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 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 leadtime 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 breakthrough 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 successful outcome with only minor side effects is 0.15 whereas the probability of a successful 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 gaining 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 probabilities and characteristics:

If Prezcott cannot secure FDA approval, it can still try to sell the drug to an international 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 to secure FDA approval, there is a 50% chance that the company can sell the drug for $500 million if the clinical trials reported minor side effects and a 30% chance the company 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?

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Minor Side Effects Large Medium Small Revenue $ 4,200 $ 2,150 $ 1,500 Probability 55% 35% 10% Major Side Effects Revenue Probabulaty $2,300 $1,400 $850 35% 50% 15%