Prostate testing is a standard part of physicals for men over 50. The standard test is the prostate specific antibody test or PSA. Approximately 40 million PSA tests are performed annually. The PSA test is marketed by several manufacturers and is sold to laboratories for approximately $3 per test. The full cost of a PSA test is about $30.
The PSA test measures the presence of an antibody in the blood stream. If the test shows that the antibody measures less than 4ng/million, the patient is assumed to be cancer free. If the antibody measures more than 10ng/million, the patient is almost certain to have prostate cancer. A finding between 4 and 10 is referred to as the “gray” area. Approximately 15% of all patients test in this area. Unfortunately, 75% all gray findings occur when there is no cancer – they are essentially false positives. The remaining 25% normally have prostate cancer.
PSA tests are controversial because of their unreliability. On the one hand, prostate cancer, like many cancers, responds well if detected early. On the other hand, the PSA leads to considerable unneeded medical expenses, not to mention mental anguish to patients. It is estimated that PSA sales would double if they were a more accurate test.
The only way to determine definitively whether there is a tumor is by doing a biopsy which is the normal follow-up procedure to a gray-area finding. A biopsy costs $1500 but the health risks are minimal.
Franco scientists have developed a new test, the BASS test, that is considerably more accurate than the PSA. Like the PSA, the BASS test is made on blood samples and , like the PSA, the BASS could be included automatically as part of physicals for men over 50. The laboratory costs of performing the BASS would be identical to those of the PSA.
The primary difference between the PSA and the BASS is that the BASS is much more accurate than the PSA. In recent tests conducted for FDA approval, the BASS test produced results that were accurate in 90% of the cases. That is, biopsies confirmed that 90% of the patients who received positive results from the BASS test did, in fact, have cancer. Only 10% of those patients with positive BASS results did not have cancer.
The BASS test has received FDA approval and is ready to be marketed. Its developers believe that it is a clearly superior test to the PSA. The PSA costs $0.50 to manufacture and is routinely sold for $3. (Laboratory charges add another $30 to the final cost of the test.)
BASS will cost approximately $1.50 to manufacture and the laboratory costs should be about the same.
Please create a model that FraneCo can use to maximize its profit. For simplicity’s sake, your model does not need to project five years of returns i.e. you do not need to factor inhow long it will take the market to accept the BASS test. Assume that it will have full penetration in the first year. That one year is all that you need to model.
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