1 Quick Cure is a convenient name to use for the brand pharmaceutical product in the hypothetical situation considered in this paper. A company would probably seek trademark protection for an actual brand name and use the appropriate trademark designation when referring to the product.

2 See also the Final §6662 Transfer Pricing Penalty Rules (TD 8656), 61 Fed Reg 4876, issued 9 February 1996.

3 Reg Sec 1.482-1(b)(1).

4 Distributing Quick Cure to hospitals, federal facilities, and wholesalers in the USA.

5 Reg Sec 1.482-1(b)(1).

6 Reg Sec 1.482-1(c).

7 Reg Sec 1.482-1(c)(2)(i) and (ii).

8 Reg Sec 1.482-1(c).

9 Reg Sec 1.482-1(c)(2). For a description of each method, see RP Rozek, “Valuing the Residual Intellectual Property in Mature Pharmaceutical Products” (2018) 9(2) EJRR 337.

10 Reg Sec 1.482–3(a). See Rozek, RP et al, “A Market-Based Approach for Tangible Property Transfer Pricing” (2005) 13 Transfer Pricing Report 1110–1115Google Scholar.

11 Imitators do not develop brand products, but, rather, wait until the patents or other forms of exclusivity for the brand products expire and then offer generic versions of the products.

12 Financing for inventors and developers comes from sources such as retained earnings, government support (eg appropriations and grants), and venture capital. Developers may rely on contract research organisations to perform some activities.

13 Sometimes a supplier relies on contract manufacturing organisations (CMOs) to produce the API or finish/package a product. The contract manufacture merely responds to orders from the supplier.

14 Marketers may engage contract sales organisations to disseminate certain well defined messages about a product.

15 “More Than 800 Medicines and Vaccines in Testing Offer Hope in the Fight Against Cancer” (Medicines in Development for Cancer, Pharmaceutical Research and Manufacturers of America (PhRMA) 2009) p 103.

16 PhRMA, Pharmaceutical Industry Profile 2006 (Washington, DC, PhRMA 2006) p 52 and PhRMA, supra, note 15, p 103.

17 The $802 million amount represents the total capitalised cost and is stated in 2000 dollars. Average out-of-pocket costs were estimated to equal $403 million: JA Di Masi et al, “The Price of Innovation: New Estimates of Drug Development Costs” (2003) 22 Journal of Health Economics 151.

18 See PhRMA, Pharmaceutical Industry Profile 2006 (Washington, DC, PhRMA 2006) p 52 and H Grabowski and J Vernon, “A New Look at the Returns and Risks to Pharmaceutical R&D” (1990) 16(7) Management Science 804.

19 Review data on Start-Up’s licences, acquisitions, co-marketing/co-promotion agreements, and distribution agreements.

20 See RP Rozek, “Applying the Best Method Rule When Reliable Internal Comparable Intangibles Exist” (1996) 12 Tax Notes International 1191; and RP Rozek et al, “A Market-Based Approach for Tangible Property Transfer Pricing” (2005) 13 Transfer Pricing Report 1110. These papers describe the types of adjustments that are necessary to the uncontrolled transactions in transfer pricing analyses.

21 “In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm’s length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results”: see Reg Sec 1.482-1(d)(2).

22 Reg Sec 1.482-1(c)(2) states “[d]ata based on results of transactions between unrelated parties provides the most objective basis for determining whether the results of a controlled transaction are arm’s length”. Furthermore, fewer adjustments are necessary when the taxpayer is a party to the agreements in both the controlled and uncontrolled transactions.

23 Reg Sec 1.482-4(c)(2)(iii)(B)(1)(ii).

24 Start-Up enters such agreements for a variety of reasons. For example, it may expand its product portfolio by licensing technology from another pharmaceutical company. It may gain experience marketing pharmaceutical products by co-marketing a product with an established company.

25 Windhover is a comprehensive industry guide to pharmaceutical and biotechnology alliance activity. Data are available beginning in January 1991. The database is updated periodically. It provides summary information about transactions in the pharmaceutical industry. The summary information does not always identify factors such as the stage of development for the underlying technology at the time of the licence or the contribution of the licensor to developing manufacturing know-how.

26 The database is from the US Securities and Exchange Commission.

27 This journal is published by the Licensing Executives Society.

28 Data from public sources are not as complete as data from the taxpayers’ own experiences of licensing intangible property. There is limited information available in the public domain on the terms of an agreement. Information on such factors as the complete milestone payments, equity investments, territory, and exclusivity provisions are often not available.

29 S Finch, “Royalty Rates: Current Issues and Trends” (2001) 7(3) Journal of Commercial Biotechnology 228.

30 The absence of financial analyses of the agreements means lump sum payments cannot be considered. Estimates of sales for the associated products are necessary to calculate an effective royalty rate in an agreement with lump sum payments.

31 The range stated is to illustrate the method. It is not derived from any specific database.

32 The obligation to develop manufacturing know-how is not typical in Start-Up’s uncontrolled transactions for intangible property.

33 DM McGavock et al, “Factors Affecting Royalty Rates” (1992) XXVII(2) les Nouvelles 109.

34 For example, one article states that “[e]arly-stage royalties are a strong contrast to the end-stage co-commercialisation agreements (such as co-marketing and co-promotion agreements), which often attract very high royalty levels, in the range of 40–60[%] (Table 6)”: S Finch, “Royalty Rates: Current Issues and Trends” (2001) 7(3) Journal of Commercial Biotechnology 228.

35 To the extent that Start-Up-Developer/Supplier relies on other affiliates to conduct or monitor clinical studies, Start-Up-Developer/Supplier continues to bear the risks, but compensates the affiliate for its efforts.

36 Start-Up may abandon research projects at any time if it determines that the underlying compound is unsafe or ineffective.

37 As discussed above in connection with our review of data available from Start-Up and public sources, Start-Up-Developer/Supplier performs more functions and bears greater risks than CMOs.

38 Start-Up-Marketer can return any unsold products to Start-Up-Developer/Supplier.