The patent has a 12-year life remaining. The drug requires $150 million initial costs for commercial production.
Question:
The patent has a 12-year life remaining. The drug requires $150 million initial costs for commercial production. Based on market research, the current assessment is that the net cash flows of the drug would be $24 million per year until the patent expires. The cost of capital for the Future Pharma Inc. is 7%. The standard deviation on the assets of pharmaceutical companies is 32%. The Treasury bond yield is 5%.
a. (1 point) What is the value of the patent if it is immediately commercialized?
b. (2 point) Provide the following inputs for the Black-Scholes model AND use the model to determine the value of Future Pharma's patent as an option to delay.
- Current value of the underlying asset S =
- Strike price K =
- Standard deviation of the asset value Sigma =
- Life of the option t =
- Risk-free rate r =
- Cost of delay y =
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon