(i) The facts are the same as in Example 1, except that there are no reliable estimates of the value to P from the licensing alternative to the CSA. Further, reasonably reliable estimates indicate that an arm’s length return for S’s routine manufacturing and distribution activities is a 10% mark-up on total costs of goods sold plus operating expenses related to those activities. Finally, the Commissioner determines that the respective activities undertaken by P and S (other than licensing payments, cost contributions, and PCT Payments) would be identical regardless of whether the arrangement was undertaken as a CSA (cost sharing alternative) or as a long-term licensing arrangement (licensing alternative). In particular, in both alternatives, P would perform all research activities and S would undertake routine manufacturing and distribution activities associated with its territory.
(ii) P undertakes an economic analysis that derives S’s cost contributions under the CSA, based on reliable financial projections. Based on this and further economic analysis, P determines S’s PCT Payment as a certain lump sum amount to be paid as of the date of the PCT (Date D).
(iii) Based on reliable financial projections that include S’s cost contributions and that incorporate S’s PCT Payment, as computed by P, and using a discount rate appropriate for the riskiness of S’s role as a CSA participant (see paragraphs (g)(2)(v) and (4)(vi)(F) of this section), the anticipated post-tax net present value to S in the cost sharing alternative (measured as of Date D) is $800 million. Further, based on these same reliable projections (but incorporating S’s licensing payments instead of S’s cost contributions and PCT Payment), and using a discount rate appropriate for the riskiness of S’s role as a long-term licensee, the anticipated post-tax net present value to S in the licensing alternative (measured as of Date D) is $100 million. Thus, S’s anticipated post-tax net present value is $700 million greater in the cost sharing alternative than in the licensing alternative. This result suggests that P’s anticipated post-tax present value must be significantly less under the cost sharing alternative than under the licensing alternative. This means that the reliability of P’s analysis as described in paragraph (ii) of this Example 2 is reduced, because P would not be expected to enter into a CSA if its alternative of being a long-term licensor is preferable.