The Pharmagen True Blood

The Pharmagen True Blood case deals with a substantial contribution of R&D funds, from a private equity investor (PEI) to a pharmaceutical company. The funds were given for the development of drug X, in return for future royalties. The issue is at hand is how the R&D contribution and royalties should be accounted for.

The relevant facts of the case are:

• Pharma received a pledge of up to $500 million contribution earmarked for the R&D of drug X, from a PEI.

• Pharma had already begun developing the drug prior to the contribution

• The contribution are nonrefundable

• Pharma is under no performance obligation to complete the drug, or repay the funds should they fail to develop the drug

• Total estimated costs to develop Drug X are $1 billion and estimated time is 3 years

• Pharma will retain all intellectual property rights to Drug X

• There are no other agreements between the companies

• The PEI will receive royalties from the future revenues of Drug X and royalties from an existing drug for a predetermined period of time

ASC 730-20-25 should be applied when considering the payment of $500 million to Pharmagen. Pharmagen is determined to have l liability under ASC 730-20-25-4. This section mandates that a liability exists if no "substantive and genuine" transfer of "financial risk" occurs. ASC 730-20-25-5 states that "surrounding conditions might indicate that the entity is likely to bear the risk of failure of the research and development", and that creates a "presumption" that the entity will "repay the other party". A condition enumerated by ASC 730-20-25-6 states that "The entity has indicated intent to repay all or a portion of the funds provided regardless of the outcome of the research and development."