Pharma and Biotech Accounting: R&D and Milestones

Introduction

AbbVie reported net revenues of $61.2 billion in 2025. To get there, it deducted $65.1 billion of rebates and chargebacks to pharmacy benefit managers, Medicaid programs, insurers and wholesalers from its gross sales, more than its entire net revenue. It spent $9.1 billion on research and development and a further $5.0 billion on acquired research and milestone payments, including $1.9 billion for the acquisition of Capstan Therapeutics, all charged to expense. And it recorded $6.5 billion of charges for increases in the value of payments it owes on products it had acquired years earlier, according to its 2025 annual report.

Each of those lines reflects accounting specific to drug companies, and together they explain why pharmaceutical earnings can look weak in years when the business is investing heavily in its future.

Under US generally accepted accounting principles (GAAP), research and development is expensed as incurred under Accounting Standards Codification (ASC) 730, whatever its prospects, as explained in research and development accounting. For a drug company, that means the cost of years of discovery and clinical trials reaches the income statement long before any product is sold, and successful and failed programs are treated alike. A pharmaceutical company's balance sheet therefore carries little of the value of its own pipeline; the intangible assets it does show come from acquisitions.

Contract research organizations run most trials, so their cost is accrued as the work is performed, and nonrefundable advance payments are deferred until then.

Acquired research is treated according to how it is bought. In a business combination (ASC 805), in-process research and development (IPR&D) is capitalized at fair value as an indefinite-lived intangible asset, tested for impairment until the product is approved or abandoned. In an asset acquisition, which includes most purchases of single drug candidates and most licensing deals, acquired research with no alternative future use is expensed immediately, as the guide's article on business combination or asset acquisition explains. AbbVie's $5.0 billion line for acquired IPR&D and milestones in 2025 included $1.9 billion for Capstan and $906 million for Gilgamesh Pharmaceuticals, both acquisitions treated as asset purchases, plus upfront payments for licenses.

Acquired IPR&D

In-process research and development obtained by buying a company, a drug candidate or a license, rather than developed internally. Under US GAAP it is capitalized as an intangible asset when acquired in a business combination, but expensed immediately when acquired in an asset acquisition and it has no alternative future use.

The distinction makes earnings comparisons across companies difficult. One company that buys a biotech through a business combination capitalizes the research, while another that buys a similar asset by licensing it expenses the cost at once. Many drug companies used to exclude acquired IPR&D from their adjusted earnings, but Securities and Exchange Commission (SEC) staff has challenged the adjustment as removing a normal, recurring cost, and companies such as Bristol Myers Squibb stopped making it from 2022. Practice is not uniform, so bankers decide the treatment themselves and apply it consistently across peers.

US drug prices are subject to large discounts and rebates negotiated with pharmacy benefit managers and insurers, mandated by government programs such as Medicaid, and paid as chargebacks to wholesalers selling to qualifying buyers. Under the revenue standard, these are variable consideration: the company estimates them and deducts them from revenue when the product is sold, recording accruals until they are paid, as described in revenue recognition under ASC 606. The difference between list-price sales and net revenue is the gross-to-net deduction, and for US products it can exceed half of gross sales, as AbbVie's figures show.

The estimates are large and sensitive. Changes in the mix of customers, contract terms, government rules or the volumes sold through each channel move net revenue directly, and accruals for prior periods can be revised. Drug price negotiation under the Inflation Reduction Act adds a further element for some products, as the healthcare guide's article on IRA drug price negotiation explains. Returns of expired products are estimated in the same way.

Drug companies frequently license compounds to and from each other, with payments spread across the life of the program: an upfront payment, milestones on clinical, regulatory and commercial events, and royalties on sales. For the company licensing in, upfront and development milestone payments are usually expensed as acquired research, while milestones paid after approval are generally capitalized as intangible assets. For the company licensing out, an upfront payment for a distinct license is usually revenue when the license is granted, because a drug license is generally a right to use intellectual property as it exists; when the license cannot be separated from ongoing research services, the payment is recognized as those services are performed. Milestones are variable consideration, included in revenue only once it is probable that doing so will not cause a significant reversal, typically when the milestone is achieved, and royalties are recognized when the licensee's sales occur, under the exception for sales-based royalties explained in Deloitte's guide to sales- and usage-based royalties.

Collaborations in which both companies share the costs and profits of developing and selling a drug are accounted for under separate guidance, ASC 808, with each party presenting its share of costs and revenue according to its role. Contingent consideration in a business combination, often tied to approvals or sales, is recorded at fair value at closing and, when it is a liability, remeasured at fair value each period through earnings, the source of AbbVie's $6.5 billion charge in 2025, as described in earnouts and contingent consideration.

AbbVie's Income Statement

AbbVie's income statement brings these elements together:

Read across the two years, the statement shows how far reported profit can drift from the business. Operating earnings rose 65% to $15.1 billion in 2025, yet net earnings slipped to $4.2 billion, because the contingent consideration charge sits below operating earnings and a 2024 tax benefit turned into a $2.4 billion expense. Research and development appears to fall by 29%, but the 2024 figure included $4.5 billion of impairment charges on acquired research, and spending other than impairments increased.

Because reported earnings mix investment with operations, bankers value drug companies on forecasts rather than historical profit. Marketed products are valued on their expected sales through patent expiry, and pipeline products on risk-adjusted forecasts that weight each program's sales by its probability of reaching the market, the method described in the healthcare guide's article on risk-adjusted net present value. For established companies, adjusted earnings excluding amortization of acquired intangibles and contingent consideration remeasurement, with acquired IPR&D treated the same way for every peer, are the basis for multiples; for development-stage biotechs with no revenue, the relevant figures are cash, burn rate and the months of runway they imply.

Acquired products bring a second layer of non-cash charges. Intangible assets from business combinations are amortized over the products' expected lives, $7.4 billion for AbbVie in 2025, and research capitalized in an acquisition is written off if a trial fails: AbbVie's intangible impairments fell to $847 million in 2025 from $4.5 billion the year before, when a setback in a program acquired with Cerevel Therapeutics drove a large charge. Both are excluded from most adjusted earnings, but impairments are a record of what acquisitions failed to deliver.

Acquisitions, the sector's main way of refilling pipelines, combine all of these elements: purchase price allocations dominated by intangibles and goodwill, contingent value rights and earnouts, and the choice between buying a company and licensing an asset that decides whether billions are capitalized or expensed. The healthcare guide's article on analyzing pharma financials shows how bankers put the statements together for that work.