Problem:
LiveForever Biotechnology Corporation (LFBC) has a new potential drug developed by their research group for which they are planning the marketing. The plan has three steps: 1) development (gaining approvals and designing processes and packaging), 2) marketing as a proprietary drug (no direct competitors) and 3) marketing as a generic drug. Step 1 is envisioned as happening in 2010, step 2 in years 2011-2015, and step 3 as years 2016 to 2018. The tables below lists the relevant costs and sales forecast. Depreciation will be computed as straight line from 2011 through 2015.
As an alternative, they could sell the rights to the product to a major pharmaceutical company. Based on this information, what would be the minimum price for which they sell considering past investments and future gains (e.g. the net present value today)?
| Present value (in 2010) of past research costs |
$100 |
million |
|
|
|
|
|
| Development (approvals and processes) |
$10 |
million |
(assume that this can not be included in depreciation) |
| COGS (proprietary period) |
15% |
of revenues |
|
|
|
|
|
| COGS (generic period) |
5% |
of revenues |
|
|
|
|
|
| Machinery Investment |
$2 |
million |
in 2010 |
|
|
|
|
| Machinery Salvage Value |
$0.0 |
|
|
|
|
|
|
| Inventory |
10% |
of revenues |
|
|
|
|
|
| Accounts receivable |
15% |
of revenues |
|
|
|
|
|
| Accounts Payable |
12% |
of revenues |
|
|
|
|
|
| Cost of capital |
8% |
|
|
|
|
|
|
| Tax Rate |
30% |
|
|
|
|
|
|
|
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
| Sales Revenue Forecast |
$0.00 |
$50.00 |
$75.00 |
$125.00 |
$400.00 |
$400.00 |
$150.00 |
$100.00 |
$50.00 |
| SG&A |
|
$8.00 |
$5.00 |
$5.00 |
$3.00 |
$1.00 |
$1.00 |
$1.00 |
$1.00 |