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'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.
1. Which costs are relevant when deciding whether to proceed with the project?
2. Which costs are relevant when deciding how many doses of the drug to produce (assuming the drug makes it to production)?
3. Is there any other information for which you would need to ask the company to complete your analysis?