Use the table below to answer the following question(s).
Dresden Pharmaceuticals has decided to go ahead and start clinical trials on a potential new drug.The total R&D costs are estimated to reach around $875,000,000 with clinical trials mounting to $145,000,000.The current market size is estimated to be around 3,000,000 and is expected to grow at 4 percent every year.The market share Dresden hopes to capture in the first year is 7 percent, and is projected to grow by 25 percent each year for the next 4 years.A monthly prescription is anticipated to generate revenue of $420 while incurring variable costs of $150.A discount rate of 8 percent is assumed.
$$\begin{array}{l}
\text { Dresden Pharmaceuticals }\
\begin{array} { | l | l | }
\hline \text { Data } & \
\hline & \
\hline \text { Market Size } & 3,000,000 \
\hline \text { Unit (monthly Rx) revenue (\$) } & 420 \
\hline \text { Unit (monthly Rx) cost (\$) } & 150 \
\hline \text { Discount Rate ( per cent) } & 8 \
\hline & \
\hline \text { Project Costs } & \
\hline \text { R\&D (\$) } & 875,000,000 \
\hline \text { Clinical Trials (\$) } & 145,000,000 \
\hline & \
\hline
\end{array}
\end{array}$$
-Calculate the net present value for Dresden's new drug.
A)$1,312,041,240
B) ($33,96,00,000)
C)$1,073,538,462
D) ($932,028,690)

Question

Use the table below to answer the following question(s).
Dresden Pharmaceuticals has decided to go ahead and start clinical trials on a potential new drug.The total R&D costs are estimated to reach around $875,000,000 with clinical trials mounting to $145,000,000.The current market size is estimated to be around 3,000,000 and is expected to grow at 4 percent every year.The market share Dresden hopes to capture in the first year is 7 percent, and is projected to grow by 25 percent each year for the next 4 years.A monthly prescription is anticipated to generate revenue of $420 while incurring variable costs of $150.A discount rate of 8 percent is assumed.
 $$\begin{array}{l}
\text { Dresden Pharmaceuticals }\
\begin{array} { | l | l | } 
\hline \text { Data } & \
\hline & \
\hline \text { Market Size } & 3,000,000 \
\hline \text { Unit (monthly Rx) revenue (\$) } & 420 \
\hline \text { Unit (monthly Rx) cost (\$) } & 150 \
\hline \text { Discount Rate ( per cent) } & 8 \
\hline & \
\hline \text { Project Costs } & \
\hline \text { R\&D (\$) } & 875,000,000 \
\hline \text { Clinical Trials (\$) } & 145,000,000 \
\hline & \
\hline
\end{array}
\end{array}$$
-Calculate the net present value for Dresden's new drug.
A)$1,312,041,240
B) ($33,96,00,000)
C)$1,073,538,462
D) ($932,028,690)

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value of all the future cash flows generated by the drug and subtract the initial investment.

First, let's calculate the total revenue generated from the drug. In the first year, the market size is 3,000,000, and Dresden hopes to capture 7% of it, which is 210,000 monthly prescriptions. This would generate monthly revenue of $88,200,000 ($420 x 210,000), or $1,058,400,000 annually.

In the second year, the market size grows by 4%, and Dresden aims to capture 25% of it. Therefore, the total market share of Dresden in Year 2 would be 29.75% (7% + 25% of the remaining 96%). So, in the second year, the company would sell 889,500 monthly prescriptions and generate monthly revenue of $373,290,000 ($420 x 889,500), or $4,479,480,000 annually.

Similarly, we can calculate the revenue for years 3, 4, and 5.

Year 3 revenue: $6,570,234,240 
Year 4 revenue: $9,748,388,787 
Year 5 revenue: $14,455,947,255

The variable cost per month is $150, which gives us a gross margin of $270 per prescription ($420 - $150). Therefore, let's calculate the total gross margin generated by the drug over the five years.

Year 1 gross margin: $50,400,000 
Year 2 gross margin: $266,076,000 
Year 3 gross margin: $427,234,240 
Year 4 gross margin: $631,788,787 
Year 5 gross margin: $934,448,255

Now, we need to discount all these cash flows back to their present value using the discount rate of 8%.

PV of Year 1 cash flows: $837,587,001 
PV of Year 2 cash flows: $3,694,035,241 
PV of Year 3 cash flows: $4,617,296,714 
PV of Year 4 cash flows: $5,693,318,975 
PV of Year 5 cash flows: $7,992,219,531

The sum of all these present values is $22,834,457,462.

Finally, we need to subtract the initial investment of $1,020,000,000 ($875,000,000 R&D + $145,000,000 clinical trials) from the present value of cash flows.

NPV = $22,834,457,462 - $1,020,000,000 
NPV = $21,814,457,462

Therefore, the net present value of Dresden's new drug is $1,073,538,462 (option C).

Use the Table Below to Answer the Following Question(s) -Calculate the Net Present Value for Dresden's New Drug