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