Question

NN Pharma, a pharmaceutical company in Iceland, owns and maintains a portfolio of patents related to an antibiotic that treats life-threatening diseases. On February 23, 20X8, NN grants BTX (a pharmaceutical company in Saudi Arabia) the exclusive right to use its patented drug formula to commercialize and supply the antibiotic in the MENA Region. The intellectual property (IP) is fully developed, and regulatory approval has been obtained; therefore, BTX is able to commercialize the IP. NN has determined that the patented drug formula is functional IP and that therefore, the license grants BTX the right to use the IP. In exchange for the exclusive right to use the patented drug formula, BTX agrees to pay NN Pharm the following amounts: 1. An up-front fee of $300 million. 2. Annual fixed fees of $50 million payable at the end of each year in which the contract is effective. 3. Sales-based royalties of 5 percent of BTX’s sales of the antibiotic in Saudi Arabia (recognized in accordance with the sales-based royalty exception in ASC 606-10-55-65). The contract states that BTX has the exclusive right to use the patented drug formula through the patent term, which expires in 10 years (i.e., the contract ends when the patent expires). The contract also states that BTX may terminate the contract before the expiration of the patent by providing three months’ notice to NN Pharma. All amounts already paid by BTX are nonrefundable in the event of early termination. The contract does not include an explicit termination penalty (i.e., BTX is not required to pay additional cash consideration to NN Pharma upon early termination); however, upon early termination, the right to the patented drug formula in MENA would revert back to NN Pharma, which would be able to relicense the patented drug formula to a different pharmaceutical company in the MENA region. This alternative is only available to BTX and only if BTX terminates the contract before the end of the 10-year term.

Questions:

(1) what is the contract period here?

(2) how should BTX account for the upfront payment (it’s a cost to BTX)?

(3) how should NN Pharma account for the upfront payment (its revenue to NN)?

(4) How should NN account for the royalty payments (revenue)?

And (5) how should NN account for the fixed annual payments (revenue)?

maximum 1 page

Answer 1