Pharmaset, Inc. Acquisition

The reason of the low probability of FDA approval for Fosbuvir is that another company, Pharmaset, Inc., is working on a similar drug, called FosbuvirP, and is very close to getting FDA approval and a patent. If Pharmaset gets a patent, Fosbecks own application will be denied. Therefore, instead of developing Fosbuvir internally, Fosbeck can acquire Pharmaset. Pharmaset already has manufacturing facilities in place and FosbuvirP is its only product. The book value of the companys fixed assets is $3 B, which will be depreciated using the straight-line depreciation over the next 10 years. Pharmaset expects to receive the FDA approval and patent by the end of this year with sales starting next year. Its next year revenues are expected to be $4 B ($10 B revenue in case of success times the 40% probability of success) with subsequent annual growth of 50% over the next three years (until the fourth year of sales), after which the sales will be stable until the tenth year of sales. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are expected to be 15% of revenues and SG&A expenses are $3.5 B a year if the drug is produced and zero otherwise. In other words, in case of FDA approval Pharmasets revenues and costs will be similar to Fosbecks, but SG&A expenses will be higher. If Fosbeck were to acquire Pharmaset, it would be able to bring SG&A costs down to Fosbecks level. The probability of FDA approval is 40% and the probability of patent obsolescence remains the same as before 5% each year.

Mergers and Acquisitions. Target (Pharmaset) Valuation

Pharmasets management would be open to the sale in the valuation range of $ 22 to 26 Billion.

• Please estimate Pharmasets value to Fosbeck, if it gets acquired.

This is what I have, can you please check for accuracy?

COGS ratio growth SGA Fosbeck SGA Pharmaset Pharmaset PPE Revenuel Project Life Tax rate Pharmaset probability of approval probability of obsolescence WACC 15% 50% $2.00 $3.50 $3.00 $10.00 10 years 21% 40% 5% 12% Solution Legend Value given in problem Formula/Calculation Analysis required Assumptions, Qualitative analysis or Short answer required Goal Seek, Scenario or Data Table cell Crystal Ball Input Crystal Ball Output 2020 Year Probability of Success Revenue Cost SGA if acquired Depreciation (unconditional) EBIT Taxes Net Income 2021 0.4 $4.00 $0.60 $3.50 $0.30 ($0.40) $0.00 ($0.40) 2022 0.95 $6.00 $0.90 $3.50 $0.30 $1.30 $0.27 $1.03 2023 0.95 $9.00 $1.35 $3.50 $0.30 2024 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 2025 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 2026 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 2027 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 2028 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 2029 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 2030 0.95 $13.50 $2.03 $3.50 $0.30 $7.68 $1.61 $6.06 $3.85 $0.81 $3.04 $46.11 OCF FCF ($0.10) $4.10 $1.33 $4.67 $3.34 $5.66 $6.36 $7.14 $6.36 $7.14 $6.36 $7.14 $6.36 $7.14 $6.36 $7.14 $6.36 $7.14 $6.36 $7.14 $64.39 Value if acquired $18.28