A certain pharmaceutical firm recently developed a new

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.

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.

KarishmaB
would request your opinion on this particular one.
Even I consider option B to be at par with D.

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.
→ This directly resolves the issue: if Dendadrine can be sold at 10× variable costs, and only 5× is needed to break even, the company can make a solid profit.
✅ Strong choice.

B. The development of some pharmaceutical products involves substantial initial expenditures on research, testing, and approval.
→ True, but this is just background info and doesn't explain how profits will be made.
❌ Too generic.

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 explains demand, but not pricing or profitability. It might support profits indirectly, but it doesn’t address the 5× cost requirement.
❌ Not sufficient.

D. No competitors are developing or planning to develop new medicines that might compete with Dendadrine in the marketplace.
→ This supports a lack of competition, but again, doesn’t explain how pricing or profitability is achieved.
❌ Not the best reconciliation.

E. Millions of people suffer from severe stomach disorders, representing an estimated one to two billion dollars every year in revenue.
→ If the potential revenue is only $1–2 billion/year, and R&D cost is $5 billion, it could actually contradict the profit claim unless prices are very high.
❌ Possibly makes it worse.