Question

ASP Pharmaceuticals has decided to go ahead and start clinical trials on a new
drug. The total R&D costs are estimated to reach $750,000,000 with clinical trials
mounting to $120,000,000. The current market size is estimated to be 2,000,000 and is
expected to grow at 3% every year. The market share ASP hopes to capture in the first year
is 8%, and is projected to grow by 20% each year for the next 4 years. A monthly
prescription is anticipated to generate revenue of $350 while incurring variable costs of
$150. A discount rate of 9% is assumed.

a. What is the net present value over the first four years?

b. By which year ASP can expect to realize a positive cumulative profit? What is the
cumulative profit of this year?

c. Conduct appropriate what-if analyses to investigate how the cumulative profit for
the next four years and the net present value change if unit price varies between
$250 and $450 with increment of $20 (the table below is to show the format of the
solution, you may submit your answers in the EXCEL file).
Unit Price Year 1 Year 2 Year 3 Year 4 NPV
250
270
290
310
330
350
370
390
410
430
450

d. Conduct appropriate what-if analyses to investigate the joint effect of unit cost and
market share growth rate on net present value. (For consistency, let unit cost vary
between $100 and $200 with increment of $10, and let market share growth rate
vary between 10% and 30%, with increment of 2%. The table below is to show the format of the solution, you may submit your answers in the EXCEL file).

format of the solution, you may submit your answers in the EXCEL file).

Market Share Growth Rate

Unit Cost 0.1 0.12 0.14 0.16 0.18 0.20 0.22 0.24 0.26 0.28 0.3
100
110
120
130
140
150
160
170
180
190
200

e. Use a tornado chart to identify the most important 3 variables that affect the NPV
(you may submit the tornado chart in the EXCEL file).

Answer 1

a. The Net Present Value for first four years is $936,319,360.

Unit Price	$350
Variable cost	$150
Market share growth rate	20%
Discount rate	9%
Market share for year 1	8%
Market size growth rate	3%

	Year 0	Year 1	Year 2	Year 3	Year 4
Market Size (@ growth rate of 3%)	2,000,000	2,060,000	2,121,800	2,185,454	2,251,018
Market share of ASP (8% year 1 & 20% growth there after)		164,800	197,760	237,312	284,774
Yearly revenue ($350 per month per subscription)		$692,160,000	$830,592,000	$996,710,400	$1,196,052,480
Variable cost ($150 per month)		$296,640,000	$355,968,000	$427,161,600	$512,593,920
R&D cost	-$750,000,000
Cash Flow	-$750,000,000	$395,520,000	$474,624,000	$569,548,800	$683,458,560
Annuity factor (discount rate 9%)	1	0.917431193	0.841679993	0.77218348	0.708425211
PV	-$750,000,000	$362,862,385	$399,481,525	$439,796,174	$484,179,275
NPV	$936,319,360

b. The ASP can expect to realize a positive cumulative profit in year 2. The cumulative profit is $120,144,000.

	Profit	Cumulative profit
Year 0	-$750,000,000	-$750,000,000
Year 1	$395,520,000	-$354,480,000
Year 2	$474,624,000	$120,144,000
Year 3	$569,548,800	$689,692,800
Year 4	$683,458,560	$1,373,151,360

c. Below is the what-if analysis

	Cumulative Profit
Unit Price	Year 1	Year 2	Year 3	Year 4	NPV
$250	-$552,240,000	-$314,928,000	-$30,153,600	$311,575,680	$93,159,680
$270	-$512,688,000	-$227,913,600	$113,815,680	$523,890,816	$261,791,616
$290	-$473,136,000	-$140,899,200	$257,784,960	$736,205,952	$430,423,552
$310	-$433,584,000	-$53,884,800	$401,754,240	$948,521,088	$599,055,488
$330	-$394,032,000	$33,129,600	$545,723,520	$1,160,836,224	$767,687,424
$350	-$354,480,000	$120,144,000	$689,692,800	$1,373,151,360	$936,319,360
$370	-$314,928,000	$207,158,400	$833,662,080	$1,585,466,496	$1,104,951,295
$390	-$275,376,000	$294,172,800	$977,631,360	$1,797,781,632	$1,273,583,231
$410	-$235,824,000	$381,187,200	$1,121,600,640	$2,010,096,768	$1,442,215,167
$430	-$196,272,000	$468,201,600	$1,265,569,920	$2,222,411,904	$1,610,847,103
$450	-$156,720,000	$555,216,000	$1,409,539,200	$2,434,727,040	$1,779,479,039

d. below is the what if analysis

	NPV
?Unit cost/Market Share Growth rate ?	10%	12%	14%	16%	18%	20%	22%	24%	26%	28%	30%
100	$1,089,432,579	$1,140,598,532	$1,193,011,359	$1,246,687,871	$1,301,644,881	$1,357,899,199	$1,415,467,639	$1,474,367,011	$1,534,614,127	$1,596,225,800	$1,659,218,840
110	$1,015,855,276	$1,064,974,591	$1,115,290,905	$1,166,820,356	$1,219,579,086	$1,273,583,231	$1,328,848,933	$1,385,392,330	$1,443,229,562	$1,502,376,768	$1,562,850,087
120	$942,277,973	$989,350,650	$1,037,570,450	$1,086,952,842	$1,137,513,290	$1,189,267,263	$1,242,230,228	$1,296,417,650	$1,351,844,997	$1,408,527,736	$1,466,481,333
130	$868,700,670	$913,726,708	$959,849,996	$1,007,085,327	$1,055,447,495	$1,104,951,295	$1,155,611,522	$1,207,442,970	$1,260,460,432	$1,314,678,704	$1,370,112,580
140	$795,123,367	$838,102,767	$882,129,542	$927,217,812	$973,381,700	$1,020,635,327	$1,068,992,817	$1,118,468,289	$1,169,075,867	$1,220,829,672	$1,273,743,826
150	$721,546,063	$762,478,826	$804,409,087	$847,350,297	$891,315,905	$936,319,360	$982,374,111	$1,029,493,609	$1,077,691,302	$1,126,980,640	$1,177,375,072
160	$647,968,760	$686,854,885	$726,688,633	$767,482,782	$809,250,109	$852,003,392	$895,755,405	$940,518,928	$986,306,737	$1,033,131,608	$1,081,006,319
170	$574,391,457	$611,230,943	$648,968,178	$687,615,267	$727,184,314	$767,687,424	$809,136,700	$851,544,248	$894,922,172	$939,282,576	$984,637,565
180	$500,814,154	$535,607,002	$571,247,724	$607,747,752	$645,118,519	$683,371,456	$722,517,994	$762,569,567	$803,537,607	$845,433,544	$888,268,811
190	$427,236,851	$459,983,061	$493,527,270	$527,880,238	$563,052,724	$599,055,488	$635,899,289	$673,594,887	$712,153,041	$751,584,512	$791,900,058
200	$353,659,548	$384,359,119	$415,806,815	$448,012,723	$480,986,928	$514,739,520	$549,280,583	$584,620,207	$620,768,476	$657,735,480	$695,531,304