MECH 431

# Conference 7

Updated 2018-07-16

# Conference 7

## Logistics

• Assignment 2 should be out in the immediate future
• Quesitons regarding grading go through the TA first, then instructor
• Extension for draft report: it’s been extended to the weekend :heart:

## Pharma R&D Discussion

How do we analyze rate of return on R&D, something that is uncertain?

• Pharma companies throws a lot of things on the wall and see which ones sticks
• The costs for continuing developing potential drugs increase
• More regulation increase as they go further in development process
• By looking at industry R&D average investment, the benefit is the average sale in certain point in the future. (Assumption is the benefit viewed as a single lump-sum in future). The rate of return is computed from that - solving for $i$.
• Turns out that the rate of return decline over time (graph below). One reason is that people tends to choose drugs that have highest rate of return first, so over time, the leftovers don’t have as much potential. Hence the trend. (The easiest drugs with the best rate of return are developed first)
• The conclusion of the study is that pharma industry will change drastically as new drugs will not be profitable. It could mean a stagnation of R&D.
• Patent protection enables pharma to markup the price to make a profit.

Should the government be involved in R&D?

• This would be subsidizing the research, and the cost to buying drugs would be cheaper
• But less people will buy the patented drug, and private pharma companies will get mad :angry:

## Question

Q: Will midterm 2 be similar to midterm 1?

The exam is still take-home. But the style of the question would be different (less plug-and-chug).

Q. Asking engineers or experts and cite as source?

Yes

Q. How much marketing data should one assume/make up?

Use existing or analogous data if possible. Try and find data for a similar product that would be more easily obtainable. Keep made-up numbers to a minimum.

Q. Future modules in report?

Not harsh, the intent is to provide feedback

Q. How to handle taxes if the company annual report only reports the revenue for North America as a whole

Generally (preview), when looking at any given period, you can get a net benefit from benefit-cost.

Q. Suggested problems for recent modules?

SoonTM

Q. Good way to determine period of analysis?

Q. What should the interest rate be in NPV or EACF analysis

From lesson of weighted costs of capital: it should be from the sources of capital etc.

Q. How to cover depreciation if the company will be leasing the equipment rather purchasing?

Leasing costs are expense. Generally, there won’t be depreciating of the equipment. Depreciating is part of the grading rubric, but incorporate it as much as possible. (Perhaps when comparing purchasing vs. leasing, include depreciating in the purchasing portion).

Q. For opportunity cost, is a detailed analysis required for other options?

Not necessary. i.e. if I buy a house, then the opportunity cost would not able to invest into something else (insert more detail here - I lagged out).

Q. France winning the World Cup?

:thumbsup: