Basis of Presentation
Foreign Currency Transactions
Functional and Presentation Currency
Items included in the consolidated financial statements of each of our entities are valued using the currency of their economic environment in which the entity operates. As of January 1, 2021, and for all periods thereafter, the consolidated financial statements are presented in USD, which is the Company’s presentation currency.
Change in Functional and Presentation Currency as of January 1, 2021
As of January 1, 2021, the Company changed its functional and presentation currency from EUR to USD. The change in functional currency was made to reflect that USD has become the predominant currency for the Company, representing a significant part of the Company’s cash flows and financing. The change has been implemented with prospective effect.
The change in presentation currency, effective January 1, 2021, from EUR to USD is retroactively applied to comparative figures according to IAS 8 and IAS 21, as if USD had always been the presentation currency of the consolidated financial statements. The change was made to better reflect the economic footprint of the Company’s business going forward. The Company believes that the presentation currency change will give investors and other stakeholders a clearer understanding of the Company’s performance over time.
Revenue from Sale of Product
Revenue from the sale of goods is recognized at an amount that reflects the consideration that we expect to be entitled to receive in exchange for transferring goods to a customer, at the time when the customer obtains control of the goods rendered. This means when the customer has the ability to direct the use of the asset. The consideration that is committed in a contract with a customer can include fixed amounts, variable amounts, or both. The amount of the consideration may vary due to discounts, rebates, returns, chargebacks or other similar items. Contingent consideration is included in the transaction price when it is highly probable that the amount of revenue recognized is not subject to future significant reversals.
Our product net sales consist of sales of VYVGART in U.S., Japan and Europe. Product net sales are recognized once we satisfy the performance obligation at a point in time under the revenue recognition criteria in accordance with IFRS 15 “Revenue from Contracts with Customers”.
Revenue arising from the commercial sale of VYVGART is presented in the consolidated financial statements of profit or loss under note 15 “Product net sales”. In accordance with IFRS 15 “Revenue from Contracts with Customers”, such revenue is recognized when the product is physically transferred, in accordance with the delivery and acceptance terms agreed with the customer. Payment of the transaction price is payable at the point the customer obtains the legal title to the goods.
Revenue from Collaborations and License Agreements
Revenues to date have consisted principally of milestones, license fees, non-refundable upfront fees and research and development service fees in connection with collaboration and license agreements.
We recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods and services. In order to determine revenue recognition for agreements that we determine to be in the scope of IFRS 15, the following five steps are performed:
1. Identify the Contracts
In our current collaboration and license agreements, we are mainly licensing our intellectual property and/or providing research and development products/services, which might include a cost sharing mechanism and/or in the future, selling our products to collaborative partner entities. Revenue is generated through these arrangements via upfront payments, milestone payments based on clinical and regulatory criteria, research and development service fees and future sales-based milestones and sales-based royalties. In some cases, the collaboration and license agreements also include an equity subscription component. If this is the case, we analyze if the criteria to combine contracts, as set out by IFRS 15, are met.
2. Identify Performance Obligations
Depending on the type of contract, there can be one or more distinct performance obligations under IFRS 15. This is based on an assessment of whether the promises in an agreement are capable of being distinct and are distinct from the other promises to transfer goods and/or services in the context of the contract.
For our material ongoing collaboration and license agreement (i.e., the Zai Lab Agreement), we assessed that there is more than one distinct performance obligation, being the transfer of a license and supply of clinical and commercial product.
This is because we consider the performance obligation is distinct in the context of the contract as the license has stand-alone value without our further involvement in the research and development collaboration and that there is no interdependence between the license and the clinical and commercial supply to be provided.
For other material collaboration and license agreements, we assessed that there is one single performance obligation in our collaboration and license agreements, being the transfer of a license combined with performance of research and development services.
3. Determine the Transaction Price
Our material ongoing collaboration and license agreements include non-refundable up-front payments or license fees, milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, royalties on sales and research and development service fees.
3.1 Non-Refundable Upfront Payments or License Fees
If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable upfront fees allocated to this license at the point in time the license is transferred to the customer and the customer has the right to use the license.
For all our material ongoing collaboration and license agreements, we consider the performance obligations related to the transfer of the license as distinct from the other promises to transfer goods and/or services; we use judgement to assess the nature of the performance obligation to determine whether the performance obligation is satisfied over time or at a point in time. If over time, revenue is then recognized based on a pattern that best reflects the transfer of control of the service to the customer.
