Cephalon Inc. - Case Questions
1. If Myotrophin is approved by the FDA, would you recommend that Cephalon follows a strategy of making an immediate onetime payment to purchase all of the rights to this drug rather than making a stream of payments under the milestone payment/interim license/purchase option agreement that was in place? Explain your reasoning. Answer:
If Myotrophin is approved, I will recommend Cephalon to make a onetime payment to purchase the rights to this drug. First of all, we want to find out if we are capable to raise this large amount of money instantly. To buy out this drug, we need to pay $125 million in cash in 1997, as total financing shortfall of about $196 million in that year. In the next year, we still expect to see a $31 million shortfall, which make the total of $227 million cash requirement. But take consideration of the $146 million in balance December 1996, our shortage of cash is actually around $80 million. At the moment the Myotrophin got approved, it is clear that our stock price will increase. As analysts predicted, it is quite clear that our stock price will go up to $30-40 per share. In the least case of our new stock price $30, the call option that we bought from SBC will generate us $21.25 million and in the most optimal case the pay off will be $45 million. Plus the $100 million we are expect to raise through financing, we can surely meet the near-term cash flow requirement. And by applying the immediate buy back method, we will see positive net cash flow from the third year on. So there should not be any further cash shortage. Now we know we do not have any cash problem to use tender method, what benefit can tender method bring us? Higher NPV of the project! We determined the NPV of this project at analyst discount rate 25% will lead to $269 million in a 14 year base if we buy out the rights to this drug at once. At the same time, if we choose to use the long term purchasing option, the NPV will only be $226...
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