Question

The answer is an uncrease in phase 2 success rate of about 28%. Please SHOW STEPS & EXPLAIN

Question 3: Below is a description of expected probability of success, by stage, in the Pharma R&D pipeline. Note: "Filing is the process of submitting all of the clinical and safety evidence from Phase 1, ll, and Ill trials, and asking for regulatory approval to actually sell the drug. Expected probability of success, by stage of research and development, % Disom 40 50 Candidate drugs Phase 1 trial Phase II trial Phase III trial Filing 90 Successful marketing and sales 30 60 50 10 Fail Fail Fail Fail GlobaPharm believes that the likelihood of success of BioFuture's primary drug candidate can be improved by investing an additional $150 million in a larger Phase II trial. The hope is that this investment would raise the success rate in Phase II, meaning that more candidate drugs successfully make it to Phase Ill and beyond. By how much would the Phase Il success rate need to increase in order for this investment to break even? The interviewer would tell you to assume that if the drug is successfully marketed and sold, it would be worth $12 billion (that is, the present value of all future profits from selling the drug is $1.2 billion).

Answer 1

Here we are talking about phase 2

Lets make probability diagram for both before and after investment:

Phase2	Phase3	Filing	Final Probability(Multiplication)	Expecetd value(probability*1.2)
0.4	0.5	0.9	0.18	0.216
P	0.5	0.9	0.45P	0.45P * 1.2

Difference in expected value should be 150 million(0.15 billion)

0.45P *1.2 - 0.216 =.15

0.45P *1.2 = 0.366

P = 0.68

Hence new probability of success for phase 2 should be 68% but previous it was 40%.

Hence it should increased by 28%

Please revert back in case of any doubt.

Please upvote. Thanks in advance.