3.2 Milestone Payments Other than Sales-Based Milestones
A milestone payment, being a variable consideration, is only included in the transaction price to the extent it is highly probable that a significant reversal in the amount of cumulative revenue recognition will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate the amount to be included in the transaction price upon achievement of the milestone event. The transaction price is then allocated to each performance obligation on a stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and, if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and earnings in the period of adjustment.
3.3 Research and Development Service Fees
Our material ongoing collaboration and license agreements may include reimbursement or cost sharing for research and development services. Research and development services are performed and satisfied over time given that the customer simultaneously receives and consumes the benefits provided by us. Such costs reimbursements received are recognized in revenues when costs are incurred and agreed by the parties.
3.4 Sales-Based Milestone Payments and Royalties
Our material ongoing collaboration and license agreements include sales-based royalties, including commercial milestone payments based on the level of sales, and the license has been deemed to be the predominant item to which the royalties and commercial milestone payments relate. Related revenue is recognized as the subsequent underlying sales occur.
4. Allocate the Transaction Price
In principle, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis. As our material ongoing collaboration and license agreement (i.e., the Zai Lab Agreement) contains more than one performance obligation, we allocate the transaction price to all performance obligations identified.
5. Recognize Revenue
Revenue is recognized when the customer obtains control of the goods and/or services as provided in the collaboration and license agreements. The control can be transferred over time or at a point in time – which results in the recognition of revenue over time or at a point in time, respectively.
As our ongoing collaboration and license agreement (i.e., the Zai Lab Agreement) contains more than one performance obligation, we recognized revenue at the point in time of the transfer of license and we recognize revenue over time for supply of clinical and commercial products as the customer simultaneously receives the benefits provided by our performance, satisfied over time.
Other ongoing collaboration and license agreements only contain one single performance obligation which is, as the customer simultaneously receive the benefits provided by our performance, satisfied over time, we recognize revenue over time.
The recognition of revenue over time is based on a pattern that best reflects the satisfaction of the related performance obligation, applying the input method. The input method estimates the satisfaction of the performance obligation as the percentage of total collaboration costs that are completed each period compared to the total estimated collaboration costs.
Research and development service fees are recognized as revenue when costs are incurred and agreed by the parties as we act as a principal in the scope of its stake of the research and development activities of its ongoing collaboration and license agreements.
Other Operating Income
As a company that carries extensive research and development activities, we benefit from various grants, research and development incentives and payroll tax rebates from certain governmental agencies. These grants and research and development incentives generally aim to partly reimburse approved expenditures incurred in our research and development efforts. The primary grants, research and development incentives and payroll tax rebates are as follows:
We have received several grants from agencies of the Flemish government to support various research programs focused on technological innovation in Flanders. These grants require us to maintain a presence in the Flemish region for a number of years and invest according to pre agreed budgets.
Research and Development Incentives
Companies in Belgium can benefit from tax savings on amounts spent on research and development by applying a one time or periodic tax deduction on research and development expenditures for the acquisition or development of patents. This tax credit is a reduction of the corporate income taxes for Belgian statutory purposes and is transferrable to the next four accounting periods. These tax credits are paid to us in cash after five years to the extent they have not been offset against corporate taxes due.
Payroll Tax Rebates
We also benefit from certain rebates on payroll withholding taxes for scientific personnel. The government grants and research and development incentives generally aim to partly reimburse approved expenditures incurred in our research and development efforts and are credited to the income statement, under other operating income, when the relevant expenditure has been incurred and there is reasonable assurance that the grant or research and development incentive is receivable.
Changes in Fair Value on Non-Current Financial Assets
In March 2019, we entered into a license agreement with AgomAb for the use of hepatocyte growth factor-mimetic SIMPLE Antibodies™, developed under our IIP. In exchange for granting this license, we received a profit share in AgomAb.
In June 2022, AgomAb secured €38.4 million as a result of the extension of Series B. We used the post-money valuation of this Series B financing round and the number of outstanding shares in determining the fair value of the profit-sharing instrument, which results in a change in fair value of non-current financial assets of $4.3 million recorded through profit or loss. The fair value of non-current financial assets is updated at the end of each reporting period.
