Purinex Case Study

Background

Purinex, Inc. is a small pharmaceutical company based out of Syracuse, New York that focuses on drug discovery and development based on their purine drug-development platform. The drug-development platform is based off of the naturally occurring compound, purine. Purinex is looking to develop a process for creating purine-based molecules that would act as activators or blockers in cell receptors to produce the desired effect on the targeted receptor without negative outcomes on other receptors. Purinex has 14 employees, a chemistry lab near their offices, and more than 35 patents pending or already issued for purine related drugs.

Problems

Purinex has $700,000 in cash on hand, and with $60,000 in monthly costs, they only have enough capital to last for 12 more months. Purinex has two drugs (one for sepsis, one for diabetes), which are entering Phase II of the FDA clinical review process. Purinex is talking with two large pharmaceutical companies who are interested in making deals for the sepsis or diabetes drugs (mutually exclusive). Gilad Harpaz, Purinex’s CFO, believes there is a 75% chance that Purinex will make a deal with a pharmaceutical company in the next 4-12 months. Because of this uncertainty, Harpaz is considering other options to capitalize Purinex in the short term. He identifies 3 options: 1) Use funds from a VC firm. Purinex can get $10 million upfront, and a $15 million valuation. 2) Get funds from angel investors, receive $2 million upfront and a valuation of $17.5 million. 3) Wait six months and see if a pharmaceutical deal happens. Each option has its pros and cons, like timing, upfront payments, and valuation. Harpaz also must keep in mind that only 15% of the drugs that enter Phase II of the FDA review make it through successfully and that the process could still take another 8+ years to complete.

Solution

By using a decision tree and its results to quantify future expected earnings Purinex will be able to decide on the...