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A certain pharmaceutical firm recently developed a new medic

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rajcools Rising GMAT Star Default Avatar
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A certain pharmaceutical firm recently developed a new medic Post Sun Apr 29, 2012 8:45 am
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    A certain pharmaceutical firm recently developed a new medicine, Dendadrine, that provides highly effective treatment of severe stomach disorders that were previously thought to be untreatable. However, to develop the new medicine, the company spent nearly $5 billion in research and development costs. Given the size of the market for Dendadrine and the amount of the initial investment in its development, the company would need to sell Dendadrine at a price that is at least 5 times greater than its variable costs just to break even. Yet the company’s management claims that Dendadrine will soon become the major driver of the firm’s profits.

    Which of the following statements best reconciles the management’s claim with the evidence on the expenditures associated with the development of Dendadrine?

    a)The pharmaceutical firm expects to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs.
    b) The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.
    c) In clinical tests, Dendadrine has proven far more effective at treating severe stomach disorders than any prior available treatments, without any serious side effects.
    d) No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace.
    e) Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue.

    OA after some discussion

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    ice_rush GMAT Destroyer! Default Avatar
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    Post Sun Apr 29, 2012 1:32 pm
    I'd have to go with (A) on this one.

    Choices B, C and D can be quickly ruled out - they are mostly out of scope.

    Though I did glance at choice (E) for a couple seconds. The fact that millions or even a billion people suffer from stomach disorders does not ensure firm's profitability as it is mentioned in the stem that the firm had already sized up the market.

    What's the OA?

    rajcools Rising GMAT Star Default Avatar
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    Post Sun Apr 29, 2012 2:58 pm
    OA is A
    i was stuck between A and E
    and as per OE E is more closer to being a correct answer than u have mentioned.
    So waiting for some expert to comment

    ice_rush GMAT Destroyer! Default Avatar
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    Post Sun Apr 29, 2012 3:56 pm
    not sure if you noticed, but i selected (A)...Is that correct?

    don't follow your comment: E is closer to being a correct answer than I have mentioned??

    rajcools Rising GMAT Star Default Avatar
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    Post Sun Apr 29, 2012 9:52 pm
    yeah OA is A

    sorry for convoluted language I meant we need some strong reason to eliminate E

    agarwalmanoj2000 Rising GMAT Star Default Avatar
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    Post Mon Apr 30, 2012 12:12 am
    I am also stuck between A and E.

    rajcools: Can you share the OE?

    shantanu86 Rising GMAT Star Default Avatar
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    Post Mon Apr 30, 2012 12:31 am
    Hi rajcools, agarwalmanoj2000;

    IMO it definitely [A]
    Here is the comparison-

    Argument-
    The drug will have major contribution to profits despite the fact that company must sell it for > 5X price.

    Quote:
    e) Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue
    - This option only indicates that there is a big market for the drug but since competitors don't have to invest in R&D they can effectively sell it for much less price for same profit (2x or so) effectively eating into market share of the firm and causing losses to it.

    Quote:
    a)The pharmaceutical firm expects to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs.
    - This option clearly indicates that the drug is protected by patent and hence competition can't sell it without paying out loyalty.. effectively the patent protects first X5 margins. Further the option indicates that such patent protected drugs typically sell 10X the price.

    Hope it helps!!

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    rajcools Rising GMAT Star Default Avatar
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    Post Mon Apr 30, 2012 8:41 am
    Here is the OE

    The argument provides information about the substantial costs associated with the development of Dendadrine. Yet the management views Dendadrine as a highly profitable project. In order to reconcile these claims, we need to demonstrate that the drug will be able to generate profits that will more than compensate for the high initial expenditures associated with its development.

    (A) CORRECT. If management expects to earn patent protection for the new drug, then the company can also expect to charge the unusually high prices that will more than compensate for the initial research and development costs. Note that the patent protection is likely to result in prices twice as high as those necessary for the company to recoup its costs, thus leading to substantial profits.

    (E) Though this supports the idea that the market for Dendadrine is very large and will generate revenues in excess of $5 billion within a few years, it does not specifically support the contention that the drug will be profitable in the face of the unusually high costs associated with it

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