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Collaboration agreements | 9 Months Ended
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Sep. 30, 2022
Collaboration agreements |
Collaboration agreements | Collaboration agreements GlaxoSmithKline Intellectual Property (No. 4) Limited On August 6, 2022, the Company entered into a Collaboration, Option and License Agreement (the "GSK Agreement") with GlaxoSmithKline Intellectual Property (No. 4) Limited ("GSK"), pursuant to which the Company granted GSK an exclusive option to obtain an exclusive license (the “Option”) to co-develop and to commercialize products containing XMT-2056 (the "Licensed Products"), exercisable within a specified time period (the “Option Period”) after the Company delivers to GSK data resulting from completion of dose escalation with enrichment for breast cancer patients in a Phase 1 single-agent clinical trial of XMT-2056. GSK’s exercise of the Option may require clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Clearance” and GSK’s exercise of the Option following any applicable HSR Clearance, the “GSK Option Exercise”). Prior to the GSK Option Exercise, the Company will lead and will be responsible for the costs of manufacturing, research, and early clinical development related to its XMT-2056 program. After the GSK Option Exercise, if any, GSK may elect to manufacture XMT-2056, and GSK and the Company will co-develop XMT-2056 aimed at the approval of Licensed Product(s) in the United States and the European Union, with GSK being responsible for the majority of the development costs. GSK will be responsible for all development costs aimed solely at gaining approval outside the United States and European Union. Pursuant to the GSK Agreement, following the GSK Option Exercise and subject to certain exceptions and specified payment obligations, the Company’s aggregate shared development costs are capped at a fixed amount, with any amounts in excess to be borne by GSK unless and until the Company exercises its option to receive (or bear) a specified share of U.S. profits (or losses) for any Licensed Products (“Profit Share Election”). The excess development costs will accrue interest as specified in the GSK Agreement and will later either be repaid by the Company or offset against future regulatory and sales milestones or royalty payments that may become due to the Company. If the Company exercises its Profit Share Election, the cap on the Company’s share of development costs shall no longer apply, and the Company must pay any then-outstanding excess plus accrued interest costs. Additionally, if the Company exercises its Profit Share Election, it may also simultaneously elect to co-promote any Licensed Products in the United States. Pursuant to the GSK Agreement, GSK paid the Company a non-refundable, upfront fee of $100.0 million in August 2022. Following the GSK Option Exercise, if any, GSK is obligated to pay the Company an option exercise payment of $90.0 million (the "Option Payment"). The Company is eligible to receive future development, regulatory, and commercial milestone payments up to approximately $1.3 billion and, if the Company does not exercise its Profit Share Election, tiered royalties up to the mid-twenty percent range based on global sales of Licensed Products. Included in the aggregate milestone payments amount is $30 million that the Company is eligible to earn upon the satisfaction of early clinical development milestones that may occur prior to the GSK Option Exercise. If the Company exercises its Profit Share Election, the Company will be eligible to receive reduced development, regulatory, and commercial milestone payments and reduced royalty rates on sales outside of the United States. Whether or not the Company exercises its Profit Share Election, GSK will be responsible for certain milestone payments or royalties due to specified third parties with which the Company currently has agreements that relate to the XMT-2056 program. The GSK Agreement will terminate at the end of the Option Period if GSK does not exercise its Option. In the event of the GSK Option Exercise, unless earlier terminated, the GSK Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all Licensed Products in all countries have expired. Accounting Analysis The Company assessed the GSK Agreement in accordance with ASC 606, Revenue from Contracts with Customers, and concluded that the contract counterparty, GSK, is a customer. The Company identified the following two material performance obligations under the GSK Agreement: (i) development activities, including manufacturing, research and early clinical development activities, necessary to deliver the package of data, information and materials specified in the GSK agreement (the "Development Activities") and (ii) the Option to co-develop and to commercialize Licensed Products (the "License Option"). The Company concluded that the Development Activities are one distinct performance obligation, as the underlying activities are not distinguishable in the context of the contract and are inputs to an integrated development program that will generate data and information providing value to GSK in determining whether to exercise the Option. The License Option is considered a material right as the value of the license exceeds the Option Payment, and is therefore a distinct performance obligation. In accordance with ASC 606, the Company determined that the initial transaction price under the GSK Agreement equals $100.0 million, consisting of the upfront, non-refundable and non-creditable payment paid by GSK. None of the early clinical development milestones that may occur prior to the GSK Option Exercise have been included in the initial transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including stage of development and the remaining risks associated with the development required to achieve the milestones, as well as whether the achievement of the milestones is outside the control of the Company or GSK. