Question
You work for a Venture Capitalist that is considering buying a pharmaceutical company, which has two existing drugs and one new drug. The first existing
You work for a Venture Capitalist that is considering buying a pharmaceutical company, which has two existing drugs and one new drug. The first existing drug is a cardiovascular drug that is expected to generate profits of $10 million at the end of this year and this amount is expected to decline at a rate of 10% per year until the end of year 10 at which time the drugs patent will expire and the drug will have zero profits. The second drug is a generic diabetes drug that is expected to generate profits of $1 million at the end of this year, which will continue forever. The patent on the new drug is for treating Dementia, which will last 17 years. You expect that the drugs profits will be $2 million at the end of this year and that this amount will grow at a rate of 5% per year until the end of year 17. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. How much should the Venture Capitalist pay today to buy the pharmaceutical company, assuming the pharmaceutical company only has these three drugs to sell and the interest rate is 10% per year? What other criteria should be used to make the decision?
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