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Proto Pharm is deciding whether to fund the penultimate stage of a drug development project. This would require an investment of £50 million. Alternatively, Proto can sell the intellectual property from its existing results to another company for £40 million. Proto and the other company do not compete in the same market, and the executives at Proto do not believe there is any additional organizational learning to be gained from continuing the drug development. The decision is considered to be purely financial. If Proto fund the penultimate stage there is a 0.6 chance of a poor result and a 0.4 chance of a promising result. If the penultimate stage is promising, then the other company is willing to pay Proto £100 million for the intellectual property rights. If the penultimate stage is poor, then Proto estimate a final stage would only have a 0.5 chance of success. If the penultimate stage is promising, then the final stage has a 0.7 chance of success. The payoff after costs for a successful final stage is estimated at £140 million, and the payoff after costs for a failed final stage is estimated at £0. The other company would not purchase the intellectual rights from Proto if the penultimate stage were unsuccessful.

Draw and roll back a decision tree and describe to advise Proto Pharm whether to fund the penultimate stage or to sell the intellectual property to the other company.

 

Basic Finance, Finance

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