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement and any related constraint and, if necessary, adjust its estimate of the overall transaction price. Any such adjustments will be recorded on a cumulative catch-up basis, which would affect the reported amount of revenues in the period of adjustment. The GSK Option payment is excluded from the initial transaction price at contract inception along with any future development, regulatory, and commercial milestone payments (including royalties) following the GSK Option Exercise. Consistent with the allocation objective under ASC 606, the Company allocated the $100.0 million fixed upfront payment in the transaction price to the Development Activities and the License Option based on each performance obligation’s relative standalone selling price. The standalone selling price for the Development Activities was calculated using a cost-plus margin approach for the estimated pre-option development timeline. For the standalone selling price of the License Option, the Company utilized an income-based approach which included the following key assumptions: post-option development timeline and costs, revenue forecast, discount rates and probabilities of technical and regulatory success. The Company is recognizing revenue related to the Development Activities performance obligation over the estimated period of the pre-option development using a proportional performance model as the underlying activities are performed. Th e C ompany measures proportional performance based on the costs incurred relative to the total costs expected to be incurred. The Company will defer revenue recognition related to the License Option. If the License Option is exercised and GSK obtains an exclusive license, the Company will recognize revenue as it fulfills its obligations under the GSK Agreement. If the Option is not exercised, the Company will recognize the entirety of the revenue in the period when the Option expires. During the three and nine months ended September 30, 2022, the Company recorded collaboration revenue of $0.7 million related to its efforts under the GSK Agreement. As of September 30, 2022, the Company had recorded $99.3 million in deferred revenue related to the unsatisfied performance obligations under the GSK Agreement. This deferred revenue will be recognized over the remaining performance period and classified as current or noncurrent on the consolidated balance sheets. Summary of Contract Assets and Liabilities The Company did not record any contract assets as of September 30, 2022 related to the GSK Agreement. The following table presents changes in the balances of the Company's contract liabilities related to the GSK Agreement during the nine months ended September 30, 2022:
(in thousands) | Balance at Beginning of Period |  | Additions |  | Deductions |  | Balance at End of Period
Nine months ended September 30, 2022 |  |  |  |  |  |  |
Contract liabilities: |  |  |  |  |  |  |
Deferred revenue | $ | — |  |  | $ | 100,000 |  |  | $ | 655 |  |  | $ | 99,345 |
During the three and nine months ended September 30, 2022, the Company recognized the following revenues related to the GSK Agreement as a result of changes in the contract liability balances in the respective periods:
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
(in thousands) | 2022 |  | 2022 |  |
Revenue recognized in the period from: |  |  |  |  |
Amounts included in the contract liability at the beginning of the period | $ | — |  |  | $ | — |  |  |
Performance obligations satisfied in previous periods | $ | — |  |  | $ | — |  |  |
Janssen Biotech Inc. In February 2022, the Company entered into a research collaboration and license agreement with Janssen Biotech Inc. ("Janssen" and such agreement, the "Janssen Agreement") focused on the research, development and commercialization of novel ADCs for three oncology targets by leveraging Mersana’s ADC expertise and Dolasynthen platform with Janssen’s proprietary antibodies. Upon execution of the Janssen Agreement, the Company received a non-refundable upfront payment of $40.0 million from Janssen. Pursuant to the Janssen Agreement, the Company granted Janssen two exclusive, non-transferrable, worldwide licenses - the Research License and the Commercialization License (together, the "Licenses"). The Research License provides Janssen, on a target-by-target basis, rights under the Company’s technology and the Company’s interest in the technology developed jointly through the collaboration solely to conduct Janssen’s activities under the research and Chemistry, Manufacturing and Controls ("CMC") plans with respect to each target. The Commercialization License is a royalty-bearing license granted on a target-by-target