The biopharma industry is facing significant challenges to their existing business models because of expiring drug patents, declining risk tolerance of venture capitalists and other investors, and increasing complexity in translational medicine. In response to these challenges, new alternative investment companies have emerged to bridge the biopharma funding gap by purchasing economic interests in drug royalty streams. Such purchases allow universities and biopharma companies to monetize their intellectual property, creating greater financial flexibility for them while giving investors an opportunity to participate in the life sciences industry at lower risk. Royalty Pharma is a privately owned alternative investment company that focuses on the acquisition of these pharmaceutical royalty interests. The company invests in products after regulatory approval and, more recently, also in the late stages of clinical trials. By the end of 2013, its portfolio consisted of royalty interests in 39 approved and marketed biopharmaceutical products, and 2 products in clinical trials and/or under review by the FDA and/or EMA. With such a large portfolio diversified across multiple therapeutic indications, it is the global leader in dedicated royalty investment entities. In this case study, we analyze Royalty Pharma's unique financing structure and business model. Problem 5a 0.0/1.0 point (graded) While Sunesis had sufficient capital to fund the original Phase-Ill design of the trial, the company was seeking an additional $25 million to fund a potential expansion of the study based on the results of an interim analysis. At that time, an independent data safety monitoring board (DSMB) would decide whether to stop the study early for efficacy or futility, continue the study as planned, or implement a one-time increase in sample size with an additional 225 patients. By designing the study this way, Sunesis could avoid conducting an unnecessarily large trial in certain cases, potentially reducing the overall cost and risk of their study. After conducting its due diligence, Royalty Pharma conditionally agreed to pay Sunesis the $25 million to acquire a royalty interest on the future net sales of Vosaroxin. However, under the terms of the agreement, Royalty Pharma would only invest the $25 million if, following the interim analysis, the study was stopped early for efficacy or if the sample- size increase was implemented. In return, assume Royalty Pharma would get a 3.6% royalty interest on future net sales of the drug if the study was stopped early for efficacy, or a 6.75% royalty on future net sales if the sample size was increased. Assume these scenarios were estimated to occur with probability 10% and 40%, respectively. Furthermore, the probability that the study would be terminated early for futility and abandoned was probability that the study would be terminated early for futility and abandoned was estimated to be 5%. If the sample size was increased, Royalty Pharma estimated there was a 10% chance the therapy would show a strong effect, a 65% chance that it would show a weak effect, and a 25% chance that it would show no effect and be abandoned. Finally, if the DSMB decided that the trial should continue as planned, Royalty Pharma would have the option of making the $25 million investment upon the un- blinding of the study (i.e., the results were made known) in exchange for a 3.6% royalty interest on future net sales. Given this scenario, Royalty Pharma estimated there was a 15% chance the therapy would show a strong effect, a 60% chance that it would show a weak effect, and a 25% chance that it would show no effect and be abandoned. As such, Royalty Pharma would be able to significantly limit its exposure to the risk of an undesirable outcome of the clinical trial and, at the same time, position itself to receive a sizable royalty in the event that Vosaroxin was approved. Vosaroxin was projected to be highly profitable, especially if it the trial was stopped early for efficacy. Under this scenario, future net sales were projected to have a present value of $4 billion. If, however, the trial required a sample-size increase, then future net sales were projected to have a present value of only $2.5 billion under the strong effect scenario, and 0.5 billion under under the strong effect scenario, and 0.5 billion under the weak effect scenario. Finally, if the DSMB decided that the trial should continue as planned, the future net sales would have a present value of $3 billion under the strong effect scenario, and $0.5 billion under the weak effect scenario. Build a decision tree for Royalty Pharma that shows the cash flows and probabilities of each possible scenario. Your tree should have 8 outcomes with 3 failures and 5 successes. What is the probability that the clinical trial fails and the project is abandoned? (Note: Your answer should be a number in percentage form. Do not enter '%'.) What is the probability that the clinical trial fails and the project is abandoned? (Note: Your answer should be a number in percentage form. Do not enter '%'.) Hint: Remember that the probabilities leaving a branch must sum to 100%. % Problem 5b 0.0/1.0 point (graded) What is Vosaroxin's NPV from Royalty Pharma's perspective? For simplicity, assume the discount rate is 0% so the specific timing of the various cash flows can be ignored. (Note: Your answer should be expressed in units of millions of dollars.) $ million