3. Gronkology Pharmaceuticals is considering purchasing one of two competing drugs (molecules) developed by outside labs to beef up their oncology line. Drug A is from an existing class of drugs that has made it into the marketplace and is therefore considered less risky. Drug B would create a new class of molecules and therefore carries slightly more risk (and greater FDA scrutiny) but also has greater upside. Both drugs have successfully passed Phase II clinical trials, thus only a Phase III clinical trial (testing on humans) remains. If Gronkology buys a drug, they will pay for Phase III testing. I! II The results of the Phase III trials can be classified as "very positive, positive," or \"negative." A negative Phase III result means the drug is worthless. If the results are very positive or positive, Gronkology can either seek FDA approval or sell the drug to another company. If Gronkology seeks FDA approval, the FDA can either approve or reject the drug. If the FDA approves the drug, Gronkology will manufacture/sell the drug and collect all future revenues. If the FDA rejects the drug, Gronkology loses their entire investment. The table below summarizes the probabilities, purchase costs, trial costs, sale prices, and future revenues. Assume all S denominated quantities represent their present values. TABLE 1 Drug (Molecule) A Drug (Molecule) B Phase III Trial Probabilities Probability Probability Very Positive 0.3 Positive 0.4 Negative FDA Approval Rates: Very Positive Phase I Reats Probability FDA Approves Drug FDA Rejects Drug Probability FDA Approval Rates: Positive Phase I Results Probability FDA Approves Drug 0.75 FDA Rejects Drug 0.25 Probability .os: .09 LDNI Hm Costs (Millions) OO O ggill'ml'w Purchase Drug/Molecule 450 Phase III costs 75 FDA Review Costs 10 10 C In '0') Sale Price after Phase III Results (in Millions) Very Positive Phase III Results 1200 Positive Phase III Results Negative Phase III Results 5 1100 Eils %H Drug Revenues if Produced by Gronkology (in Millions) Very Positive Phase III Results Positive Phase III Results Draw a Decision Tree for this problem and determine what course of action Gronkology should take