Trueblood Case 9-2: Pharmagen
1.State the issue at hand. (Typically this is merely the question you are asked at the end of the case.) How to account for the funding of the R&D and royalty payments 2.State the fact pattern. BRIEFLY present the relevant facts. (Bullet points can be very useful here.) (This can be a challenge, given that some Trueblood cases are only a few paragraphs long, it can be hard to further summarize them.) •Pharmagen entered into a funding agreement with Company XYZ, an unrelated third-party private equity investor (PEI) •Pharmagen will receive $500 million from PEI for R&D costs associated with drug X •The funding is to be used solely for the development of X and may not be used for any other purposes •The funding is non-refundable and Pharmagen is not necessarily required to complete the development – “best efforts” arrangement •Pharmagen estimates $1 billion in total R&D costs over 3 years •Pharmagen retains the intellectual property rights of X

•There are no other agreements that have been executed between Pharmagen and PEI •Pharmagen estimates it will take 3 years to complete drug X from the execution of the agreement •The PEI will contribute funds to the development of X and is entitled to receive future royalties from Pharmagen in return oThe PEI will receive royalties associated with future revenues of X (if/when it has been successfully developed) oThe PEI will also receive future royalties associated with an existing commercialized drug for a defined period

3.Present your answer and the GAAP that supports your position. Use GAAP to explain why you chose the conclusion you did. Citing the appropriate paragraphs in the authoritative literature will definitely help your grade. Not citing the appropriate paragraphs in the authoritative literature will have the opposite effect. •Pharmagen should recognize the royalty that it owes