Research and Development Expenses
Research and development expenses consist principally of:
- external research and development expenses related to (i) chemistry, manufacturing and control costs for our product candidates, both for preclinical and clinical testing, all of which is conducted by specialized contract manufacturers, (ii) fees and other costs paid to CROs in connection with preclinical testing and the performance of clinical trials for our product candidates and (iii) costs associated with regulatory submissions and approvals, QA and pharmacovigilance;
- personnel expense related to compensation of research and development staff and related expenses, including salaries, benefits and share based compensation expenses;
- materials and consumables expenses;
- depreciation and amortization of tangible and intangible fixed assets used to develop our product candidates; and
- other expenses consisting of (i) costs associated with obtaining and maintaining patents and other intellectual property and (ii) other costs such as travel expenses related to research and development activities.
We incur various external expenses under our collaboration and license agreements for material and services consumed in the discovery and development of our partnered product candidates. Under our agreement with AbbVie, our own research and development expenses were not reimbursed. Under our agreement with Zai Lab, we are responsible for certain costs relating to future clinical trials involving efgartigimod conducted partially by Zai Lab.
Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, including the timing of the initiation of clinical trials, production of product batches and enrolment of patients in clinical trials. Research and development expenses are expected to increase as we advance the clinical development of efgartigimod and ARGX-117 and further advance the research and development of our other early-stage pipeline candidates. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, or the period, if any, in which material net cash inflows may commence from, any of our product candidates. This is due to numerous risks and uncertainties associated with developing drugs, as fully described in section “Risk Factors” and including the uncertainty of:
- the scope, rate of progress and expense of our research and development activities;
- the successful enrollment in, and completion of clinical trials;
- the ability to market, commercialize and achieve market acceptance for efgartigimod or any other product candidate that we may develop in the future, if approved;
- establishing and maintaining a continued acceptable safety profile for our product candidates;
- the terms, timing and receipt of regulatory approvals from applicable regulatory authorities;
- the successful completion of preclinical studies necessary to support IND applications in the U.S. or similar applications in other countries;
- the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and our current and future collaborators continuing their collaborations with us.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of:
- personnel expenses relating to salaries and related costs for personnel, including share-based compensation, of our employees in executive, finance, business development, marketing, commercial and support functions;
- professional fees for business development, marketing, IT, audit, commercial, legal services and investor relations costs;
- Board of directors expenses consisting of directors’ fees, travel expenses and share-based compensation for non-executive board members;
- costs associated with commercial launch of VYVGART™ for the treatment of gMG and marketing and promotional activities and continued investment in supply chain;
- allocated facilities costs; and
- other selling, general and administrative expenses, including leasing costs, office expenses, travel costs.
We expect our general and administrative expenses to increase as we continue to support our growth. Such costs include increases in our finance and legal personnel, additional IT-related expenses, and expenses and costs associated with compliance with the regulations governing public companies. We expect our selling and marketing expenses to increase due to marketing and promotional activities with respect to the ongoing commercial launch of VYVGART™ and preparation of commercial launch of our other product candidates.
Financial Income (Expense)
Financial income mainly reflects interest earned on our cash and cash equivalents and current financial assets and net gains on our cash and cash equivalents and current financial assets held at fair value through profit or loss. Financial expense corresponds mainly to net losses on cash and cash equivalents and current financial assets held at fair value through profit or loss and other financial expenses.
Exchange Gains (Losses)
Our exchange gains (losses) relate to (i) our transactions denominated in foreign currencies, mainly in euro, Swiss francs, British pounds and Japanese yens which generate exchange gains or losses and (ii) the translation at the reporting date of assets and liabilities denominated in foreign currencies into USD, which is our functional and presentation currency since January 1, 2021 and therefore the presentation currency throughout this Annual Report unless otherwise specified. For more information on currency exchange fluctuations on our business, please see note 26 “Financial risk management”. We have no derivative financial instruments to hedge interest rate and foreign currency risk.
Income Tax Expense
We have a history of losses. We expect to continue to incur losses as we continue to invest in our clinical and pre-clinical development programs and our discovery platform, and as we incur costs for the commercial launch of VYVGART, following the regulatory approval by the FDA, the PMDA and the EU Commission. Consequently, we do not have any deferred tax asset regarding certain tax losses on our consolidated statements of financial position.
We incur current income tax expense on the profit generated in various subsidiaries in view of the transfer price agreements set up between argenx BV and these subsidiaries.