Economic Scenario?

Question

Scenario 1 (length: 0.5 &ndash; 1 page)
A pharmaceutical company has hired you to perform an economic analysis on a currently ongoing project. Experts from the company have estimated the market for the drug and thus the potential revenues for the drug are knows, but the relevant costs are becoming a sticking point for the company&rsquo;s analysis.  The company initially provides you the following information:

The company has already spent $150,000 on research and development for the drug.  The first round of clinical trials has been performed cost $75,000 and the results from the trials were promising. 
The company is considering whether to proceed with the development of the product.  If the company continues the project, a second round of trials will be necessary. 
The company estimates that the cost of ingredients for the drug will cost $2 per dose, and 150,000 doses will be needed for the trial.
The company would also seek patent protection for the drug, which would cost an estimated $25,000 in filing fees.
When the drug goes into production, a new production line would need to be purchased at a cost of $240,000 and would last ten years, and the cost for the ingredients for the drug would fall to $1 per dose. 
Packaging and distribution would cost $0.50 per dose. 
The company also expects to spend $500,000 per year to advertise and promote the drug. 
The patent protection on the drug would last 17 years, at which time a generic version of this drug could be produced, at which time the company would cease production of this drug.
Which costs are relevant when deciding whether to proceed with the project?
Which costs are relevant when deciding how many doses of the drug to produce (assuming the drug makes it to production)? 
Is there any other information for which you would need to ask the company to complete your analysis?

Answer

Before doing any calculations (which all seem very straight forward) the most important factor from simple skim reading is finance. Yes this drug will make a profit after x amount of years, but do you have the cash flow to handle it? It is very important to ask the company their financial information as this drug, whilst possibly very very lucrative, could cause the business to go bust if they cannot afford the fees needed to begin the production up until the point they begin to break even. In this industry, it takes years and years to begin to make a profit and it is very expensive! If they run out of money before such time it could mean that their drug will cease to be sold until the patent ends and some other company sells it. Its all about the cash flow.

Oh and a generic answer to your question, calculate the fixed costs and the contribution per unit sold (variable cost per unit). Make sure that you sell at least (fixed costs)/(contribution per unit) of doses in order to make a profit and to cover the costs of production. Never sell a product where the contribution is negative or unrealistically low, or else you will lose money each unit sold or will simply have to make too many drugs to be feasible. 
Hope this helps.

Economic Scenario?

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