A certain pharmaceutical firm recently developed a new

Question

A certain pharmaceutical firm recently developed a new medicine, Dendadrine, that provides highly effective treatment of severe stomach disorders that were previously thought to be untreatable. However, to develop the new medicine, the company spent nearly $5 billion in research and development costs. Given the size of the market for Dendadrine and the amount of the initial investment in its development, the company would need to sell Dendadrine at a price that is at least 5 times greater than its variable costs just to break even. Yet the company’s management claims that Dendadrine will soon become the major driver of the firm’s profits.

Which of the following statements best reconciles the management’s claim with the evidence on the expenditures associated with the development of Dendadrine?

A. The pharmaceutical firm expects to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs.

B. The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.

C. In clinical tests, Dendadrine has proven far more effective at treating severe stomach disorders than any prior available treatments, without any serious side effects.

D. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace.

E. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue.

VeritasPrepBrian · Accepted Answer

Great discussion, everyone. One piece of advice on these questions - make sure that you're "conclusion driven" on Strengthen/Weaken questions, which means that on these derivative "Explain the Paradox/Discrepancy" questions you want to make sure that you're focusing first on the paradox.

Here, the paradox is that:

1) In order to just break even on this expensive drug, they'll need to sell for 5x the variable cost
2) HOWEVER, the firm believes that this particular drug will become its biggest profit generator

Just looking at that paradox, it should stand out that we're looking for a reason to believe that they'll be able to sell for greater than the breakeven point, which is 5x the variable cost. Answer choice A gives us that reason - with patent protection they'll be able to sell for 10x the variable cost, so therefore we're doubling the breakeven revenue and making 100% profit.

If you focus on the paradox, you'll often be able to anticipate the correct answer to a decent degree, and even if not you'll know which two items you must link together. On these "explain the paradox" questions, make sure that you settle on a paradox before you start dissecting answer choices.

parker · Answer

for krishnasty--
the "5x greater than variable cost" price is what is given by the argument as the threshhold for breaking even--that threshold is set already having taken the market into the account. Although it's tempting, don't argue with the stated premises unless there's a really really good reason! (For example, in the rare instances on weaken questions where the weakening answer choice is a counter-premise that contradicts an initial premise)

It might be helpful to think of this question as an "explain/resolve" type, rather than as a simple strengthen question. We are, ultimately, trying to strengthen the management's claim, but the reason we need to do so is that there is a seemingly paradoxical premise in the argument. Note the word "reconcile" in the question. So we could rephrase this question: Why does the management think Dendadrine will soon be a major PROFIT DRIVER when they'd need to sell it at a price 5 times greater than its costs just to BREAK EVEN?

As explained beautifully by other posters above, choice A provides evidence that directly reconciles this seemingly contradictory information.

Choices B and E are not related to this particular case, and merely provide additional information about the industry as a whole.

C and D are more tempting, as they seem to give information that show Dendadrine is awesome (C), or that no one else has a product that is anywhere near as awesome (D). However, these factors do not necessarily mean the product will be profitable. We'd like to believe awesome=more profitable, but we don't even know that awesome=more sales! (How many crappy products succeed when better ones fail due to marketing or trends?) The major information we need to reconcile is that 5x greater figure, and only A directly addresses this concern.

Bunuel · Answer

OFFICIAL EXPLANATION

The argument provides information about the substantial costs associated with the development of Dendadrine. Yet the management views Dendadrine as a highly profitable project. In order to reconcile these claims, we need to demonstrate that the drug will be able to generate profits that will more than compensate for the high initial expenditures associated with its development.

(A) CORRECT.  This statement demonstrates that the patent protection is likely to allow the pharmaceutical company to charge the unusually high prices that will more than compensate for the initial research and development costs. Note that the patent protection is likely to result in prices that are at least double the level necessary for the company to recoup its costs, thus leading to substantial profits.

(B) This answer tells us that for some pharmaceutical products, high R&D expenditures are quite typical. While this explains the high costs associated with the development of Dendadrine, it tells us nothing about how well such products do on the market and whether they subsequently become profitable.

(C) This statement makes an emotionally-charged claim about the irrelevance of corporate profits in health-related issues and provides no information that would explain how the pharmaceutical company would be able to make profits on Dendadrine.

(D) This statement would actually reduce the likelihood that the company will be able to make profits on Dendadrine, since the presence of similar products would likely reduce the market share of the firm and put downward pressure on prices.

