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init_params_fn_distribution.m
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init_params_fn_distribution.m
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%This function initializes all parameters used by the simulation code
%This version uses the orphan drug parameters discussed in
%"Financing drug discovery for orphan diseases" Fagnan et al. 2013.
%@params is of type struct and has 4 fields simu (simulation parameters),
% assets (asset parameters), bonds (bond parameters), and ce (guarantee parameters)
function params = init_params_fn_distribution()
% ASSET PARAMETERS
assets = struct;
assets.mode = 'General';
assets.distribution = 'LogNormal';
%Correlation value for asset valuation.
assets.rho = 0.2;
%Present value upon succesful FDA approval.
approvalValue = 817.643;
%Costs for clinical trials by phase.
costs = [5,5,8,43,0];
%Discount rates for estimating valuation at phases prior to approval.
disc = [0.3, 0.3, 0.3, 0.25, 0.15];
%Duration of each phase in years.
dur = [1, 1.6561, 2.0942, 2.1497, 0.8];
%Probabilities of technical and regulatory success by phase.
%%Note that the original paper by Fernandez et al. uses a more
%%advanced generating matrix approach using data unavailable for
%%the Orphan drug paper published in Drug Discovery Today.
steady = [.69, .84, .53, .74, .96];
%Target phase (eg. 4 = P3, 3 = P2), used for calculating budgeting rules.
target = 4;
%% Success probabilities for non-markov chain clinical trials.
assets.success = steady;
assets.dur_mean = dur;
%Orphan drug utility functions build the capped log-normal distributions
%Uses values for the standard deviations derived from previous work by Fernandez et al. 2012.
assets.pricing_params = createTransMat(approvalValue,costs,disc,dur,steady,target);
assets.trans_prob=createProbMat(steady,dur);
%%Set the named variables to the corresponding column numbers.
%DSC refers to a state of withdrawal or discontinued.
assets.trans_prob_row.DSC = 1;
assets.trans_prob_row.PRE = 2;
assets.trans_prob_row.P1 = 3;
assets.trans_prob_row.P2 = 4;
assets.trans_prob_row.P3 = 5;
assets.trans_prob_row.NDA = 6;
assets.trans_prob_row.APP = 7;
assets.trans_prob_col = assets.trans_prob_row;
assets.pricing_params_row = assets.trans_prob_row;
assets.pricing_params_col.vmu = 1;
assets.pricing_params_col.vsigma = 2;
assets.pricing_params_col.vmx = 3;
assets.pricing_params_col.UpFront = 4;
assets.pricing_params_col.Milestone = 5;
assets.pricing_params_col.mu = 6;
assets.pricing_params_col.sigma = 7;
assets.pricing_params_col.max = 8;
assets.pricing_params_col.FutureCostEst = 9;
%Sell compounds upon reaching this phase.
%Note that it is possible for a compound to transition
%past the target phase due to parallel trials (code
%only checks for transition every six months).
assets.sell_in_phase = {'P3'};
assets.sale_time = ones(7,1).*1.5;
assets.sale_time_col = assets.trans_prob_col;
%Percent that assets are worth if they remain in the same stage
%for the entirety of the simulation.
assets.ratio_unchanged = 1.00;
%Share of valuation payouts that go to the megafund.
%eg. 0.85 means 85% of the sale value goes to the megafund
% with 15% paid out as royalties, lost to the megafund.
assets.equity_stake = 0.85;
%BOND PARAMETERS
bonds = struct;
%Capital structure percentages e.g. senior, junior, equity
bonds.capital_structure = [0.15 0.2 0.65]; %A1, A2, EQ
bonds.capital_structure_col.A1 = 1;
bonds.capital_structure_col.A2 = 2;
bonds.capital_structure_col.EQ = 3;
%Number of periods for which to cover expected interest
% and coupon payments with cash. (interest coverage)
bonds.IC_pers = 2;
% Interest coverage ratios
% e.g. hold cash equal to 1.75x future senior tranche interest & coupon
% and 3.5x the future junior tranche interest & coupon
bonds.interest_coverage = [1.75, 3.5, 0]; %A1, A2, EQ
bonds.interest_coverage_col = bonds.capital_structure_col;
%Bond amortization schedule.
%e.g. Senior tranche is paid out from Period 5 through 8
% Junior tranche is paid out from Period 9 through 12
%Note that Coupon payments are paid semi-annually until completion of the schedule.
bonds.amort_timing = [...
... %start, stop
5, 8; ... %A1
9, 12; ... %A2
];
bonds.amort_timing_row.A1 = 1;
bonds.amort_timing_row.A2 = 2;
bonds.amort_timing_col.start = 1;
bonds.amort_timing_col.stop = 2;
%Annual coupon rates scaled for semi-annual payments.
bonds.coupon = [0.05/2, 0.08/2, 0]; %A1, A2, EQ
bonds.coupon_col = bonds.capital_structure_col;
%Servicing rate or management fee for the fund.
bonds.servicing_rate = 0.0025;
%Accrual rate on missed service payments.
bonds.svc_accrual_int_rate = 0.07/2;
%Interest rate on unused cash on hand.
bonds.cash_accrual_int_rate = 0.01/2;
%CE PARAMETERS - Guarantees
ce.ce_amt = 0;
ce.ce_repay = false;
ce.ce_premium = 0;
% SIMU PARAMETERS
simu = struct;
%Number of simulations recommend 100K for quick estimates,
% or 2 million for a complete profile.
simu.NSIMUS = 10000;
simu.TIMESTEPS = max(reshape(bonds.amort_timing,1,[]))+1;
%Total capital to be spread across tranches.
simu.initial_cash = 575;
simu.initial_compounds = [0, 8, 8, 0, 0, 0, 0];
simu.initial_compounds_col = assets.trans_prob_col;
%Set the nominal amounts corresponding to the CS and total capital.
bonds.nominal = simu.initial_cash*bonds.capital_structure;
bonds.nominal_col = bonds.capital_structure_col;
%create global parameter list
params = struct;
params.simu = simu;
params.assets = assets;
params.bonds = bonds;
params.ce = ce;
end
%COPYRIGHT 2013
% This program is free software: you can redistribute it and/or modify
% it under the terms of the GNU General Public License as published by
% the Free Software Foundation, either version 3 of the License, or
% (at your option) any later version.
%
% This program is distributed in the hope that it will be useful,
% but WITHOUT ANY WARRANTY; without even the implied warranty of
% MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the
% GNU General Public License for more details.
%
% You should have received a copy of the GNU General Public License
% along with this program. If not, see <http://www.gnu.org/licenses/>.
%
%