- The initial cost of developing the drug for
commercialuseisestimatedtobe$2.875billion,if
the drug is introduced today. - Thefirmhasthepatentonthedrugforthenext 17
years,andthecurrentlong-termTreasurybondrateis
6.7%. - The average variance in firm value for publicly
traded biotechnology firms is 0.224.
Weassumethatthepotentialforexcessreturns existsonly
during the patent life and that competition will eliminate
excess returns beyond that period. Thus, any delay in
introducing thedrug,onceitbecomesviable, willcost the
firm one year of patent-protected excess returns. (For the
initialanalysis,thecostofdelaywillbe1/17,nextyearitwill
be 1/16, the year after 1/15, and so on.)
Basedontheseassumptions,weobtainthefollowinginputsto
the option pricing model:
These yield the following estimates fordandN(d):
Plugging back into the dividend-adjusted Black-Scholes
option pricing model,
8 we get: