Fosbuvir Project The company considers development of a new drug to treat Hepati
ID: 2789047 • Letter: F
Question
Fosbuvir Project
The company considers development of a new drug to treat Hepatitis C, code-named the Fosbuvir Project. Fosbeck has already spent $420 M on preliminary research for drug development and it will need another $600 M on development this year (tax deductible) and $2 B in CapEx next year (these cash outlays are not part of the cash flows that you have estimated earlier, because this project is not approved yet). Capital expenditures will be depreciated over 10 years using straight line depreciation.
The patent for the drug is pending and the company expects to receive an FDA approval and start selling the drug in two years. Its expected revenues in the first year of sales are $1 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 7 years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are estimated to be 15% of revenues and SG&A expenses are $2 B a year if the drug is produced and zero otherwise.
Expected revenues and expenses take into account the uncertainty of getting the patent and FDA approval. The company estimates the probability of getting the approval in two years is 10% (i.e., if the company gets the approval the revenue is $10 B, if it does not, the revenue is zero). Even if Fosbuvir gets approved by FDA, each year there is a 5 % probability of the patent becoming obsolete due to a new drug entering the market, in which case the revenues, as well as CoGS and SG&A expenses will drop to zero.
NPV and IRR
Please estimate the NPV and IRR of the Fosbuvir Project, using the company’s WACC of 12%. Please show excel formula and calculations.
CoGS ratio 15% growth 50% SGA $2.00 CapEx $2.00 Revenue1 $10.00 Project Life 10 years Tax rate 38% R&D $0.60 probability of approval 10% probability of obsolescence 5% WACC 12% Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Probability of Success 0.1 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 Revenue Cost SGA R&D Depreciation (unconditional) EBIT Taxes Net Income OCF CapEx FCF NPV IRRExplanation / Answer
CoGS ratio 15% growth 50% SGA $2.00 CapEx $2.00 Revenue1 $10.00 Project Life 10 years Tax rate 38% R&D $0.60 probability of approval 10% probability of obsolescence 5% WACC 12% Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Probability of Success 0.1 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 Revenue 10.00 15.00 22.50 33.75 45.00 56.25 67.50 78.75 90.00 101.25 112.50 123.75 Cost 1.50 2.25 3.38 5.06 6.75 8.44 10.13 11.81 13.50 15.19 16.88 18.56 SGA 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 R&D 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Depreciation (unconditional) 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 EBIT 5.70 9.95 16.33 25.89 35.45 45.01 54.58 64.14 73.70 83.26 92.83 102.39 Taxes 2.166 3.781 6.2035 9.83725 13.471 17.10475 20.7385 24.37225 28.006 31.63975 35.2735 38.90725 Net Income 3.53 6.17 10.12 16.05 21.98 27.91 33.84 39.77 45.69 51.62 57.55 63.48 OCF 3.16 4.92 7.20 10.20 12.47 14.14 15.30 16.06 16.48 16.62 16.55 16.30 CapEx (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) (2.00) FCF 3.334 5.969 9.922 15.850 21.779 27.708 33.637 39.565 45.494 51.423 57.352 63.280 CapEx (2.00) Net Income 3.53 6.17 10.12 16.05 21.98 27.91 33.84 39.77 45.69 51.62 57.55 63.48 WACC 12% 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 0.2875 0.2567 NPV 5.16 6.92 9.20 12.20 14.47 16.14 17.30 18.06 18.48 18.62 18.55 18.30 IRR 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21%
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