I - Exercise 1 Information: PharmaCo is a large pharmaceutical company.

BioCo on the other hand is a small biotech firm that is developing a new technology. They are willing to sell their monopoly license (50 million), which PharmaCo has the first option on. Objectives: Determine the best course of action to resolve the following question: Should PharmaCo buy BioCos monopoly licence for the use of their newly developed technology by the determined deadline of November 30, 2009 ? Alternative Options:

The first alternative PharmaCo is confronted with is whether or not to buy the monopoly license of BioCo. If they decide not to buy the license, BioCo will most likely sell it to a competitor. Furthermore, PharmaCo has another alternative assuming they have decided to buy the license. It is the decision of launching the product or not. Something to take into consideration here is that the technology will need another year (October 2010) before it is fully developed and another six months (April 2011) till they can actually launch the new product. On the other hand they could also decide to buy the monopoly license and not launch the product.

Risk Constraints: There are two main risk constraints presented. The first risk PharmaCo will encounter is that there is a 50% chance is that the UK will have to adopt the EU legislation. In this case the UK will not get an exception and launching cost will be up to 350 million pounds. On the contrary, if the UK would get an exception launching cost would be 150 million The second risk is that the product finds a low demand that result in sells around 1M instead of high sales around 5M units. These probabilities are 50% as well. Intuition: Quick calculations show that there is a potential of earning 500 million. Therefore, it seems definitely interesting. On another hand, when closely considering the information, the main factors of success or failure are completely out of PharmaCos hands and positive as well as negative outcomes are evenly probable. Nevertheless, if the company wants to have a chance of making money, they will have to buy the first risk, which contains the 50 million for the monopoly license.

II - Exercise 2

III - Exercise 3 Upside outcomes: UK adopts modified guidelines + High demand = 300M* EU Guidelines + High demand = 100M Risks: UK Modified Guidelines + Low Demand = -300M EU Guidelines + Low Demand = -100M The upside outcomes would occur in two situations independant from PharmaCos decisions, which subsequently depend on the same factor: a high demand for the product. In other terms, if the demand for the product is high, PharmaCo will make profits whether or not the UK has to adopt the original EU legislation. This does not affect the recommendation as the chances are still the same (50/50) for having a low or a high demand, it will just depend of the companys attraction or aversion for risk. The other way, if the demand is low, the company will lose money anyways, but it will lose more if the UK does not adopt its own version of the EU guidelines.

*1 in this calculation, we took into consideration the fact that gross margin by definition does not include
the monopoly rights so it is 5,000k units * 100 - 150,000k - 50,000k

IV - Exercise 4 We disagree as this person does not take into account the fact that if the EU regulation is adopted by UK, then we will not launch the product as showed in question 2. This decision will give us a higher expected value than 0. Colleagues Expected Profit = -50 + 0.5*(-150) + 0.5*(-350) + 0.5*(500) + 0.5(100) = 0 Our version of Expected Profit = (0.5*(-50)) + (0.25*300) + (0.25*(-100)) = 25

V - Exercise 5 Yes it is good to have the marketing study because the company could raise its expected profit from 25 million to 75 million according to the calculation: (0,25*100)+(0.25*300)+(0,25*(-50))+(0,25*(-50)) = 75 This, due to the fact that if PharmaCo would know the demand before the New Regulation is enforced and before they launch the product they would eliminate the market risk, and they can therefore take a better decision.

VI - Exercise 6 This extension would be really valuable; actually the companys expected value would rise from 75million expected revenue with the market study performed; to 100 million, according to the calculation: (0.25*100) + (0.25*300) + (0.25*0) + (0.25*0) = 100

As shown in the above Decision Tree, the fact that the decision to partner or not to partner is needed after the Market Study and the New Regulation; It gives PharmaCo the opportunity, that in case that the results of these two events are not beneficial for the company they can decide not to partner and do not spend the 50 million.

VII - Exercise 7 At first sight, we could consider that it was a good decision as it resulted in a great profit. But in reality, considering decision tree 1, they would have an estimated profit of 0, given by the formula -50 + 0.5*(-150) + 0.5*(-350) + 0.5*(500) + 0.5(100) = 0. So based on this, we would have decided not to launch the product because of the bad perspective and due to the bad perspective the EU regulation gives to our future business. VIII - Exercise 8 P(FF)=80% P(FI)=20% P(P|FF)=80% P(F|FF)=10% P(R|FF)=10% P(P|FI)=10% P(F|FI)=60% P(R|FI)=30%

1. P(R)=P(FF)*P(R|FF)+P(FI)*P(R|FI)=(80%*10%)+(20%*30%)=14.00% The probability that an item is referred to a second inspection is 14% 2. P(FF|R)=P(R|FF)*P(FF)P(R)=10%*8014%=8%14%=57.1429% The probability that an item is fault free, given that it has being referred to a second inspection is 57.1429%

3. For the third question we have another Bayesian problem, for this we have to built a Tree given that we have new facts with already given probabilities

Then we calculate the probability that any given item referred would pass the test and we will call it P(2P) P(2P)=P(FFR)*P(2P|FFR)+P(FIR)*P(2P|FIR)=57.14%*90%+42.86%*10%=55.71% With this, now we can calculate the probability that an item is a Faulty Item given it has passed the second test and we will call it P(FIR|2P) P(FIR|2P)=P(2P|FIR)*P(FIR)P(2P)=10%*42.86%55.71%=7.69% With this result, we can say that 7.69% of all items that pass the 2nd test were originally Faulty Items, or what is the same: it has 7.69% of probability that an item is faulty, given that it has been referred and passed the inspection.

And just as an extra note, we can also say that from all the events possible the 0.60% would be Items that pass the second test that were initially Faulty Items P=P(2P)*P(FIR|2P)*P(R)= 0.60%