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

Thus, the companies jointly agreed on the development of a transdermal patch that
treats a common form of epilepsy. Neurocentral, Inc. had made a lot of progress in the
research and expected to start clinical studies in the near future. To fund this R&D project,
White Pharmaceuticals AG was to provide its U.S.-counterpart with three forms of
compensation that corresponded to the typical steps in a drug development process 2
: After
signing the contract, Neurocentral, Inc. was to receive a non-refundable upfront payment of
five million Euros that was directly linked to the development of the transdermal patch.
Using this money, the American company could increase their research efforts and complete
the research and the pre-clinical phase in the year 2001, a little earlier than expected. In
addition, White Pharmaceuticals AG would make two milestone payments of ten million
Euros each as soon as Neurocentral, Inc. reached pre-defined targets in the development of
the patch. The payments would become due when Neurocentral completed Phase I and II of
the clinical studies which would be when preliminary testing of the new drug provided first
results on central characteristics like dosage range, efficacy and side effects. Provided that no
complications arose, Neurocentral, Inc. estimated to finalize Phase I in 2002 and Phase II in
2004. The final component of the compensation package would include a lump-sum payment
of 55 million Euros that White would transfer when Neurocentral, Inc. completed the final
clinical studies (Phase III) successfully. Early estimations by Neurocentral’s researchers
showed that they expected the drug ready for approval in 2006. In exchange for their
payments, White Pharmaceuticals AG received worldwide commercialization rights for the
transdermal patch. Consequently, White would use their own resources to file for approval of
the patch with both FDA and European Medicines Agency (EMA). The post-approval studies
(Phase IV) would also be undertaken by White who would then continue to market the new
drug.
2 See Appendix for a depiction of the drug development process and the payment structure.
3