Question

New Dawn pharma is considering the acquisition of a small biotech company—Sunset Pharmaceuticals. Sunset is developing a new drug that, if successful, would revolutionize the treatment of pancreatic and/or liver cancer. Sunset is about to start Phase I of the clinical testing for the new drug. New Dawn estimates that if they acquired Sunset the costs associated with Phase I testing would be around $60 million. They believe the probability of successful Phase I testing is 30%. Phase 2 testing for the pancreatic cancer and/or liver cancer indication would cost $170 million. The probability that Phase 2 testing will show effectiveness for pancreatic cancer is 25%. The probability that Phase II will show clinical efficacy for liver cancer only is 45%. Phase 3 testing for the pancreatic cancer indication will cost $300 million. The probability that Phase 3 testing for pancreatic cancer will be successful is 40%, and the cost of launching the drug for the pancreatic indication only will be $250 million. New Dawn estimates that future cash flows from a successful pancreatic cancer indication will be in the vicinity of $10 billion. Phase 3 testing for the liver cancer indication only will cost $350 million. The probability that Phase 3 testing will show effectiveness for liver cancer is 70%, and the cost of launching the drug for the liver indication only will be $200 million. Estimates for future cash flows from a successful liver cancer launch are in the vicinity of $20 billion. (All cash flows are expressed in after-tax present values discounted to time zero, including capital expenditure.)

C. New Dawn estimates that the value created from the acquisition will be on the order of $600 million. They also think that the deal will need about $0.8 million in Work. How much should New Deal be willing to pay in Consideration?

Answer 1

It is already mentioned in the problem statement that "All cash flows are expressed in after-tax present values discounted to time zero, including capital expenditure.".

Cost of Launching will occur only in succesful case/ Therefore multiplied by Probability Factor.

Assuming 0.8 m is required for Working Capital. there might be a Typo.

Feel free to ask any Query in Comment Section.

Please provide feedback.

Cheers