Question Completion:
AbbVie Pharmaceuticals (headquartered in Lake Forest, IL) has commenced a $10 million R&D project to develop a new drug to treat a rare disease. So far, it has spent $6 million of the $10 million, and preliminary results are positive. If the additional $4 million is invested, the drug will certainly be completed and is expected to generate profit of $18 million in present value for AbbVie. Meanwhile, a research biologist at Illinois Tech has independently developed a treatment for the same disease. The scientist has offered to sell her invention to AbbVie for $2 million. Her drug would be just as effective as AbbVie’s drug, and would also generate profit of $18 million in present value.
Answer:
AbbVie Pharmaceuticals
a. AbbVie should buy the drug for $2 million.
b. The most AbbVie should be willing to pay for the Illinois Tech researcher's drug is $4 million. Luckily, this much is not demanded by the researcher.
c. If the Illinois Tech biologist had developed her drug two years ago, before AbbVie started its own R&D project, AbbVie could have paid an amount ranging from $2 million to $10 million.
d. Before Merck buys the drug, AbbVie should be willing to pay $2 million without further delays.
e. Merck should be willing to pay as much as $4 million.
Explanation:
a) Note that the introduction to the question was flawed. The mathematics do not add up. For this reason, I have worked with the more properly formulated question as shown in the Question Completion above.
b) Data and Calculations:
Projected cost of R&D = $10 million
Amount of the R&D cost spent already = $6 million
Remaining R&D cost to be spent = $4 million
Expected profit = $18 million
Cost of the offer by the research biologist = $2 million
Expected profit from the biologist's drug = $18 million
c) The conclusions above were reached because all the amounts are stated in present value terms.
