Question

Prezcott Pharma Developed in association with Dr. Cem Saydam, Belk College of Business, UNC Charlotte. Anyone who has suffered with an acute or chronic illness is probably very appreciative for whatever drugs are available to cure or manage the disease. In the United States the Food and Drug Administration (FDA) is the governmental agency that oversees the drug development, testing, and monitoring process see http://www.fda.gov /Drugs/). Developing new drugs that safely address particular medical issues without producing unpleasant or dangerous side-effects is a very long and expensive process, often taking 10-15 years of work and costing an average of $4 billion. The long lead- time for brining drugs to market is mostly due to required clinical trials. Thus, drug manufacturers have to make very important, high-stakes decisions when they consider whether or not to place a new drug into the clinical trials process Suppose scientists at Prezcott Pharma have discovered a potential drug break- through for the treatment of Alzheimer's disease, and corporate executives now need to decide whether to go forward to conduct clinical trials and seek FDA approval to market the drug. The company has spent $295 million to date in research expenses The cost of clinical trials is expected to be $145 million, and the probability of a suc- cessful outcome with only minor side effects is 0.15 whereas the probability of a suc- cessful outcome with major side effects is 0.2. After the clinical trials are completed, the company may seek approval from the Food and Drug Administration (FDA) at an estimated cost of $25 million. If the clinical trials suggested the drug produced only minor side effects, the chance of FDA approval is 0.6. Alternatively, the chance of gain- ing FDA approval if the drug has major side effects is 0.35. The market potential for the drug has been estimated as large, medium, or small, with the following probabili- ties and characteristics Minor Side Effects Large Medium Small Revenue $4,200 $2,150 $1,500 Probability 55% 35% 10% Major Side Effects Revenue $2,300 $1,400 $ 850 Probability 35% 50% 15% (Revenue is expressed in millions of dollars.) If Prezcott cannot secure FDA approval, it can still try to sell the drug to an interna ional company known to seek drugs that have successfully completed clinical trials but failed to get FDA approval. A business analyst at Prezcott estimates that if the drug fails o secure FDA approval, there is a 50% chance that the company can sell the drug for 5500 million if the clinical trials reported minor side effects and a 30% chance the com pany could get $200 million for the drug if the clinical trials reported major side effects 1. Develop a decision tree to determine the best course of action recommended by the EMV criterion 2. Which sequence of decisions may lead to the worst outcome? 3. What is your recommended sequence of decisions and why?

Answer 1

If it's not too much trouble note if the appropriate response isn't obvious in the snap, right tap on the snap and select choice 'open in new tab', than grow the picture for comprehension.

Initial A - Research expense - $ 295 M clinical initial expense - $145 M FDA approval expense - $25 M total expense - $465 M Approval probability B - clinical trial minor side effects - 0.6 clinical trial major side effect - 0.3 drug fails to get FDA approval - 0.0 1.00 we have 20% chance of zero sell of losing money at (A) point which is $465 in \r\n EMV calculation: MINOR SF = 0.55 ($ 4200M) + 0.35 (2150 M) + 0.10 ($ 1500M) = $ 3212.5 M MAJOR SF = 0.35 ($2500M) + 0.5 ($1400M)+ 0.15($830M) = $ 1699.5 M FDAAPPROVAL FAILIA = 0.5 ($500M) + 0.3 ($200M) + 0.2 (- $465M) = $217 M VALUE OF B APPROVAL = 0.60 ($3212.5M) + 0.35 ($1699.5M) = $792.33 M NO APPROAL = 0.05 ($217M) = $10.85 M Answer (1): - best course of action by EMV calculate is to go ahead for;approval� as payoff is $792.33M compared to �No approval � pay of $10.85 M Answer(2): No FDA approval and