basis under the Company’s technology and the Company’s interest in the technology developed jointly through the collaboration to develop, manufacture, commercialize and otherwise exploit licensed ADCs and any licensed products containing licensed ADCs directed toward a target. Janssen may select up to three targets and may substitute each target once prior to a substitution deadline. Janssen is not required to pay a fee for its first substitution right, but must pay a one-time fee for access to the subsequent substitution rights following its exercise of its second substitution right. Pursuant to mutually agreed research and CMC plans, the Company will perform bioconjugation, production development, preclinical manufacturing, and certain related research and preclinical development activities, in order to progress the targets through investigational new drug application ("IND") submission for further development, manufacture and commercialization by Janssen. Janssen will have sole responsibility for IND-enabling studies, IND submission, clinical development, regulatory activities and commercialization of the licensed ADCs. Both the Company and Janssen will have equal representation on a Joint Research Committee and Joint Manufacturing Committee to oversee the research and CMC activities. The Company estimates that its activities under the research plans for the targets will be performed through 2024. The Company's CMC activities will be compensated by Janssen at agreed upon rates. Assuming successful development and commercialization of all three targets by Janssen, the Company could receive up to an additional $505 million in development and regulatory milestones and $530 million in sales milestones as well as tiered mid single-digit to low double-digit royalties on aggregate net sales of the ADC products. To date, the Company has not achieved any of the specified milestones. Unless earlier terminated, the Janssen Agreement will expire upon the expiration of the last royalty term for a product under the Janssen Agreement. The Janssen Agreement contains customary provisions for termination by either party, including in the event of breach of the Janssen Agreement, subject to cure, by Janssen for convenience and by Mersana upon a challenge of the licensed patents, and customary provisions regarding the effects of termination. Janssen may request that the Company perform clinical manufacturing services under a separate clinical supply agreement. Janssen may also request that the Company perform a technology transfer of bioconjugation and manufacturing process technology, at Janssen's cost, at an agreed upon rate. Accounting Analysis The Company assessed the Janssen Agreement in accordance with ASC 606 and concluded that the contract counter party, Janssen, is a customer. The Company identified the following seven material performance obligations under the Janssen Agreement: (i) exclusive Licenses and research activities for each of the three designated targets, (ii) CMC activities for each of the three designated targets and (iii) the first target substitution right. The Company concluded that the Licenses and research activities are one combined performance obligation for each target as the Licenses are not capable of being distinct from the research activities given their proprietary nature. The CMC activities are considered a distinct performance obligation for each target as the activities could be performed by a third-party provider. The first target substitution right is considered a material right as there is no option exercise fee and, as such, is a distinct performance obligation. In accordance with ASC 606, the Company determined that the initial transaction price under the Janssen Agreement equals $40.0 million, consisting of the upfront, non-refundable and non-creditable payment. None of the development and the regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including stage of development and the remaining risks associated with the development required to achieve the milestones, as well as whether the achievement of the milestones is outside the control of the Company or Janssen. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as such milestones were determined to relate predominantly to the license granted to Janssen and therefore have also been excluded from the transaction price. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint and, if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the reported amount of revenues in the period of adjustment. The Company determined that the consideration for CMC activities represents variable consideration. The Company has not included potential cost reimbursements within the transaction price as no CMC activities for any of the three targets have been initiated. The Company elected to apply the Right to Invoice practical expedient under ASC 606. As such, the Company will recognize revenue related to the CMC activities when the services are performed. Consistent with the allocation objective under ASC 606, the Company allocated the $40.0 million fixed upfront payment in the transaction price to the Licenses and research activities and first substitution right based on each performance obligation’s relative standalone selling price. Each of the standalone selling prices for the Licenses and research activities and for the first