patents. The prospective amendment of the amortization plan of the monalizumab intangible asset, which is modified according to the estimate ending date of the Phase II clinical trial is described in Note 6.
3) Management of financial risks and fair value
The principal financial instruments held by the Company are cash, cash equivalents and marketable securities. The purpose of holding these instruments is to finance the ongoing business activities of the Company. It is not the Company’s policy to invest in financial instruments for speculative purposes. The Company does not utilize derivatives.
The principal risks to which the Company is exposed are liquidity risk, foreign currency exchange risk, interest rate risk and credit risk.
Liquidity risk
The Company’s cash management is performed by the Finance department, in charge of monitoring the day-to-day financing and the short-term forecast and enabling the Company to face its financial commitments by maintaining an amount of available cash consistent with the maturities of its liabilities. As of December 31, 2019, cash, cash equivalents and short-term investments were €218,865 thousand, which represents more than a year of cash consumption.
The main characteristics of the financial instruments owned by the Company (including liquidity) are presented in Note 4.
Foreign currency exchange risk
The Company is exposed to foreign exchange risk inherent in certain subcontracting activities relating to its operations in the United States, which have been invoiced in U.S. dollars. The Company does not currently have recurring revenues in euros, dollars or in any other currency. As the Company further increases its business, particularly in the United States, it is expected to face greater exposure to exchange rate risk.
The revenue denominated in U.S. dollars has represented approximately 100% of revenue in the years ended
December 31, 2017, 2018 and 2019, respectively. Payments in U.S. dollars represented approximately 15.1%, 31.9%, 64.1% of the payments in the years ended December 31, 2017, 2018 and 2019, respectively. In order to cover this risk, the Company kept in U.S. dollars a part of the consideration received from AstraZeneca in June 2015 and January 2019. We entirely kept the U.S dollars portion of the proceeds received from our Global Offering in October 2019
.
The Company’s foreign exchange policy does not include the use of hedging instruments.
Interest rate risk
The Company has very low exposure to interest rate risk. Such exposure primarily involves money market funds and time deposit accounts. Changes in interest rates have a direct impact on the rate of return on these investments and the cash flows generated. The Company has no credit facilities. The repayment flows of the advances from Banque Publique d’Investissement (“BPI France”) and the borrowings subscribed in 2017 are not subject to interest rate risk.
Credit risk
The credit risk related to the Company’s cash equivalents, short-term investments and non-current financial assets is not significant in light of the quality of the issuers. The Company deemed that none of the instruments in its portfolio are exposed to credit risk.
Fair value
The fair value of financial instruments traded on an active market is based on the market rate as of December 31, 2019.
The market prices used for the financial assets owned by the Company are the bid prices in effect on the market as of the valuation date.
F-30 4) Cash, cash equivalents and financial assets
Cash and cash equivalents are mainly composed of current bank accounts, interest-bearing accounts and fixed-term accounts.
In the year ended December 31, 2017, shares in mutual funds are defined by the Company as assets available for sale measured at fair value through other comprehensive income. From January 1, 2018 and the first application of IFRS 9, they are accounted for as financial assets at fair value through profit and loss. The Company only invests into funds with a very low level of risk. As of December 31, 2019, the Company owns shares of four mutual funds. The risk profiles of these funds are rated 1 to 7 by the financial institution who manages and commercializes these funds (1 being the lowest risk profile). When the maturity of shares in mutual funds is longer than one year, they are classified as non-current financial instruments.
Other non-current financial assets generally include a guarantee of capital at the maturity date (which is always longer than one year). These instruments are defined by the Company as financial assets at fair value through profit or loss and classified as non-current due to their maturity.
As of December 31, 2017, 2018 and 2019 the amount of cash, cash equivalents and financials assets denominated in US dollars amounted respectively to €59,348 thousand, €74,442 thousand and €97,688 thousand
The variation of short-term investments and non-current financial assets for the periods presented, are the following:
Short-term investments 16,743 - (2,704) 383 - 794 15,217
Non-current financial assets 60,469 - (21,513) (4,169) (152) 547 35,181
Total 77,212 - (24,217) (3,786) (152) 1341 50,398
Short-term investments 15,217 - - 481 - 280 15,978
Non-current financial assets 35,181 - (2,000) 3,585 237 - 37,005
Total 50,398 - (2,000) 4,065 237 280 52,983
F-31 5) Trade receivables and others
Trade receivables and others are analyzed as follows:
Year ended December 31,
(in thousands of euro) 2017 2018 2019
Other receivables(1) 139 108,585 544
Accrued receivables excluding rebates related to capital expenditures 730 5,539 691
Research tax credit(2) 11,022 13,503 -
Other tax credits 251 538 333
Prepaid expenses 5,898 4,211 5,403
VAT refund 2,675 2,807 1,995
Trade account receivables - 2,522 2,816
Prepayments made to suppliers 430 1,264 197
Refund to be received (“CVAE”) 267 43 -
Rebate related to capital expenditures(3)) - 13,100 6,762
Receivables and others - current 21,412 152,112 18,741
Research tax credit(2) - - 16,737
Receivables and others - non-current - - 16,737
Trade receivables and others - excluding rebates related to capital
expenditures 21,412 139,012 28,716
_________________
(1) “Other receivables” as of December 31, 2018, mainly related to AstraZeneca as a result of the exercise of the monalizumab exclusive license option ($100,000 thousand or €87,655 thousand) and option granted on IPH5201 ($24,000 thousand or €20,961 thousand). These amounts were paid in the first quarter of 2019, see Note 1.1.a and Note 1.1.c for agreements description.
