Enforcing Financial Reporting Standards: The Case of White ...

For a pharmaceutical company, the success of a developed drug depends on the approval by
the corresponding agency (e.g. FDA). Thus, it has become common practice in the industry to
only recognize costs incurred after official approval. This policy takes into account that an
agency might deny approval so the drug will not be marketable. In addition, beginning the
clinical studies cannot be seen as a reliable indicator that a drug will eventually be brought to
the market. During the course of the studies, potential implications may arise which could
nullify any launch plans. These aspects lead pharmaceutical companies to negate the
probability of future economic benefits and the technical feasibility of completing the
intangible asset before an official approval has been received. This reasoning is also applied
by White’s CFO which is why Peter expenses the two milestone payments.
On the other hand, if the transaction is interpreted as an acquisition, a case could also
be made for a capitalization of the two milestone payments. White Pharmaceuticals AG
receives all rights to the development in progress and only transfers the money once the
phases have been completed successfully. Thus, with the ongoing development efforts the
probability increases that Neurocentral, Inc. creates a marketable drug and that White
receives an intangible asset for their payments. Thus, the two milestone payments could also
be interpreted as a compensation for the developed transdermal patch to which White
receives, i.e. acquires, all rights. This interpretation is also indicated in the letter by the FREP
that White receives at the end of our case.
(iii) Lump-Sum Payment:
Mr. Muller’s interpretation of the lump-sum payment follows the one set out for the
milestone payments. When looking at the R&D as if it were conducted in-house, the lack of
approval by FDA/EMA would justify an expense charge of the 55 million Euros. However,
the argumentation used by the FREP seems more reasonable. They argue that the lump-sum
was paid to acquire an intangible asset. Although the patch still lacks official approval, White
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