Investing in Drug Development
Part 1: Making the Optimal Decision
Draw a decision tree that represents the uncertainty in this scenario. Then, fill in the tree
with your answers to the following questions, and solve it.
1.
What are you trying to maximize (what is your objective)?
2.
What is your profit from this point forward if you abandon the drug without
investing in Phase III clinical trials?
3.
What is your expected profit if you conduct the Phase III clinical trials and the
drug is not approved?
4.
What is your expected post-approval profit (excluding the cost of Phase III trials)
if you conduct the Phase III clinical trials and the drug is approved?
5.
What is your expected profit (include the cost of Phase III) if you conduct the
Phase III clinical trials and the drug is approved?
6.
Based on past oncology treatments that were successful in Phase II, what is the
probability your drug will ultimately succeed in Phase III and be approved (make
sure you limit your analysis to oncology treatments)?
7.
What is the optimal decision?
8.
What is your expected profit from making the optimal decision?
Save your spreadsheet for future classes