(2) In accordance with the principles described in Note 2.u, the research tax credit (Crédit d’Impôt Recherche or “CIR”) is recognized as other operating income in the year to which the eligible research expenditure relates. The Company obtained the repayment of the CIR for the tax year 2017 in the amount of €11,022 thousand in 2018 and the repayment of the CIR for the tax year 2018 in the amount of €13,503 thousand in July 2019. The CIR for the tax year 2019 amounted to 16,737 thousand. Following the fact that the Company no longer meets the eligibility criteria for the SME status as of December 31, 2019, the CIR for the tax year 2019 will in principle be offset against the French corporate income tax due by the company with respect to the three following years, or refunded if necessary upon expiry of such a period (see note 2.u).
(3) The rebate refers to a definitive rebate of $7,580 thousand as of December 31, 2019 ($15,000 thousand as of December 31, 2018) granted by AstraZeneca in connection with the acquisition of Lumoxiti rights and that will be paid in 2020. This decrease of $ 7,420 thousand (€6,455 thousand) is based on the final cost figures for the 2019 financial year for Lumoxiti and invoiced by AstraZeneca. The carrying amount of the intangible asset has been adjusted accordingly (see note 6).
Trade receivables and others have payment terms of less than one year. No valuation allowance was recognized on trade receivables and others as the credit risk of each of debtors was considered as not significant.
F-32 6) Intangible assets
Intangible assets can be broken down as follows:
(1) This amount is an upfront payment for acquisition of avdoralimab rights under the in-licensing agreement signed in 2017 with Novo Nordisk A/S. The classification of this amount has been amended compared to the 2017 consolidated financial statements since it is in progress and thus not amortized.
(2) This amount mainly includes (i) an upfront payment of €43,501 thousand, less an estimate rebate of €13,050 thousand relating to the rights acquired from AstraZeneca in 2018 under the Lumoxiti in-licensing agreement and (ii) a
€13,050 thousand additional consideration to be paid to Novo Nordisk A/S following the exercise of the option by AstraZeneca for the monalizumab rights.
(3) This amount includes (i) an additional consideration of €7,000 thousand paid to Orega Biotech in June 2019 in relation to the anti-CD39 program as consideration following the collaboration and option agreement signed in October 22, 2018 with AstraZeneca regarding IPH5201 (see Note 1.c), (ii) the decrease of the rebate granted by AstraZeneca in connection with the acquisition of Lumoxiti rights for an amount of €6,455 thousand (see Note 5 and (2) above ), and (iii) an additional consideration of €13,565 thousand paid to AstraZeneca in January 2020 following the submission to the European Medicines Agency (EMA) of the Marketing Authorization Application (MAA) relating to the commercialization of Lumoxiti in Europe (see Note 1.2).
(4) This amount includes the amortization of rights related to monalizumab (€4,792 thousand), IPH5201 (€6,831 thousand) and Lumoxiti (€2,730 thousand).
F-33
Monalizumab rights under the 2014 monalizumab (NKG2A) Novo Nordisk agreement
At the agreement inception, acquired rights were recorded as intangible asset for an amount of €7,000 thousand. The Company recorded an additional consideration of €6,325 thousand in 2015 and a final consideration of $15,000 thousand (€13,050 thousand) due in 2018 (see Note 1.1.a).
Since their acquisition by the Company, monalizumab rights are amortized on a straight-line basis over the anticipated residual duration of the Phase II trials. The Company has reassessed the anticipated residual duration of the Phase II trials as of December 31, 2019 and estimated that it would be fully amortized by the end of 2021, compared to end of 2019 as estimated as of December 31, 2018, as a result of the completion of some trials and initiation of new cohorts. The impact of this revision for the fiscal year ended December 31, 2019 amounts to €4,452 thousand.
The net book values of the monalizumab rights were €7,941 thousand and €12,733 thousand as of December 31, 2019 and December 31, 2018, respectively.
IPH5201 (Anti-CD39) rights acquired from Orega Biotech
On January 4, 2016, the Company and Orega Biotech entered into an exclusive licensing agreement by which Orega Biotech granted the Company full worldwide rights to its program of first-in-class anti-CD39 checkpoint inhibitors. The undisclosed upfront payment paid by the Company to Orega Biotech has been recognized as an intangible asset in the
consolidated financial statements for the year ended December 31, 2016. Criteria relating to the first development milestone were reached in December 2016. Consequently, the amount of this milestone was recognized as an intangible asset in addition to the initial payment, for a total of €1.8 million as of December 31, 2018. In June of 2019, the Company also paid Orega Biotech
€7.0 million in relation to the anti-CD39 program as consideration following the collaboration and option agreement signed on October 22, 2018 with AstraZeneca regarding IPH5201.
