Financial Modeling and Simulation: Biologics Manufacturing Strategy
A top-5 global pharmaceutical company faced a common industry dilemma in determining how best to provide large-scale manufacturing capacity for two late stage biologics molecules. If approved and successful in the marketplace, the new biologic therapies would exhaust the limited internal pilot manufacturing capacity within two years of launch. However, a new large scale facility to support projected demands would cost over $500 million and take five years to construct. In other words, the client would have to commit an enormous amount of capital for a facility before knowing with certainty whether it would ultimately be needed.
The industry was already in the process of transition from a period of constrained biologics manufacturing capacity to one of excess supply. Late stage clinical failures and disappointing launches of several biologics molecules had left several large scale facilities completely empty or running at minimal utilization. The client was well aware of these situations and wanted to avoid building the next manufacturing "field of dreams."
MedPharma Partners was engaged to develop an analytical framework to determine the financial value of the company’s strategic manufacturing options. Given the large degree of uncertainty and the imbedded options value of many of management’s potential choices, we decided to utilize a real options analysis approach.
Real options analysis begins with the development of a fully probabilistic financial model. Key elements of the model included cost of goods impacts, capital investments required, tax strategy implications and other key costs such as technology transfer. We utilized a tool that generated a Monte Carlo distribution of potential clinical and market outcomes with associated financial implications. Next we specified the options management had to forestall capital investments while ensuring adequate supply if the products were successful. This allowed us to explicitly determine the value of postponing a decision until learning additional clinical or market information. This analysis was combined with qualitative information and allowed the client to determine the manufacturing strategy that produced the best financial returns for the company.
"MedPharma Partners brought a unique way of looking at a difficult problem and utilized a cutting edge technique that we expect to use for future strategic manufacturing decisions." -- Vice President, Finance