The biopharma industry is facing significant challenges to their existing business models because of expiring drug patents, declining risk tolerance of venture capitalists and other investors, and increasing complexity in translational medicine. In response to these challenges, new alternative investment companies have emerged to bridge the biopharma funding gap by purchasing economic interests in drug royalty streams. Such purchases allow universities and biopharma companies to monetize their intellectual property, creating greater financial flexibility for them while giving investors an opportunity to participate in the life sciences industry at lower risk. Royalty Pharma is a privately owned alternative investment company that focuses on the acquisition of these pharmaceutical royalty interests. The company invests in products after regulatory approval and, more recently, also in the late stages of clinical trials. By the end of 2013, its portfolio consisted of royalty interests in 39 approved and marketed biopharmaceutical products, and 2 products in clinical trials and/or under review by the FDA and/or EMA. With such a large portfolio diversified across multiple therapeutic indications, it is the global leader in dedicated royalty investment entities. In this case study, we analyze Royalty Pharma's unique financing structure and business model. Problem 5a 0.0/1.0 point (graded) While Sunesis had sufficient capital to fund the original Phase-Ill design of the trial, the company was seeking an additional $25 million to fund a potential expansion of the study based on the results of an interim analysis. At that time, an independent data safety monitoring board (DSMB) would decide whether to stop the study early for efficacy or futility, continue the study as planned, or implement a one-time increase in sample size with an additional 225 patients. By designing the study this way, Sunesis could avoid conducting an unnecessarily large trial in certain cases, potentially reducing the overall cost and risk of their study. After conducting its due diligence, Royalty Pharma conditionally agreed to pay Sunesis the $25 million to acquire a royalty interest on the future net sales of Vosaroxin. However, under the terms of the agreement, Royalty Pharma would only invest the $25 million if, following the interim analysis, the study was stopped early for efficacy or if the sample- size increase was implemented. In return, assume Royalty Pharma would get a 3.6% royalty interest on future net sales of the drug if the study was stopped early for efficacy, or a 6.75% royalty on future net sales if the sample size was increased. Assume these scenarios were estimated to occur with probability 10% and 40%, respectively. Furthermore, the probability that the study would be terminated early for futility and abandoned was probability that the study would be terminated early for futility and abandoned was estimated to be 5%. If the sample size was increased, Royalty Pharma estimated there was a 10% chance the therapy would show a strong effect, a 65% chance that it would show a weak effect, and a 25% chance that it would show no effect and be abandoned. Finally, if the DSMB decided that the trial should continue as planned, Royalty Pharma would have the option of making the $25 million investment upon the un- blinding of the study (i.e., the results were made known) in exchange for a 3.6% royalty interest on future net sales. Given this scenario, Royalty Pharma estimated there was a 15% chance the therapy would show a strong effect, a 60% chance that it would show a weak effect, and a 25% chance that it would show no effect and be abandoned. As such, Royalty Pharma would be able to significantly limit its exposure to the risk of an undesirable outcome of the clinical trial and, at the same time, position itself to receive a sizable royalty in the event that Vosaroxin was approved. Vosaroxin was projected to be highly profitable, especially if it the trial was stopped early for efficacy. Under this scenario, future net sales were projected to have a present value of $4 billion. If, however, the trial required a sample-size increase, then future net sales were projected to have a present value of only $2.5 billion under the strong effect scenario, and 0.5 billion under under the strong effect scenario, and 0.5 billion under the weak effect scenario. Finally, if the DSMB decided that the trial should continue as planned, the future net sales would have a present value of $3 billion under the strong effect scenario, and $0.5 billion under the weak effect scenario. Build a decision tree for Royalty Pharma that shows the cash flows and probabilities of each possible scenario. Your tree should have 8 outcomes with 3 failures and 5 successes. What is the probability that the clinical trial fails and the project is abandoned? (Note: Your answer should be a number in percentage form. Do not enter '%'.) What is the probability that the clinical trial fails and the project is abandoned? (Note: Your answer should be a number in percentage form. Do not enter '%'.) Hint: Remember that the probabilities leaving a branch must sum to 100%. % Problem 5b 0.0/1.0 point (graded) What is Vosaroxin's NPV from Royalty Pharma's perspective? For simplicity, assume the discount rate is 0% so the specific timing of the various cash flows can be ignored. (Note: Your answer should be expressed in units of millions of dollars.) $ million