This asset is amortized on a straight-line basis since November 1, 2018 (corresponding to the effective beginning date of the collaboration) until the date the Company expects to fulfill its commitment (end of fiscal year 2020).
The Company may also be obligated to pay Orega Biotech up to €51,500 thousand upon the achievement of development and regulatory milestones. In addition, the Company will be obligated to pay mid-single digit to low-teen percentage payments, depending on determinations relating to Orega Biotech’s intellectual property rights for certain patents, on sublicensing revenues the Company receives pursuant to its agreement with AstraZeneca relating to IPH5201.
Avdoralimab (IPH5401) (anti-C5aR) rights acquired from Novo Nordisk A/S
At the agreement inception, an upfront payment of €40 million for acquired rights were recorded as intangible asset. As avdoralimab is still in clinical trial, the acquired rights are classified as intangible asset in progress. They were subject to annual impairment test. No impairment were recorded since inception. These acquired rights will be amortized when the Company obtains economic benefits.
According to the agreement, the Company will pay additional payments according to the reach of specific steps. As of December 31, 2019, according to the uncertainty of these potential payments, no liability was recognized.
Development costs incurred by the Company are recognized as research and development expenses.
The main assumptions used for the impairment test are the following:
• Cash flows are set on the basis of the development and commercialization plans and budgets approved by Management;
• A discount rate of 12%;
• A risk of development is taken into consideration by applying probabilities of success of reaching future phases of development to cash flows related to each development phases Those average probabilities of success of R&D projects are based on an article published in Nature Biotechnology journal;
• For the commercialization phase, selling price and sales volume are estimated on the basis of the potential market and the observed performances of comparable drugs currently on the market. Decrease in sales volume applied to the forecasted revenue once the related rights fall off-patent.
In case of failure of the clinical trials in progress, the Company may have to depreciate the intangible asset corresponding to the avdoralimab rights.
F-34
The Company did not identify any reasonable potential variance in the key assumptions that may generate an impairment.
Sensitivity testing regarding these following assumptions and other assumptions such as: discount rate (+/- 3%), selling price (+/- 10%) and decrease in sales volume once the related rights fall off-patent (+/- 5%) were performed. These tests did not reveal any impairment.
Avdoralimab does not generate economic benefits yet for the Company. In accordance with IAS 38, it will be amortized when it generates economic benefits, which can result from:
• The commercialization the drug candidate; or,
• An out-licensed agreement.
If the Company commercialize the drug product on its own, it will have to determine the amortization period of the related capitalized rights. It will have to estimate their useful life, considering the date when they fall off patent. Those capitalized rights will be amortized on a straight line basis during the estimated useful life.
If the Company entered in an out-licensed agreement, the Company will have to perform an analysis to determine if the control of the rights are transferred to a third-party, and thus will have to derecognize the capitalized rights. If the Company conclude that it keeps the control of the rights, it will determine their useful life and will amortize them on a straight line basis during this useful life.
Lumoxiti rights acquired from AstraZeneca under the 2018 AstraZeneca multi-term agreement
The license by which the Company acquired Lumoxiti rights is amortized on a straight-line basis through July 31, 2031, which corresponds to the expiration of the current composition of matter patent, not including any additional patent extensions or patents. The net book value of the Lumoxiti rights was €47,276 thousand and €29,987 thousand as of December 31, 2019 and December 31, 2018, respectively. This increase in the net book value resulting from (i) the decrease of the rebate granted by AstraZeneca in connection with the acquisition of Lumoxiti rights for an amount of €6,455 thousand (see Note 6), and (ii) an additional consideration of €13,565 thousand paid to AstraZeneca in January 2020 following the submission to the European Medicines Agency (EMA) of the Marketing Authorization Application (MAA) relating to the commercialization of Lumoxiti in Europe. These additional considerations are partly offset by the period amortization (€2,730 thousand).
The Company applied IAS 36- Impairment of assets and assessed whether there was any indication that an asset may be impaired. The Company estimated the recoverable amount of Lumoxiti intangible assets using a discounting cash flow model which confirmed that these assets were not impaired. The following assumptions were used to determine the recoverable amount, based on the cash flows determined from the commercialization plan and the budget approved by Management:
• A discount rate of 12%
• Assumptions related to selling price increase and sales volume based on the potential market and comparable products; and
• Decrease in sales volume applied to the forecasted revenue once the related rights fall off-patent.
Sensitivity testing regarding the following assumptions and other assumptions such as: discount rate (+/- 3%), selling price (+/- 10%) and decrease in sales volume once the related rights fall off-patent (+/- 5%) were performed. These tests did not reveal any impairment.
F-35
8) Trade payables and others
This line item is analyzed as follows:
Trade payables and others excluding payables related to capital
expenditures 24,583 34,662 36,047
Payables related to capital expenditures 74 56,993 13,458
Payables and others 24,657 91,655 49,504
The book value of trade payables and others is considered to be a reasonable approximation of their fair value.