Reference no: EM132793162

Megafund financing methods for funding early-stage translational research often require billions of dollars in capital to diversify idiosyncratic scientific and clinical risk enough to attract private-sector capital. In this problem set we apply this financing method to orphan drug development, where development costs, failure rates, and correlations are low, and therefore the amount of capital required to de-risk these portfolios is much lower.

• Consider a portfolio of 8 preclinical orphan drug compounds each initially acquired and developed using US$25 million of capital. Assume this capital is used to first purchase and then develop the compounds, with excess capital not currently deployed earning a 0% return in cash. For simplicity, also assume that compounds are sold once they (successfully) complete the preclinical phase. We will perform a statistical analysis to estimate the expected return of this investment over the initial preclinical research phase

Problem 1: Assuming average annual sales of US$300 million, a 10% cost of capital, a competition-free marketing period of 12 years, and profit margin of 25%, estimate the net present value of an orphan drug's profits over its competition-free lifespan at the moment of product launch. Assume the first cash flow occurs 1 year after launch.