(E) This statement does not provide information on how the company can make profits on Dendadrine despite the high costs and side effects. In fact, the presence of side effects is likely to reduce rather than increase the profit potential of a drug.

surya610 · Answer

A.

D Only says that there is no competitor, 
But conclusion is about making profits, which is clearly stated by A.

daagh · Answer

Certainly A becos, it says the company will be granted patent protection and therefore can price its new finding even far more than its target price of five times the variable cost.

krishnasty · Answer

For people answering A, can you guys please help me out with my query ??

The passage doesnt mentions how effective the drug is or how many users would be using it or what is the other cost of the similar kind of medicines. Even if the drug is being sold at 5 times higher than the expected price, it maybe so that stomach problem being treated by the drug is a rare disease and even with such high cost, the company wont be able to recover the amount.
Please explain your ans with my perspective in view.

Thanks

akashb106 · Answer

1. The pharmaceutical firm expects to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs. --- CORRECT, because it tells us that D will soon be patented and patented products sell 10 times their variable costs. That will surely be enough to be a major part in firms profits.

2, The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.--- Out of scope. Does not talk about variable costs or revenue...

3. In clinical tests, Dendadrine has proven far more effective at treating severe stomach disorders than any prior available treatments, without any serious side effects. --- Out of Scope. No information about variable costs and the pricing etc. Just tells us that D is going to sell well but we don't know how much money it will make.

4. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace. --- Out of Scope. Again even though D will sell well. We have no information on the price and variable costs of D.

5. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue. --- Okay. D will probably make up the 5 billion in a few years. But do we know what are the variable costs of D. For example, what if storing D costs another $5 billion a year and on top of that transporting D in a high security, cool temperature trucks cost another $5 billion a year. :wink:

Now do we know for sure that even though it is expected to earn 1-2 billion, it will make up for all the variable costs...

Check out this link with the same question and more explanations...
a-certain-pharmaceutical-firm-recently-developed-a-new-105428.html

Hope that helps. :-D

Now do we know for sure that even though it is expected to earn 1-2 billion, it will make up for all the variable costs... Check out this link with the same question and more explanations... a-certain-pharmaceutical-firm-recently-developed-a-new-105428.html Hope that helps. :-D

mejia401 · Answer

A. The pharmaceutical firm has been granted a patent to become the sole producer and distributor of Dendadrine, and drugs under patent protection typically sell at prices that are at least 10 times greater than their variable costs.
 Must be correct answer because it resolves the paradox of profitability. Read others to further prove first choice.

B. Development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.
 Wrong. It no more than explains why the drug is so expensive.

C. In issues related to personal health, corporate profits should not become the primary consideration.
 Out of scope. Does not solve the paradox of profitability.

D. Several other pharmaceutical companies are working on new medicines that may become effective substitutes for Dendadrine.
 Weakens. Effective substitutes would interfere with the drug's profitability.

E. While Dendadrine can be highly effective in treating stomach disorders; it may also result in serious side effects such as dizziness and hallucinations.
 Weakens. If serious side effects occurs, then the drug will not likely be profitable.

Adit_ · Answer

A and D both look right to me.
Option A isn't that straightforward as most seem to make it look.
The keyword being "typically", we dont really know at what price it is going to sell. But is it a great option that explains. Yes.

Option D says no competitors, this ensures that they could sell at ideally any price they want and given the market size, they could be making profits.
Both statements have an assumption:
1) For option A it is the fact that they will sell at the stated price (may or may not have competitors to pull it down later)
2) For option D we are assuming that they could be selling at any price and thus leading to high profits.

How to distinguish between the two?  Bunuel , would appreciate your inputs.

guddo · Answer

A certain pharmaceutical firm recently developed a new medicine, Dendadrine, that provides highly effective treatment of severe stomach disorders that were previously thought to be untreatable. However, to develop the new medicine, the company spent nearly $5 billion in research and development costs. Given the size of the market for Dendadrine and the amount of the initial investment in its development, the company would need to sell Dendadrine at a price that is at least 5 times greater than its variable costs just to break even. Yet the company’s management claims that Dendadrine will soon become the major driver of the firm’s profits.
 
 Which of the following statements best reconciles the management’s claim with the evidence on the expenditures associated with the development of Dendadrine?

The apparent problem is that Dendadrine was extremely expensive to develop, and the company must sell it for at least 5 times its variable costs just to break even. To reconcile this with the claim that Dendadrine will drive profits, we need evidence that the company can actually charge well above that break-even level.  The best answer shows that the drug can likely be sold at a very high markup .

