Question
Fosbuvir Project The company considers development of a new drug to treat Hepatitis C, code-named the Fosbuvir Project. Fosbeck has already spent $420 M on
Fosbuvir Project
The company considers development of a new drug to treat Hepatitis C, code-named the Fosbuvir Project. Fosbeck has already spent $420 M on preliminary research for drug development and it will need another $600 M on development this year (tax deductible) and $2 B in CapEx next year (these cash outlays are not part of the cash flows that you have estimated earlier, because this project is not approved yet). Capital expenditures will be depreciated over 10 years using straight line depreciation.
The patent for the drug is pending and the company expects to receive an FDA approval and start selling the drug in two years. Its expected revenues in the first year of sales are $1 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 7 years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are estimated to be 15% of revenues and SG&A expenses are $2 B a year if the drug is produced and zero otherwise.
Expected revenues and expenses take into account the uncertainty of getting the patent and FDA approval. The company estimates the probability of getting the approval in two years is 10% (i.e., if the company gets the approval the revenue is $10 B, if it does not, the revenue is zero). Even if Fosbuvir gets approved by FDA, each year there is a 5 % probability of the patent becoming obsolete due to a new drug entering the market, in which case the revenues, as well as CoGS and SG&A expenses will drop to zero.
NPV and IRR
Please estimate the NPV and IRR of the Fosbuvir Project, using the companys WACC of 12%. Please show excel formula and calculations.
| CoGS ratio | 15% | ||||||||||||
| growth | 50% | ||||||||||||
| SGA | $2.00 | ||||||||||||
| CapEx | $2.00 | ||||||||||||
| Revenue1 | $10.00 | ||||||||||||
| Project Life | 10 years | ||||||||||||
| Tax rate | 38% | ||||||||||||
| R&D | $0.60 | ||||||||||||
| probability of approval | 10% | ||||||||||||
| probability of obsolescence | 5% | ||||||||||||
| WACC | 12% | ||||||||||||
| Year | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | |
| Probability of Success | 0.1 | 0.95 | 0.95 | 0.95 | 0.95 | 0.95 | 0.95 | 0.95 | 0.95 | 0.95 | |||
| Revenue | |||||||||||||
| Cost | |||||||||||||
| SGA | |||||||||||||
| R&D | |||||||||||||
| Depreciation (unconditional) | |||||||||||||
| EBIT | |||||||||||||
| Taxes | |||||||||||||
| Net Income | |||||||||||||
| OCF | |||||||||||||
| CapEx | |||||||||||||
| FCF | |||||||||||||
| NPV | |||||||||||||
| IRR | |||||||||||||
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Fundamentals of Financial Accounting
Authors: Fred Phillips, Robert Libby, Patricia Libby
5th edition
978-0078025914
