Accounting for financing arrangements in the life sciences sector

IFRS accounting considerations for option-based deals

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Financing is fundamental to the life sciences sector, and accounting considerations may affect how a transaction is structured. This publication discusses some of the accounting considerations for a typical option-based structure involving an initial equity investment in an investee and an option to purchase additional shares in the investee. The accounting in this area is complex and depends on the facts and circumstances of the individual structure. As a result, transactions that seem similar may have different accounting implications. While biotechnology (biotech) companies can be investors or investees in these transactions, we refer to the investor in this publication as a pharmaceutical (pharma) company and the investee as a biotechnology (biotech) company to distinguish between the parties.

Option-based structures have become more prevalent in the life sciences sector in recent years. The common thread is that an investor makes an initial payment to obtain the right, but not the obligation, to acquire the underlying (e.g., specific research and development (R&D) assets or shares of the investee) for a predefined exercise price. An option-based structure may provide the following benefits:

For a biotech company (the investee):

  • A fixed amount of cash when the option is issued, allowing the biotech company to secure short-term financing
  • Improved balance sheet leverage due to initial equity Injection
  • Market credibility that may help the biotech companyattract other investors (e.g., other large pharma companies) for future deals
  • A shorter time to market for the R&D asset if the option holder is required to take on the late-stage development or commercialisation activities

For a pharma company (the investor):

  • An expanded portfolio for a relatively small up-front fee (i.e., the biotech company has the R&D risk and the pharma company has a right, not an obligation, to acquire the underlying at a future date (e.g., when key clinical/technical outcomes are known))
  • Additional time (i.e., the option period) to conduct further due diligence about the R&D asset’s viability
  • An advantage over competitors that do not have access to the R&D asset during the option period

Our publication is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. For any questions about this publication or life sciences deal structures in general, please contact the EY Life Sciences Deal Structuring Team at