Question
You manage a drug company that has recently been awarded a patent with a 17 year life for a new drug to treat MS at
You manage a drug company that has recently been awarded a patent with a 17 year life for a new drug to treat MS at the cost of $200 million in research costs. The cost to bring the drug to market (FDA approval, marketing, etc.) would be an additional $150 million. Your market research indicates that the drug could generate annual sales of $50 million for the next 15 years. The risk free rate is 3% and your firms cost of capital is 9%
What is the value of the underlying asset (S)? a. $50 million b. $403 million c. $485 million d. $597 million
The answer is b but please explain/show work
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