A pharmaceutical company has a new drug under development and would like to know how much profit

Question:

A pharmaceutical company has a new drug under development and would like to know how much profit it might expect to make. The drug has to be tested to pass FDA approval. One hundred subjects will be tested and the company estimates that the probability that each subject will pass the test is 25 percent. The FDA will approve the drug if at least 20 out of the 100 subjects pass. Future R&D costs will be between $3 and $5 million (uniformly distributed). Advertising costs will run between $12 and $18 million, with $16 million the most likely amount. The total population of potential users of the drug is 40 million. The company expects to gain 8 percent of this market if its drug is successful. (Assume a normal distribution for market share with a standard deviation of 2 percent.) There is a one-in-four chance of a competitor entering this market, and if it does, the monopoly share will be reduced by 5 to 15 percent (uniformly distributed). The profit per customer is expected to be $12.

a. What is the mean profit?
b. What is the probability the company makes no profit at all?
c. What is the maximum profit they can make?

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First lets calculate the different components that contribute to the profit Probability of a subject passing the test Ppass 025 Number of subjects passing out of 100 X Binomial100 025 RD costs uniformly distributed between 3 million and 5 million Let R be the RD cost Advertising costs uniformly distributed between 12 million and 18 million with a mode of 16 million Let A be the advertising cost Market share if the drug is successful normal distribution with a mean of 8 and a standard deviation of 2 Let S be the market share Probability of a competitor entering the market Pcompetitor 025 Reduction in market share if a competitor enters uniformly distributed between 5 and 15 Let R be the reduction in market share Profit per customer 12 Total population of potential users 40 million Now lets calculate the requested values a Mean Profit Expected Profit The mean profit can be calculated by taking the expected value of all profit components Mean Profit EProfit ERevenue Costs Where Revenue Market share Total population Profit per customer Costs RD costs Advertising costs Lets break down each component Expected Revenue ERevenue EMarket share Total population Profit per customer EMarket share is normally distributed so we need to calculate the expected value of that distribution Given the mean 8 and standard deviation 2 the expected market share is 8 EMarket share 8 Now calculate the expected revenue ERevenue 008 40000000 12 38400000 Expected Costs ECosts ERD costs EAdvertising costs For RD costs uniform ...View the full answer

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Abdul Wahab Qaiser

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