A. The pharmaceutical firm expects to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs.

This is correct. If Dendadrine can sell at about 10 times its variable costs, and it needs only 5 times variable costs to break even, then it can plausibly generate large profits despite the huge initial investment.

B. The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.

This does not reconcile the issue. We already know Dendadrine had huge development costs; this does not explain how it will become profitable.

C. In clinical tests, Dendadrine has proven far more effective at treating severe stomach disorders than any prior available treatments, without any serious side effects.

This may support demand for the drug, but it does not show that the company can charge enough to overcome the $5 billion development cost.

D. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace.

This helps somewhat, but it is not as complete as A. Lack of competition may allow higher prices, but A directly tells us that patent-protected drugs typically sell at a price high enough to make profit plausible.

E. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue.

This suggests a market exists, but it does not show that Dendadrine can be priced high enough above variable costs to recover the huge investment and become a major source of  profit .

Answer: (A)

egmat · Answer

Hi Adit_,

Your instinct to test the assumption behind each choice is exactly right, so let's run both through the one thing the paradox actually demands.

Go back to the puzzle the way Brian framed it in the thread: the firm must sell at  "at least 5 times greater than its variable costs just to break even,"  yet management expects big profits. So the correct answer has to give us a reason to believe the price will clear - and ideally beat - that  5x  line. That single number is the hurdle.

Why A wins (even with "typically")

A says patented drugs sell at  "approximately ten times their variable costs."  Even read cautiously, that's roughly double the  5x  break-even price. The word "typically" doesn't weaken this - it's the normal pattern for exactly the kind of protection the firm "expects to be granted," so it gives a concrete reason the price lands well above break-even. That's the link the paradox needs.

Why D falls short

D removes competitors, but it never tells us what price the firm will actually charge. Here's the gap in your reasoning:  no competition  does not equal  pricing freedom high enough to clear  5x  . A monopolist still can't profit if buyers won't pay above the break-even price - and as Bunuel's official note points out, lack of rivals speaks to market share, not to whether the price beats variable costs. D leaves the  5x  hurdle completely untouched.

So the distinguisher is simple:  A supplies the price level; D only supplies the absence of rivals.  Only one of those resolves a paradox that is entirely about price versus cost.

A quick way to feel it: imagine you open the only lemonade stand in town (no competitors). Are you guaranteed to profit? Only if you can also charge enough per cup to cover your costs. "No competitors" alone never tells you that - the price does.

Answer: A

chloreton · Answer

Hi all, 
 
The option choice A says "The pharmaceutical firm  expects   to be granted patent protection for Dendadrine; drugs under patent protection typically sell at prices that are approximately ten times their variable costs."

How do we know that patent is granted? If the patent is not granted they wont be able to sell at 10 times their variable cost. How can this even be the correct answer?

Help me out on this please.  egmat   Bunuel

egmat · Answer

Hi chloreton,

You've zeroed in on the two hedges in A: " expects  to be granted" and drugs " typically  sell" at ten times variable cost. Your worry is fair, but it rests on a demand this question never makes: it doesn't ask which choice  guarantees  the outcome - it asks which one  best reconciles  the paradox.

Remember the puzzle as Brian and guddo framed it in the thread: the firm needs to sell at  at least 5x variable cost just to break even , yet management expects big profits. So the correct answer only has to give a  plausible reason  the price can clear - and beat - that  5x  line. A does exactly that: patent protection lets such drugs sell at roughly  10x  variable cost, about double the break-even hurdle. That's a solid, concrete reason profits are realistic.

Why the hedges don't sink it:

- " Expects  to be granted" - in a resolve-the-paradox question you take the choice's information as given and ask,  does this explain the gap?  You're not asked to independently prove the patent will come through.
- " Typically " - this is the normal pattern for exactly this kind of protection, so it's plenty to make the profit claim believable. Reconciling a paradox needs  plausibility , not certainty.

No other choice even touches the  5x  price hurdle, so A is the only one that closes the gap.

A quick way to feel it:  suppose I say,  "I'll afford this college because I  expect  a scholarship, and scholarship students  typically  pay 90% less."  Neither hedge is airtight - yet it clearly reconciles "broke" with "can afford it" better than any answer that never mentions money. Same move here: A is the choice that speaks directly to price versus cost, hedges and all.

So A isn't claiming the patent is a sure thing - it's giving the one plausible mechanism that makes management's profit claim make sense.

Answer: A

A certain pharmaceutical firm recently developed a new

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