substitution right were estimated utilizing an income approach, along with the likelihood of exercise for the substitution right and included the following key assumptions: the development timeline, revenue forecast, discount rate and probabilities of technical and regulatory success. The Company is recognizing revenue related to the Licenses and research services performance obligation over the estimated period of the research services using a proportional performance model. The Company measures proportional performance based on the costs incurred relative to the total costs expected to be incurred. The Company will recognize revenue related to the first target substitution right over time in congruence with the Licenses and research activities, upon the exercise of the option. If the first target substitution option is not exercised, the Company will recognize the entirety of the revenue in the period when the option expires. During the three and nine months ended September 30, 2022, the Company recorded collaboration revenue of $4.9 million and $10.9 million, respectively, related to its efforts under the Janssen Agreement. As of September 30, 2022, the Company had recorded $29.1 million in deferred revenue related to the Janssen Agreement that will be recognized over the remaining performance period and classified as current or noncurrent on the consolidated balance sheets based upon the expected timing of satisfaction of respective performance obligations. The aggregate amount of the transaction price allocated to unsatisfied performance obligations was $29.1 million as of September 30, 2022, which is expected to be recognized over the period the associated research activities are performed for each target. Summary of Contract Assets and Liabilities The Company did not record any contract assets as of September 30, 2022 related to the Janssen Agreement. The following table presents changes in the balances of the Company's contract liabilities related to the Janssen Agreement during the nine months ended September 30, 2022:
(in thousands) | Balance at Beginning of Period |  | Additions |  | Deductions |  | Balance at End of Period
Nine months ended September 30, 2022 |  |  |  |  |  |  |
Contract liabilities: |  |  |  |  |  |  |
Deferred revenue | $ | — |  |  | $ | 40,000 |  |  | $ | 10,916 |  |  | $ | 29,084 |
During the three and nine months ended September 30, 2022, the Company recognized the following revenues related to the Janssen Agreement as a result of changes in the contract liability balances in the respective periods:
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
(in thousands) | 2022 |  | 2022 |  |
Revenue recognized in the period from: |  |  |  |  |
Amounts included in the contract liability at the beginning of the period | $ | 4,908 |  |  | $ | — |  |  |
Performance obligations satisfied in previous periods | $ | — |  |  | $ | — |  |  |
Merck KGaA In June 2014, the Company entered into a collaboration and commercial license agreement with Merck KGaA (the "Merck KGaA Agreement"). Upon the execution of the Merck KGaA Agreement, Merck KGaA paid the Company a non-refundable technology access fee of $12.0 million for the right to develop ADCs directed to six exclusive targets over a specified period of time. No additional fees are due when a target is designated and the commercial license to the target is granted. Merck KGaA will be responsible for the product development and marketing of any products resulting from this collaboration. Under the terms of the Merck KGaA Agreement, the Company and Merck KGaA develop research plans to evaluate Merck KGaA's antibodies as ADCs incorporating the Company's technology. The Company receives reimbursement for its efforts under the research plans. The goal of the research plans is to provide Merck KGaA with sufficient information to formally nominate a development candidate and begin IND-enabling studies. All six targets were designated prior to 2018. The next potential milestone payment that the Company is eligible to receive is a development milestone of $0.5 million on Merck KGaA’s designation of a preclinical development candidate for a target. Revenue will be recognized when achievement of the milestone is considered probable. In May 2018, the Company entered into a supply agreement with Merck KGaA (the "Merck KGaA Supply Agreement"). Under the terms of the Merck KGaA Supply Agreement, the Company will provide Merck KGaA preclinical non-good manufacturing practice ("non-GMP") ADC drug substance and clinical good manufacturing practice ("GMP") drug substance for use in clinical trials associated with one of the antibodies designated under the Merck KGaA Agreement. The Company receives fees for its efforts under the Merck KGaA Supply Agreement and reimbursement equal to the supply cost. The Company may also enter into future supply agreements to provide clinical supply material should Merck KGaA pursue clinical development of any other candidates nominated under the Merck KGaA Agreement. Accounting Analysis The Company concluded that Merck KGaA is a customer and accounted for the Merck KGaA Agreement in accordance with ASC 606. The Company identified the following performance obligations under the Merck KGaA Agreement: (i) exclusive license and research services for six designated targets, (ii) rights to future technological improvements