Phase Cost Revenue Success R-NPV

II 20 0 70% -2.5

III 100 0 50%

Launch 650 900

Revenue estimation after each phase Growth Chance up 33% 15% no-change 0% 65% down -25% 20%

Revenue Projection Scenario Tree (assuming a multiplicative trinomial lattice with stationary expectation, i.e. expecta 1592.01 1197 1197 900 900 676.6917 676.69173 508.79077

900

Expectation consistency: Check that the value at any node = expecte (Example: value at first node = 900 = upwards prob * upwards value If the lattice is expectation consistent at the first node and all other n is expectation consistent

Option Valuation: Risk-adjusted NPV Scenario Tree, Taking Abandonment Decisions Into Account

9.60125

942.01 173.5 547 25 250 0 26.691729 0

Repeat the option valuation

ationary expectation, i.e. expectation growth r = 0)

that the value at any node = expected revenue in the next phase, given the node we are currently at 00 = upwards prob * upwards value + no-change prob * 900 + downwards prob * downwards value = 900) tent at the first node and all other nodes are "replicas" of the first node, as in this case, then the whole lattice

Into Account

Phase Cost Revenue Success R-NPV

II 20 0 0.7 -2.5

III 100 0 0.5

Launch 650 900

Revenue estimation after each phase Growth Chance up 33% 15% no-change 0% 65% down -25% 20%

Revenue Projection Scenario Tree (assuming a multiplicative trinomial lattice with stationary expectation, i.e. expectation growt 1592.01 1197 1197 900 900 676.6917 676.69173 508.79077 Contract Design Parameters Price for drug now Buyback price Buyback percentage 4M 0M 0%

900

1st main caluclation: Check if the biotech company gets positive value f and will therefore exercise the option. Plug in the corresponding numbe from the two columns to the right If Biotech If Biotech doesn't buys back buy back

Pharma valuation

5.60125

942.01 942.01 942.01 173.5 547 547 547 25 250 250 250 0 26.691729 26.69173 26.69173 0 0 0

2nd preparatory calculation: Pharma values

Biotech valuation 0 0 0 0

If Pharma launches 0 0 0 0

0 0 0

1st preparatory calculation: What's the Biotech valu

2nd main calculation: These cells are zero if the corresponding scenario cells for the pharma are zero (indica that pharma has abandoned the project). Otherwise they contain the risk-adjusted NPV in this scenario, which will always be positive because there are no further costs for NSR until it has to decide whether or not to exercise the option to buy back.

expectation, i.e. expectation growth r = 0)

ech company gets positive value from a launch . Plug in the corresponding number

ratory calculation: Pharma values for cases where Biotech exercises option or not

calculation: What's the Biotech value if it has the option to buy back, I.e., if Pharma has launched?

ells for the pharma are zero (indicating adjusted NPV in osts for NSR until

5.60125 0% 5% 10% 15% 20%

50% 5.60125 5.60125 5.60125 5.60125 5.60125

60% 5.60125 5.60125 5.60125 5.60125 5.60125

70% 5.60125 5.60125 5.60125 5.60125 5.60125

80% 5.60125 5.60125 5.60125 5.60125 5.60125

90% 5.60125 5.60125 5.60125 5.60125 5.60125

100% 5.60125 5.60125 5.60125 5.60125 5.60125