Extra_costs - UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A-Economic Analysis for Business Decisions Fall 2007 Professor Catherine

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UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A—Economic Analysis for Business Decisions Fall 2007 Professor Catherine Wolfram Question 1 Advagen is a pharmaceutical company with a new topical skin cream product. Advagen’s hope for this product, currently called compound Alpha, was that it would be the first prescription strength pharmaceutical product to treat skin wrinkles and that it would appeal to a huge anti-aging market as a “cosme-ceutical.” In line with this, Advagen has spent $4 million so far on clinical trials and the FDA approval of compound Alpha. Alas, the FDA has rejected Advagen’s claim that compound Alpha can be used for treating wrinkles, and has only approved it for a more limited set of skin conditions, such as eczema. Advagen had planned a $6 million advertising campaign for the rollout of compound Alpha, made up of $2 million targeted towards doctors and $4 million for broad consumer advertising. The consumer advertising will not be useful if compound Alpha can be prescribed only for specific skin conditions, but the doctor- oriented promotion will still be useful. None of the planned advertising money has been committed yet. Advagen has also purchased $10 million in production equipment to manufacture the drug. Advagen could recover $7 million of that if they wish to scale down production of compound Alpha to a production level consistent with the more limited set of applications for which it is approved; $8 million of the original $10 million can be recovered if Advagen decides not to introduce compound Alpha commercially at all. Advagen’s original projections were that compound Alpha’s sales would be worth $35 million over the remaining life of the patent if it were approved for anti-aging, and that variable costs of production over that time period would be $5 million. Now the projection is that, with the more limited scope, revenues would be $6
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This note was uploaded on 09/21/2009 for the course EWMBA 201A taught by Professor Wolfram during the Fall '07 term at University of California, Berkeley.

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Extra_costs - UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A-Economic Analysis for Business Decisions Fall 2007 Professor Catherine

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