Discontinuing a Generic Drug Prescott Pharmaceuticals makes a number of generic versions of drugs. When Cymbalta (Duloxetine) lost its patent, Prescott invested $500,000 to obtain FDA approval and $100,000 to certify one of its production lines for its
production. Production of the drug will cost $2,000,000 . Marginal costs for the tablet are $0.10 and they sell for $0.40 per tablet. But many firms have entered and now make Duloxetine causing sales to fall off. Prescott anticipates that it could use this production line for other drugs losing patent protection shortly. If forecasted sales are 5 million tablets, what is the breakeven price? Should Prescott discontinue selling this product?
The marginal cost of $0.10 can be avoided if the product were discontinued. The $500,000 spent to obtain FDA approval and the $100,000 spent to certify the production line are both sunk costs. But the $2 million spent on the production line itself can be avoided if it were used on a new product. So the average avoidable costs are $0.10 + $2 million / 5 million = $0.50 per tablet. This breakeven price exceeds the price of $0.40 so the product should be discontinued.
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