A pharmaceutical company has a new drug under development and would like to know how much profit potential it has. The drug has to be tested to get FDA approval. One hundred subjects will be used in the test trials. The FDA will approve the drug if at least 20 out of the 100 subjects have a "positive response" to the drug. The company's research leads them to believe that each individual subject has a 0.24 probability of a positive response. 

R&D costs for this drug up to this point have been $8 million dollars, and this money has already been spent. Expected continuing development and manufacturing process improvement costs which are needed before knowing about the FDA results are $4.8 million. In addition, if it passes the FDA requirements, future advertising costs are expected to be $12 illion, with a standard deviation of $1.5 million (if the drug passes FDA regulations, which is unknown).

The total population of potential users of the drug is 50 million, with the revenue per customer expected to be $5. The company expects to get 8 percent of that market if its drug is successful, but, there is a one-in-four chance of one particular competitor entering this market, and if it does, the share of the market will be reduced from 8% to 6%. Assume a normal distribution with a Coefficient of Variation (CV) of 0.25 for either situation.

What decision should be made now as to whether to continue development and all subsequent steps. Explain/Justify your answer.

HINT: Build a model to handle all 100 subjects, then simulate that model 1000 times.

Answer rating: 100% (QA)

To determine whether the pharmaceutical company should continue development and all subsequent steps we need to assess the potential profit and weigh ... View the full answer