and (iii) participation of project team leaders and providing joint research committee services. The Company is recognizing revenue related to the exclusive license and research and development services performance obligations over the estimated period of the research and development services using a proportional performance model. The Company measures proportional performance based on the costs incurred relative to the total costs expected to be incurred. To the extent that the Company receives fees for the research services as they are performed, these amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the respective performance period (which in the case of the joint research committee services approximate the time and cost incurred each period), which are 10 and 5 years, respectively. The Company is continuing to reassess the estimated remaining term at each subsequent reporting period. As of September 30, 2022, the Company had completed its research service obligations associated with four of the six designated targets. The Company did not recognize any corresponding research and development expense related to the Merck KGaA Supply Agreement during the three and nine months ended September 30, 2022 and 2021. As of September 30, 2022 and December 31, 2021, the Company had $3.9 million in deferred revenue related to the Merck KGaA Agreement and Merck KGaA Supply Agreement. Such amounts will be recognized over the remaining performance period. Summary of Contract Assets and Liabilities The Company did not record any contract assets as of September 30, 2022 and December 31, 2021. The following table presents changes in the balances of the Company's contract liabilities related to the Merck KGaA Agreement and Merck KGaA Supply Agreement during the nine months ended September 30, 2022 and 2021:
(in thousands) | Balance at Beginning of Period |  | Additions |  | Deductions |  | Balance at End of Period
Nine months ended September 30, 2022 |  |  |  |  |  |  |
Contract liabilities: |  |  |  |  |  |  |
Deferred revenue | $ | 3,944 |  |  | $ | — |  |  | $ | 32 |  |  | $ | 3,912 |
(in thousands) | Balance at Beginning of Period |  | Additions |  | Deductions |  | Balance at End of Period
Nine months ended September 30, 2021 |  |  |  |  |  |  |
Contract liabilities: |  |  |  |  |  |  |
Deferred revenue | $ | 3,987 |  |  | $ | — |  |  | $ | 32 |  |  | $ | 3,955 |
During the three and nine months ended September 30, 2022 and 2021, the Company recognized the following revenues related to the Merck KGaA Agreement and Merck KGaA Supply Agreement as a result of changes in the contract liability balances in the respective periods:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Revenue recognized in the period from: |  |  |  |  |  |  |
Amounts included in the contract liability at the beginning of the period | $ | 11 |  |  | $ | 11 |  |  | $ | 32 |  |  | $ | 32 |
Performance obligations satisfied in previous periods | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other Revenue The Company has provided limited services for a collaboration partner, Asana BioSciences, LLC ("Asana Biosciences"). During the nine months ended September 30, 2022, the Company recognized revenue of $0.3 million related to these services and did not recognize revenue related to these services during the three months ended September 30, 2022 or during the three and nine months ended September 30, 2021. The next potential milestone the Company is eligible to receive is $2.5 million upon dosing the fifth patient in a Phase 1 clinical trial by Asana BioSciences. While the first patient was dosed in April 2022, as of September 30, 2022, the Company considers this next milestone to be fully constrained as there is considerable judgment involved in determining whether it is probable that a significant revenue reversal would occur. As part of its evaluation of the constraint, the Company considered numerous factors, including the fact that achievement of the milestone is outside the control of the Company and there is a high level of uncertainty in achieving this milestone, as the collaboration partner continues to evaluate its candidate in the Phase 1 trial. The Company reevaluates the probability of achievement of a milestone subject to constraint at each reporting period and as uncertain events are resolved or other changes in circumstances occur.

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- Definition The entire disclosure for collaborative arrangements in which the entity is a participant, including a) information about the nature and purpose of such arrangements; b) its rights and obligations thereunder; c) the accounting policy for collaborative arrangements; and d) the income statement classification and amounts attributable to transactions arising from the collaborative arrangement between participants. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 808 -SubTopic 10 -Section 50 -Paragraph 1 -Subparagraph (a) -URI https://asc.fasb.org/extlink&oid=6931272&loc=SL5834143-161434 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 808 -SubTopic 10 -Section 50 -Paragraph 1 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=6931272&loc=SL5834143-161434 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 808 -URI https://asc.fasb.org/topic&trid=5833765 + Details
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