Question: Pharmaset, Inc. Acquisition

The reason of the low probability of FDA approval for Fosbuvir is that another company, Pharmaset, Inc., is working on a similar drug, called FosbuvirP, and is very close to getting FDA approval and a patent. If Pharmaset gets a patent, Fosbeck's own application will be denied. Therefore, instead of developing Fosbuvir internally, Fosbeck can acquire Pharmaset. Pharmaset already has manufacturing facilities in place and FosbuvirP is its only product. The book value of the company's fixed assets is $3 B, which will be depreciated using the straight-line depreciation over the next 10 years. Pharmaset expects to receive the FDA approval and patent by the end of this year with sales starting next year. Its next year revenues are expected to be $4 B ($10 B revenue in case of success times the 40% probability of success) with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 7 years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are expected to be 20% of revenues and SG&A expenses are $3.5 B a year if the drug is produced and zero otherwise. In other words, in case of FDA approval Pharmaset's revenues and costs will be similar to Fosbeck's, but SG&A expenses will be higher. If Fosbeck were to acquire Pharmaset, it would be able to bring SG&A costs down to Fosbeck's level. The probability of FDA approval is 40% and the probability of patent obsolescence remains the same as before - 5% each year.

Mergers and Acquisitions. Target (Pharmaset) Valuation

Pharmaset's management would be open to the sale in the valuation range of $ 20 to 24 Billion. Please estimate Pharmaset's value to Fosbeck, if it gets acquired.

Recommendations

Upon reviewing Fosbeck's choices, what project(s) would you recommend?