Alexion Pharma manufactures drugs used to treat genetic disorders. It recently acquired patent rights for 15 years to a drug for Huntington's disease currently undergoing trials in Europe. Inputs from a biotech equity research firm that the market for the drug was about 300,000 dosages a year with an estimated price tag of $550 per dose with a variable manufacturing cost per dose of $75. The firm estimates that the drug prices could increase 6% per year and variable costs could increase 5% per year. Cash flow volatility of individual genetic drugs is not easily available, but the standard deviation of the log of stock prices of two small companies manufacturing similar drugs is about 35%. The competition for genetic disorder drugs is hotting up creating a lot of uncertainty in the industry. Based on the R&D progress of two competitors working on similar drugs, Alexion estimates that an effective drug for Huntington's could become commercially viable in 8 years. The complex manufacturing process for such a drug implies that the drug development lag could be one year - this is the time lag between the decision to develop the drug and the actual development. The cost of developing the drug today is $1 billion.

In addition to the above patent, Alexion also had two commercially successful drugs that it manufactured and sold itself. After-tax cash flows from these drugs is expected to be $75 million per year upto perpetuity. Alexion estimates that its current WACC of 11% will remain constant in perpetuity. Alexion has also continued to fund research into new products generally spending about $150 million per year (in the most recent year), which are expected to grow 10% per year for the next 10 years and 5% per year thereafter. Given the nature of such risky research, a 5% risk premium over and above the current WACC is warranted. It was assumed that every dollar invested in research would create $ 1.25 in value in patents for the next 10 years, and break even after that (i.e., generate $ 1 in patent value for every $ 1 invested in R&D).

Estimate the value per share of Alexion, assuming there are 40 million shares outstanding and current interest bearing debt at $300 million. Assume the following interest rates: 1-year: 3% ; 8-year: 7% ; 15-year: 10%. Assume the annual % cost of delay on the patent (similar to the div. yield in Black-Scholes) as the cash flows given up in one year divided by the total PV of the cash flows.