Question
October 19, 2006
Ms.Nancy M. Ovuka
PremergerNotification Office
Bureauof Competition
Federal Trade Commission
7th& Pennsylvania Avenue, NW
Washington, DC 20580
DearNancy:
I am writing to confirm my understanding of atelephone conference we had on Friday, October 13, 2006 concerning thecalculation of fair market value pursuant to Rule 801.10 in an assetacquisition (of intellectual property).
Proposed Transaction
Our Client (a foreign corporation) intends to acquirevarious intellectual property rights relating to a particular chemicalcompound. Because there is no established purchase price in the acquisitionagreement for this intellectual property, pursuant to Rule 801.10 our Clienthas calculated the fair market value of the intellectual property to beacquired by estimating its risk-adjusted payments to Seller in the form ofanticipated royalties and milestone payments for sales in the US. Thisvaluation methodology is commonly accepted and regularly relied upon as amethod to value intellectual property in this industry. I suggested to you thatthis valuation methodology is an appropriate measure of fair market value underRule 801.10.
In addition, the Client and Seller are currentlyparties to a co-development and marketing agreement (containing a non-exclusiveU.S. license from Seller to Client) relating to the same chemical compound.Under this co-development agreement -- which will be superseded and replaced bythe acquisition agreement discussed above -- our Client and Seller had plannedto share profits pursuant to a formula upon commercialization of the chemicalcompound (which commercialization has yet to occur). Our Client made onemilestone payment to Seller pursuant to the co-development and marketingagreement. I suggested to you that because the co-development and marketingagreement is a contractual relationship (that did not involve an HSR reportableacquisition of intellectual property), the one milestone payment made by Clientto Seller pursuant to that agreement should not be included in Client'scalculation of the fair market value of the intellectual property to beacquired under the new acquisition agreement.
Conclusions
With respect to the valuation methodology used by theClient, you agreed that this methodology appears reasonable under thecircumstances as described.
With respect to the prior milestone payment made byClient pursuant to the co-development and marketing agreement, you agreed thatClient should not include this payment in its calculation of the fair marketvalue of the intellectual property to be acquired under the new acquisitionagreement.
Please let me know as soon as possible ifyou disagree with any of the conclusions discussed above, or if I havemisunderstood any aspect of your advice. As always, thank you for yourassistance in this matter.