Part 1 :

A medtech company developed a new medical device, SuperSpine, for use in spinal surgery. The device requires regulatory approval prior to product launch and sales. There are several stages involved in getting the required approval.

First, there is a Stage 1 meeting with the regulatory authority in which the regulators tell a manufacturer what studies need to be conducted in the lab by the manufacturer’s engineering team. This produces what is called clinically applicable data (CAD).

The manufacturer of SuperSpine has held Stage 1 meetings with both regulators in Europe and with the FDA in the United States. The Europeans are requiring engineering work in the lab that the manufacturer of SuperSpine estimates will cost $720,000. The FDA is requiring additional work in the lab beyond what the Europeans are demanding. The estimate for total expense required to meet the FDA demands at this stage is $1,080,000.

Once the CAD has been produced by the engineering team, there will be a Stage 2 meeting, at which the regulators decide the pathway the product must follow to get a regulatory approval. For medical devices, this usually comes down to the product being judged as either Class II (for lower-risk devices) or Class III (for higher-risk devices). The main difference involves the size of the clinical study that must be conducted. For SuperSpine, if regulated as a Class II device, the required patient count in the clinical study is 60 patients; and, if regulated as a Class III device, the required count is 120 patients. The per-patient cost is estimated to be $10,000.

Because of limited resources and other constraints, the company cannot simultaneously attempt to meet the regulatory requirements in both Europe and the U.S. and launch in both markets. It must make a choice. The U.S. market is bigger, but the regulatory challenges in the U.S. loom larger. Part of the challenge for the company is getting the product to market as quickly as possible. This is because the patent that the company holds on SuperSpine expires in 4.5 years (54 months). The total amount the company can realize by selling SuperSpine depends on how many months the company can sell the product before the patent expires.

The table below shows what the company is facing in trying to decide whether to pursue the market in Europe or the U.S.



  Classification Probability Engineering Expense Clinical Trial Costs Months Remaining Post-Launch to Patent Expiration Aggregate Margin to Patent Expiration
Europe Class II device 95% $720,000 $600,000 36 $4,900,000
Class III device 5% $720,000 $1,200,000 27 $2,100,000
U.S. Class II device 60% $1,080,000 $600,000 30 $6,200,000
Class III device 40% $1,080,000 $1,200,000 21 $2,600,000


As seen in the first row of the table, there is deemed to be a 95% chance that in Europe the device will be designated a Class II device, in which case only $600,000 in clinical trial costs will be required. In addition, if SuperSpine is considered a Class II by the European regulators, the product launch will occur fairly early, and a full three years (36 months) will remain before the patent expires. The company will realize around $4.9 million in profits. Taking all this into account, we see that a Class II designation in Europe means that what is received net of the engineering expense and the clinical trial costs is $4,900,000 – $600,000 – $720,000 = $3,580,000. There is a small chance (5%) that the European regulators will consider SuperSpine a Class III device. This will double the clinical trial costs and delay the launch by nine months. Due to the delay, the profits earned by selling in the market will be reduced to $2,100,000.

In the U.S., the probability that the device is given a Class II designation is deemed to be much lower; and, overall, the regulatory approval process takes longer than it does in Europe. The U.S. market, however, is larger, which potentially offsets the more challenging regulatory hurdles.



  1. Build the decision tree. 
  2. Simplify the tree by working backwards from the far right toward the left.
    • Replace chance nodes with expected outcomes.
    • Replace decision nodes with the numerical value of the net payoff of the best decision at that node.
  3. Use the simplified tree to make your decision.



Part 2 :

Assume that the manufacturer of SuperSpine could follow a more complicated strategy.

It would start by seeking regulatory approval in the U.S. It would pay the $1,080,000 to do the lab work needed for FDA approval; and, after doing this, it would learn whether SuperSpine was designated by the FDA as a Class II or Class III device.

If Class II were the determination, SuperSpine would continue to pursue the U.S. market. However, if the FDA were to give SuperSpine a Class III designation, the manufacturer would pivot and pursue the European market. It would not need to do any more lab work (no additional lab expense would be incurred beyond the $1,080,000). It would approach European regulators and learn their ruling on whether the device is Class II and Class III. Once the company pivots to Europe, it cannot go back to the US.

Assume that if the company does pivot to Europe after the FDA designates SuperSpine as a Class III device, the probability that the Europeans will give a Class III designation is 10%, rather than the 5%. This is because the regulators in Europe will factor in the fact that the FDA gave a Class III ruling.

  • Build the decision tree that illustrates SuperSpine’s regulatory decision problem in Part 2 and follow the steps to simplify it. Be sure to consider the possibility of the company abandoning the project at each point the company must make a decision.
  • Submit SuperSpine’s complete decision tree that illustrates the problem and it’s complexities in part 2 and submit the simplified tree for part 2.

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