Trueblood case 09-2: Pharmgen
1. There are several issues in this case. How to account for the funding of the R&D and royalty payments. The other issue is to identify the authoritative literature applicable to this funding arrangement and to discuss the appropriate accounting for the Agreement in accordance with that guidance.
2. The facts:
a. Pharma enters into an agreement with Company XYZ, a PEI.
b. Pharma to receive up to $500 million from the PEI for R&D for the development of a new drug.
c. The PEI is to participate financially in the development of X.
d. The funding is to be solely used for the development of X.
e. The amounts received is non-refundable and Pharma is not obligated to successfully complete the development of X.
f. Pharma will receive incremental funding from the PEI as long as Pharma is showing progress towards the development of X.
g. The total estimated costs are $1 billion and the development will take 3 years.
h. Pharma retains all the intellectual property rights to X.
i. There will be no joint marketing agreements nor will there be collaboration agreements.
j. The PEI is entitled to receive royalties associated with the revenues of X and future royalties associated with an existing commercialized drug for a defined period.
3. ASC-730-20 is applicable here. This is because Pharmgen is entering into an agreement with PEI (investors) on a contractural basis to provide services for the R&D results (FASB 68). Pharmgen obtains the exclusive rights to the results in return for royalty payments to the PEI. The royalties represent a contingent payment. Thought the agreement did not specify whether Pharmgen is committed to repay a liability but it can be assumed Pharmgen is committed to repay since the PEI is entitled to the royalties.
A company that is part of an arrangement in which R&D is funded by other parties usually incurs an