0801003 Informal Interpretation

Date

January 7, 2008

Rule

801.10

Staff

Michael Verne

Response/Comments

I think #2 is a reasonable approach. The FMV is what you would pay up front (without any future contingency), weighing the possibility that the deal may tank if government approvals are not received. This is not an uncommon situation, especially in the pharma industry, where a licensee is getting an exclusive license to use IP to develop and commercialize a product that has not yet started clinical trials. They often pay a relatively small amount up front and then have milestone payments and royalties if FDA approvals are received and the product becomes commercially viable at some point in the future/

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Question

From: (redacted)

Sent: Monday, January 07, 2008 1:57 PM

To: Verne, B. Michael

Cc: (redacted(

Subject: RE:Acquisition price

Thanks Mike, but HOW dothey reliably value the FMV of the opportunity. When it comes down to thatissue, I would think that there are only two choices:

1. regard the whole deal as two separate transactions,the second of which is impossible to predict; OR

2. value the transaction with a "handicap"value that discounts the overall value in case that the required consents nevercome through. I know this seems contrary to the "all or nothing"approach that you use in contingent payments.

However, the Board ofDirectors have fiduciary responsibilities when they value these transactions. Idon;t see how they can represent to their shareholders that they are enteringinto a $70 million transaction ($20 MM base + $50 MM "success" fee)when it could turn out to be a $20 MM loss if the project just dies.

We would be gratefulfor your help on this, not just for this transaction but because it also comesup in other forms.

****************************************************************

From: Verne, B. Michael [mailto:MVERNE@ftc.gov]

Sent: Monday, January 07, 2008 12:54 PM

To:(redacted)

Subject: RE: Acquisition price

Ifthere is uncertainty as to whether the contingent payment will be made, theacquisition price is undetermined andfair market value would apply.

---------Original Message-

From: (redacted)

Sent: Monday, January 07, 2008 11:30 AM

To: Verne, B. Michael

Cc: (redacted)

Subject:Acquisition price

Wewanted some guidance on how to value a project-purchase transaction when partof the transaction price is contingent on obtaining government approvals forthe project. In other words, the closing takes place with a $20 millionpayment, but if government approvals are obtained, then the buyer needs to pay$50 million more. Some people have referred to this second contingent paymentas a "success" fee.

We look atInterpretation 94 and your own ruling on 9/14/04, but those are not quite the sameissues. In this case, the contingency is not based on business success but onthe rulings of third parties (government agencies). Unlike a businesscontingency, when presumably the parties had a chance to succeed based onmarketing prowess, here, if the rulings don't come through, the project isover, period.

Under thesecases, should the second "success" fee be considered part of theacquisition price?

0801003 Informal Interpretation

Question

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