It is Spring, 2020. In response to the COVID-19 pandemic, a major worldwide pharmaceutical company is doing some initial development of a vaccine. At the same time, they are in discussions with some researchers at a university in England. These researchers began work quite some time ago seeking a vaccine for another virus, but the same research can be applied to COVID-19. Now the pharmaceutical company must make a decision. They could: (i) Abandon the project. (ii) Develop their own vaccine. (iii) Go into a partnership with the university. Developing their own vaccine would cost (all figures are in USD) 900 million, and would have a 40% chance of being successful (i.e. taking the vaccine would actually prevent infection by the virus). However, it would then need extensive testing to make sure that there are no (or at worst, few) unintended side effects. Depending on what is discovered during the development of the vaccine, there’s a 15% chance of needing extensive testing, and an 85% chance of needing only ordinary testing. The company could abandon the project just before testing if it wished to do so. Extensive testing would cost 2000 million, and there’s a 65% chance that the drug could be rejected at this stage. Ordinary testing would cost 500 million, and there’s a 30% chance that the drug could be rejected at this stage. The company believes that a vaccine with few side effects would be worth 10,000 million in future gross profit. Partnering with the university has some pluses and minuses. On the one hand, development costs would be only 750 million, and the probability of success in protecting against the virus would be 80%. On the other hand, the university would stipulate that they would have to market the vaccine only slightly above cost per vaccine. Even so, worldwide demand would be so great that the gross profit would still be a respectable 5000 million. The probability of needing extensive testing is now only 10% (and therefore the probability of needing ordinary testing is 90%), but the other testing costs and probabilities are the same as in the preceding para- graph. Again, the company could abandon the project just before testing if it wished to do so. Draw a decision tree to make a recommendation to the pharmaceutical company.

It is Spring, 2020. In response to the COVID-19 pandemic, a major worldwide pharmaceutical company is doing some initial development of a vaccine. At the same time, they are in discussions with some researchers at a university in England. These researchers began work quite some time ago seeking a vaccine for another virus, but the same research can be applied to COVID-19. Now the pharmaceutical company must make a decision. They could: (i) Abandon the project. (ii) Develop their own vaccine. (iii) Go into a partnership with the university. Developing their own vaccine would cost (all figures are in USD) 900 million, and would have a 40% chance of being successful (i.e. taking the vaccine would actually prevent infection by the virus). However, it would then need extensive testing to make sure that there are no (or at worst, few) unintended side effects. Depending on what is discovered during the development of the vaccine, there’s a 15% chance of needing extensive testing, and an 85% chance of needing only ordinary testing. The company could abandon the project just before testing if it wished to do so. Extensive testing would cost 2000 million, and there’s a 65% chance that the drug could be rejected at this stage. Ordinary testing would cost 500 million, and there’s a 30% chance that the drug could be rejected at this stage. The company believes that a vaccine with few side effects would be worth 10,000 million in future gross profit. Partnering with the university has some pluses and minuses. On the one hand, development costs would be only 750 million, and the probability of success in protecting against the virus would be 80%. On the other hand, the university would stipulate that they would have to market the vaccine only slightly above cost per vaccine. Even so, worldwide demand would be so great that the gross profit would still be a respectable 5000 million. The probability of needing extensive testing is now only 10% (and therefore the probability of needing ordinary testing is 90%), but the other testing costs and probabilities are the same as in the preceding para- graph. Again, the company could abandon the project just before testing if it wished to do so. Draw a decision tree to make a recommendation to the pharmaceutical company.

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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It is Spring, 2020. In response to the COVID-19 pandemic, a major worldwide
pharmaceutical company is doing some initial development of a vaccine. At the
same time, they are in discussions with some researchers at a university in England.
These researchers began work quite some time ago seeking a vaccine for another
virus, but the same research can be applied to COVID-19.
Now the pharmaceutical company must make a decision. They could:
(i) Abandon the project.
(ii) Develop their own vaccine.
(iii) Go into a partnership with the university.
Developing their own vaccine would cost (all figures are in USD) 900 million, and
would have a 40% chance of being successful (i.e. taking the vaccine would actually
prevent infection by the virus). However, it would then need extensive testing to
make sure that there are no (or at worst, few) unintended side effects. Depending
on what is discovered during the development of the vaccine, there’s a 15% chance
of needing extensive testing, and an 85% chance of needing only ordinary testing.
The company could abandon the project just before testing if it wished to do so.
Extensive testing would cost 2000 million, and there’s a 65% chance that the drug
could be rejected at this stage. Ordinary testing would cost 500 million, and there’s
a 30% chance that the drug could be rejected at this stage. The company believes
that a vaccine with few side effects would be worth 10,000 million in future gross
profit.
Partnering with the university has some pluses and minuses. On the one hand,
development costs would be only 750 million, and the probability of success in
protecting against the virus would be 80%. On the other hand, the university would
stipulate that they would have to market the vaccine only slightly above cost per
vaccine. Even so, worldwide demand would be so great that the gross profit would
still be a respectable 5000 million. The probability of needing extensive testing is
now only 10% (and therefore the probability of needing ordinary testing is 90%),
but the other testing costs and probabilities are the same as in the preceding para-
graph. Again, the company could abandon the project just before testing if it wished
to do so.
Draw a decision tree to make a recommendation to the pharmaceutical company.

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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