Hi there,

a couple of considerations on your approach:

1. Assuming you can proxy cash flow as profits, the value of the product for the first 5 years will be lower than 392B, due to the discount rate, unless the interviewer says you can ignore it
2. Assuming it is profitable for the company to copy the product after 5 years, the value of the patent after 5 years will be given by the investment required to copy the product (assuming the results of copying would be the same as purchasing the patent)
3. The maximums price could be further increased if acquiring the patent will generate synergies for the pharma company

To calculate the actual value of the patent for the pharma company, assuming they will copy the product after year 5, you can therefore consider the following:

Value of the patent = Present value of the 392B + Present value of the investment to copy the product after year 5 + Present value of synergies

Once you have that value, you can then compare it with other possible alternatives for the pharma company, and check which one will generate the best return given the client objective.

If there is a better alternative for the pharma company and Dr. Rossman wants to sell the product to that company, they should then reduce the price to at least match the best alternative.

Hope this helps,
Francesco

Hello!

This is indeed an interesting case!

In general terms, in a pricing problem you can use three techniques:

1. Break even to know minimum price and cover cost
2. Benchmark aginst competitors: this does not apply
3. Willingness to pay

Those 3 techniques define you some boundary limits, and the answer will lay somewhere in the area defined by them.

Hope it helps!

Cheers,

Clara

Hi, I would conduct the analysis by discussing in a structured table pros and cons of the 3 main pricing strategies: cost based, willingness to pay, competitive benchmark

Best,
Antonello