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# A certain pharmaceutical firm recently developed a new

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A certain pharmaceutical firm recently developed a new  [#permalink]

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Updated on: 12 Jul 2015, 03:18
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Difficulty:

55% (hard)

Question Stats:

65% (01:18) correct 35% (01:34) wrong based on 963 sessions

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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.

Originally posted by anilnandyala on 27 Nov 2010, 02:23.
Last edited by reto on 12 Jul 2015, 03:18, edited 2 times in total.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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30 Nov 2010, 09:55
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1
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.

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.
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##### General Discussion
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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27 Nov 2010, 21:04
A.

D Only says that there is no competitor,
But conclusion is about making profits, which is clearly stated by A.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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29 Nov 2010, 11:13
yeah...even I would go for A.
D only states about their monopoly in the market which does not imply that they could afford to sell the product
for 5 times their actual cost . In A , the extent to which they can increase the cost has been given..
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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30 Nov 2010, 08:46
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.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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30 Nov 2010, 10:37
A ...
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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01 Dec 2010, 11:01
Thanks for the explanations everyone! The only thing that keeps me from choosing A is the word 'expect' which makes the fact of being able to sell 10 times more than the cost is very uncertain. And we have to make another assumption that the company will be granted that pattern.
However, btw A and D, A touches the conclusion more directly, I agree.

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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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19 Jun 2011, 19:43
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.

i feel it must be (c)Profit depends on sales and cost.we already know that denda is costly,so inspite of its high selling price if the firm feels that they can make profit then their assumption mst be that irrespective of the high price denda'a sale will not be affected which is what (c) says
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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19 Jun 2011, 20:18
from the question its clear that the drug was expensive to make and the market is not very big. The management still claims that the drug would be a major source of revenue in the coming years. The company can break even if it sells the drug at 5*Var.Cost.

So one of the ways the drug can be profitable for the company is if the company can sell it at more that 5*Var. Cost. Answer Choice A clearly tells us that the company can sell the drug at 10*var Cost. therefore the company can make a profit of 5*var. cost. So A explains the management's claim.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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20 Jun 2011, 03:05
1
If we break the problem down:

Statement 1: The company spent a lot of money in R&D to manufacture the new drug ---> To break even the company needs to sell the drug at 5 times its variable cost.

Statement 2: The company claims that the new drug will significantly "drive" profits.

So how do we reconcile the two statements? The answer choice must provide a rationale --> that explains how the company is actually going to make a profit. Only choice A provides that rationale by introducing the term "patent protection" and suggesting that the company can charge as much as 10 times the drug's cost.

Choice C -- Does not tell us anything about the sales of the drug. It just says that the drug is effective -- but that does not link statement 1 and 2. It also does not provide any explanation for how the company will make a profit. The choice also does not state that the public will be willing to pay any price for the drug.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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01 Sep 2011, 16:06
A.

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.

Under patent protection, the firm will be able to sell the drug at 4 times or more of their variable costs and meet the R&D and development cost.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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08 Sep 2011, 11:29

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.

Thanks
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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08 Sep 2011, 20:42
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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.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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09 Sep 2011, 14:32
I picked A...The company management is concerned with profit and if the product can get 2x cost then that is the answer for an increase in co. profits.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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09 Sep 2011, 22:37
Thanks Parker...Kudos to you for your exceptionally well explained information. Loved the last para of your post...
Quote:
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.

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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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10 Sep 2011, 06:58
i chose E but A seems correct after reading explanation...
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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15 Sep 2011, 04:28
+1 to A.. E comes close ..but it doesn't prove that the drug will be profitable for the company.
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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15 Sep 2011, 23:17
+1 for A. Took me 3 minutes .

Gr8 explanation by parker. Thanks
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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Updated on: 17 Oct 2013, 02:02
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?

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.

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

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.

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

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

Can someone explain the answer to the above CR Question

Originally posted by vishal0077 on 16 Oct 2013, 18:02.
Last edited by Narenn on 17 Oct 2013, 02:02, edited 1 time in total.
Merged in similar topic. Pls search the forum before posting any new question
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Re: A certain pharmaceutical firm recently developed a new  [#permalink]

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16 Oct 2013, 18:46
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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. 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.
Re: A certain pharmaceutical firm recently developed a new &nbs [#permalink] 16 Oct 2013, 18:46

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