Enanta Pharmaceuticals Inc (ENTA)

[DewDiligence]

Re: Accounting treatment of the Omers transaction

Here’s the explanation from ENTA’s FY3Q23 10-Q (p.12):

https://www.sec.gov/ix?doc=/Archives/edgar/data/0001177648/000095017023039754/enta-20230630.htm

In April 2023, the Company entered into a royalty sale agreement with an affiliate of OMERS, pursuant to which the Company was paid a $200,000 cash purchase price in exchange for 54.5% of future quarterly royalty payments on net sales of MAVYRET/MAVIRET, after June 30, 2023, through June 30, 2032, subject to a cap on aggregate payments equal to 1.42 times the purchase price.

Because the royalty sale agreement will be paid back to OMERS up to a capped amount as well as the Company’s significant continuing involvement in the generation of future cash flows under its AbbVie Agreement, the Company recorded the proceeds from the transaction as a liability on its consolidated balance sheets which will be amortized as interest expense in the consolidated statements of operations under the effective interest rate method over the life of the royalty sale agreement. The Company will continue to record the full amount of royalties earned on MAVYRET/MAVIRET sales as royalty revenue in the consolidated statements of operations.

The Company’s liability related to the sale of future royalties is estimated based on forecasted worldwide MAVYRET/MAVYRET royalties to be paid to OMERS over the course of the royalty sale agreement. This estimate requires significant judgment, including the amount and timing of royalty payments up until the end of the royalty sale agreement, which is estimated to be the stated term of June 30, 2032. As royalties are earned by OMERS, the liability is reduced on the Company’s consolidated balance sheets. At June 30, 2023, the estimated future cash flows resulted in an effective annual imputed interest rate of approximately 5.5%.

Emphasis added. Note that the interest-expense amount that will appear on each quarter’s income statement (starting in FY4Q23) is a non-cash item.