Question
A pharmaceutical company is developing a new drug. The potential market size for this drug is somewhere between 20 and 40 million users (actual number
A pharmaceutical company is developing a new drug. The potential market size for this drug is somewhere between 20 and 40 million users (actual number can be modeled using a uniform distribution). Company expects to capture 25% of this market (actual market share follows a normal distribution with a standard deviation of 5%). Revenue per customer is expected to be $12. Production and advertising costs run between $20 and $70 million with $50 million the most likely amount (triangular distribution seems appropriate).
The drug has to be approved by the FDA before going into production. For that, the drug will be tested in 25 tests. Probability that the drug will pass each test is 0.8 (test outcomes are independent). The FDA will approve the drug if it passes at least 20 out of 25 tests (all 25 tests will be run regardless of the outcomes). If the drug is approved, it goes into production and subsequently the production, advertising, and revenue cash flows are realized. If the drug is not approved, it is abandoned and the subsequent cash flows are not realized. Before the drug is ready for the FDA testing, company must incur R&D costs that historically fit the lognormal distribution with mean $10 million and standard deviation $5 million.
For your final answers that rely on simulation, please, use 10,000 simulation iterations and if the question is multiple choice, select the option that is the closest to your number.
Now consider the entire problem, from the time before R&D costs are incurred and before the drug goes for FDA approval. What is the probability that the company loses money on this drug?
A. 0.6
B. 0.65
C. 0.4
D. 0.5
E. 0.3
F. 0.45
G. 0.7
H. 0.35
I. 0.55
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