You pulled of a corporate coup and have recently been appointed the youngest ever CEO of Make-Money Therapeutics. Make-Money therapeutics is a research based pharmaceutical company that brings novel therapies to the market. Recent advances, in bioinformatics, and the deciphering of the human genome have provided pharmaceutical companies with a limitless library of potential compounds to be tested and brought to the market as drugs. However, before a drug can be sold it must undergo a series of development trials, mandated and monitored by the Food and Drug Administration (FDA). The drug development process at Make-Money has four stages:

Pre-clinical Research: In this stage, compounds are tested for desired therapeutic activity and safety in animals. Typically, only 10% of compounds that enter this stage survive and make it to the next stage.

Phase I Clinical Trials: Compounds which successfully pass pre-clinical trials can be tested in humans. This stage involves testing compounds for safety in small samples of healthy humans. Typically, 2 out of 3 compounds that undergo phase I clinical trials proceed to the next stage.

Phase II Clinical Trials: In this stage, compounds are tested for safety and efficacy in a small sample of patients. Typically, 3 out of 5 compounds that undergo this stage proceed to the next and final stage.

Phase III Clinical Trials: This is the final stage of clinical trials. The main objective in this stage is to verify the safety and efficacy of drugs in a large sample of patients. Typically, 5 out of 6 compounds that undergo this stage proceed successfully to the next stage.

Each of these stages requires a group of stage-specific scientists, biostatisticians, clinical sites, etc. Based on the current staff levels and resources at Make-Money Therapeutics, the Vice President of R&D estimates the available annual input capacity at each of the stages. These capacities and the drug development process are illustrated in Figure 1. Finally, the Vice President of Marketing estimates that each drug that is successfully brought to the market leads to average sales of $1.5 Billion per year.

a) You need to provide the stock markets with a sales estimate for the next few years. What is your best assessment of the average annual sales?

b) As is typical in a recessionary environment, drug sales at Make-Money continue to hold up strong despite all-round economic downturns. Thus, you have a generous cash-flow from your existing drugs. However, limited credit availability restricts your ability to acquire or merge with other companies. You are thus exploring the option of expanding in-house drug development capabilities. You would like to focus on increasing capacity at one stage. At

what stage and by how much would you increase the capacity?

1 2 10 3 9 10 Preclinical Phase I Phase II Phase III 300 35 15 12 acity Compounds/Year Compounds/Year Compounds/Year Compounds/Year