	)
Adjustments		—			—			—			—
Foreign exchange		—			—			6			6
Balance at September 30, 2023	$	1,000		$	—		$	—		$	1,000

Unbilled receivables
Balance at January 1, 2023	$	1,987		$	808		$	189		$	2,984
Accrued receivables		10,152			3,541			—			13,693
Billings		(10,779	)		(3,497	)		—			(14,276	)
Adjustments		44			(7	)		—			37
Foreign exchange		—			—			(4	)		(4	)
Balance at September 30, 2023	$	1,404		$	845		$	185		$	2,434

CONTRACT LIABILITIES
Deferred revenue
Balance at January 1, 2023	$	52,059		$	16,130		$	—		$	68,189
Additions to contract consideration		—			—			—			—
Revenue recognized in the period		(12,912	)		(8,270	)		—			(21,182	)
Foreign exchange		(68	)		54			—			(14	)
Balance at September 30, 2023		39,079			7,914			—			46,993
Less: current portion		(16,882	)		(6,137	)		—			(23,019	)
Non-current balance at September 30, 2023	$	22,197		$	1,777		$	—		$	23,974

The balance of unbilled receivables predominantly represents reimbursement revenue under the Company’s collaboration arrangements earned in the period to be billed and collected in the next period, generally quarterly.

Contract Revenues and Expenses


	Three Months Ended September 30, 2023
	(In thousands)
	Third Party
	Incyte		Lilly			Other		Total
Upfront payments	$	4,371	$	789		$	—	$	5,160
Reimbursement revenue		1,547		847			—		2,394
Milestones		3,479		—			—		3,479
Other		—		—			—		—
Total collaboration revenue	$	9,397	$	1,636		$	—	$	11,033
Operating expenses:
Research and development expense	$	—	$	—		$	—	$	—
General and administrative expense		—		—			—		—
Total operating expenses from collaborations	$	—	$	—		$	—	$	—
Revenue recognized that was included in deferred revenue at the beginning of the period	$	4,371	$	789		$	—	$	5,160

	Three Months Ended September 30, 2022
	(In thousands)
	Third Party
	Incyte		Lilly			Other		Total
Upfront payments	$	4,045	$	(551	)	$	—	$	3,494
Reimbursement revenue		2,300		787			—		3,087
Milestones		—		—			—		—
Other		—		—			—		—
Total collaboration revenue	$	6,345	$	236		$	—	$	6,581
Operating expenses:
Research and development expense	$	162	$	—		$	—	$	162
General and administrative expense		—		—			—		—
Total operating expenses from collaborations	$	162	$	—		$	—	$	162
Revenue recognized that was included in deferred revenue at the beginning of the period	$	4,045	$	(551	)	$	—	$	3,494


	Nine Months Ended September 30, 2023
	(In thousands)
	Third Party
	Incyte		Lilly		Other		Total
Upfront payments	$	12,912	$	8,270	$	—	$	21,182
Reimbursement revenue		4,248		3,543		—		7,791
Milestones		5,980		—		—		5,980
Other		—		—		55		55
Total collaboration revenue	$	23,140	$	11,813	$	55	$	35,008
Operating expenses:
Research and development expense	$	24	$	—	$	—	$	24
General and administrative expense		—		—		—		—
Total operating expenses from collaborations	$	24	$	—	$	—	$	24
Revenue recognized that was included in deferred revenue at the beginning of the period	$	12,912	$	8,270	$	—	$	21,182

	Nine Months Ended September 30, 2022
	(In thousands)
	Third Party
	Incyte		Lilly		Other		Total
Upfront payments	$	12,677	$	7,634	$	222	$	20,533
Reimbursement revenue		6,514		2,823		—		9,337
Milestones		1,000		—		—		1,000
Other		—		—		50		50
Total collaboration revenue	$	20,191	$	10,457	$	272	$	30,920
Operating expenses:
Research and development expense	$	712	$	—	$	—	$	712
General and administrative expense		—		—		—		—
Total operating expenses from collaborations	$	712	$	—	$	—	$	712
Revenue recognized that was included in deferred revenue at the beginning of the period	$	12,677	$	7,634	$	222	$	20,533