Question

Pharmaceutical companies spend billions of dollars every year on the research and development of new drugs. Suppose a pharmaceutical company estimates that if they invest $1 billion on the development of a new drug, they can expect to earn $500 million in accounting profit as a result (their stream of future revenue would be $500 million higher than all of their explicit costs, including the R&D costs).   Just based on this information (that this company can expect to earn $500 million in accounting profit from this drug), does this necessarily indicate that this company should develop this drug? What does the decision of whether to invest in this new drug (or another) depend on? Be specific.

Answer 1

invention of an effective drug may take a longer period probably the time can be in years. research and development expenditure on new drug/medicine makes a huge financial burden over the company as well as the investors.it involves various process-

• approval from designated concerns and medical authorities established by government
• animal trial
• human trial
• authenticity of effectiveness and safety
• depth study of the entire reaction process of drug.
• approval
• marketing research and selling cost

in the present given scenario the investment amount is very high and the profit/revenue generated is also very high.therefore a proper marketing and analytical panel should be conducted for the proper in depth study of the scenario.the company may have to face many challenges as mentioned below-

• getting the approval of investors - for spending this huge amount the investors and shareholders have to made aware and thus a proper meeting is needed to be conducted,after getting their approval the firm can starts the official documentation process.
• getting all the requisite permission of government bodies- permission to conduct and continue research several obligations are needed to be undertaken therefore all the required documentation is needed to be fulfilled.
• the space for marketing - getting market space in the competitive world it self is a challenge.thus there should be proper marketing space for the selling operation of the prepared drug.
• prevention of copyright (in both domestic as well as in international market)- if a drug is available in the market then chances of getting imitation for such drug is very high and in the immense competitive world this would devastate the financial investment of the country. competitors can imitate the drugs without incurring/spending on R&D and still can earn very well. there should be proper law against imitation and strong enough to prevent the copyright and know how not only in the domestic country but all over the world.
• determination of period of R&D- research can't be continue for an indefinite period,there need to be proper timeframe to process the operation.investor won't be able to wait for a longer period on hope because the competitors would also be in race to develop such drug and if they got succeeded first then there is a chance of wastage of all the resources and efforts.

a company need to undertake the above crucial steps before the commencement on the investment of R&D and thus we can conclude that-

• a company can't go straight forward in investing such a huge amount just based on higher profit ratio and great rate of return.
• instead rate of return over the investment the company should first focus on the above stated points and then the probability of getting success.
• most important proper reserves and backup plans concerned with financial planning should be undertaken incase of failure of the project.

if company can manage at least these crucial plannings then it should go ahead and carry it research ahead.