Pfizer, in the year 2030, has made a revolutionary breakthrough by developing a drug that kills colon cancer cells, something the pharma industry has never seen before. Pfizer claims that this drug will enable patients to cut their medical costs to $10 per month and manufacturing costs will be reduced by $3 per unit. Pfizer proposed to capitalize on this invention by embarking on a huge $1 billion expansion.By the year 2032, the annual sales of Pfizer's cancer drug was $1.68 billion, or 240 Million units of drugs. Below, I outline the steps taken to value this new drug, including demand forecasting, financial calculations, and stock evaluation.
Key Assumptions:
1) The Cost of Capital is 20%.
2) The production facility has an indefinite physical life.
3) The demand curve and cost of each technology does not change.
4) There is no chance of a new generation technology in the foreseeable future.
5) The corporate income tax is 0%.
The demand for the drug is expected to be very high due to its uniqueness. I constructed a demand curve to analyze the relationship between price and demand. The assumption was that, for every $100 reduction in a patient's overall drug bill, demand for the drug increases by 80 million units. Using this, I plotted a linear demand curve in Excel:
Y-axis: Drug price (reduction in patient drug bill).
X-axis: Number of units demanded.
The demand curve helped visualize how sensitive patients (or buyers) are to price changes. As the price decreases, the demand surges significantly, emphasizing the drug’s importance.
The Curve summarizes the fact thta for each $1 cut in price, there is an increase in demand of $80 million.
In the table above, I have drawn the size and cost structure of the cancer-killing drug industry before Pfizer announced its expansion plans. In this, the selling price is $7 per unit. One unit means one blister pack. The table summarizes the cost structure of new and old drug manufacturing. Pfizer with the new drug is earning 20% on its initial investment. Other firms have been hit by excessive price cuts.
Forecasting the Prices of Pfizer's new drugs
I have derived the forecasted prices from a set of scenerios using the demand curve I drew earlier.
In the first scenario, Pfizer will focus on increasing the maximum production capacity to 340 Million units.
The Value of Pfizer's new drug
Alternate Expansion Plans
