TriPharma has discovered a potential drug breakthrough in the lab and needs to deide whether to go forward to conduct clinical trials and seek FDA approval to market the drug.  Total R&D costs are expected to reach $700 million, and the cost of clinical trials will be about $150 million. The current market size is estimated to be 2 million people and is expected to grow at a rate of 3% each year. In the first year, TriPharma estimates gaining an 8% market share, which is anticipated to grow by 20% each year. It is difficult to estimate beyond 5 years because new competitors are expected to be entering the market. A monthly prescription is anticipated to generate revenue of $130 while incurring variable costs of $40. A discount rate of 9% is assumed for computing the net present value of the project. The company needs to know how long it will take to recover its fixed expenses and the net present value over the first 5 years.

 

a) Determine the NPV of the project.

b) In what year will this project break even?

c) What is the minimum initial market size for this project to break even? (holding all other assumptions the same)

d) Using Excel's Scenario Manager & Table 1, analyze the three market scenarios.

e) What are your conclusions about this product? 

Table 1 Market Scenarios
	Most likely market	Slow market	Hot market
Market size	2,000,000	1,000,000	2,500,000
Market growth rate	3%	2%	4%
Estimated market share	8%	5%	10%