VIDEO: Using @RISK in Evaluating Full (late stage) Compound Development in the Pharmaceutical Industry

This free webcast video, presented by Palisade client Venkat Raman, Managing Principal of VR Advisors, discusses the financial evaluation of late-stage development of compounds in the pharmaceutical industry. However, the rationale, methodology, and analysis discussed here have universal applicability to any multi-stage product development activities across industries.

In this webcast, we:

  • Present the case – a miniature model of a full-blown real world case
  • Discuss the two financial models – the deterministic and the probabilistic models
  • Frame the case
  • Model the case
  • Discuss insights and results


About the presenter:Venkat Raman is a management consultant with over 25 years of extensive global experience in strategy and corporate finance across large and small enterprises. He began his career with the Big 6 and over the years has held leadership positions in the management consulting, insurance, technology services, and entrepreneurial ventures. Venkat brings his collective experience, wisdom, and judgment to every engagement. Venkat is an MBA from Indiana University, a qualified CPA, and a Chartered Accountant.


Making Medicine Count: The DecisionTools Suite Bolsters Efficacy of Humanitarian Programs

Linksbridge_CaseStudyGetting life-saving drugs to under-served people in developing countries is a driving goal for many non-profit organizations. However, well-intentioned efforts like these can fall short of their desired impact due to poor understanding of market uncertainty and risks associated with pharmaceutical manufacturing.

Linskbridge, SPC, a consulting firm that advises international development organizations in determining what efforts have the highest impact along with the best value for money spent, recently used @RISK, RISKOptimizer, and PrecisionTree to help determine the best method of introducing a life-saving medicine in developing countries. The process requires analytical forecasting of both demand and supply of the drug, as well as a detailed market analysis. With the aid of Palisade’s DecisionTools Suite software, the consultancy has been able to offer clients sound advice on which ventures have both humanitarian impact and fiscal soundness.

Khatuna Giorgadze, an associate with Linksbridge SPC, was able to take complex data from multiple sources and translate it into clear and comprehensive information. For example, she used @RISK to create a demand forecasting model, which included both static inputs like population data from United Nations Population Division, country census data, and World Health Organization coverage data, as well as probability distributions for highly uncertain inputs that represent a range of possible values.  Thus she was better able to predict the demand for a drug or medical treatment in developing countries. She was also able to forecast supply.  This step “is even more uncertain than demand,” Giorgadze says, “so we use @RISK to a great extent to assess manufacturing risks and supplier’s plans in the market.” With supply and demand established, Giorgadze then used @RISK, RISKOptimizer, and PrecisionTree to do a thorough market analysis. She then investigated different investment options for the company, determining the potential benefits and risks of each.

All this information was then presented to clients looking to make sound and cost-effective investment and policy decisions to meet public health objectives. Palisade’s products helped make this process all the more efficient and effective. “Palisade’s DecisionTools Suite is a very important component to our work,” says Giorgadze. “Since 2011, it has enabled us to do the required market and investment analysis and make decisions. It’s easy to use, and its compatibility with Excel makes it all the more appealing. We’re very happy with how this software has enhanced our work.”

Read the complete case study here.

Want To Launch A New Drug? @RISK Can Help

Captum_CaseStudyFor biotechnology or pharmaceutical firms, development presents a significantly risky prospect. Development times are usually prolonged by step-wise clinical trials, and there is only  a 20% chance that a new drug beginning clinical trials will ever reach the market. Nevertheless, the potential return can reach billions of dollars. For startup companies, it is crucial that they approach these products carefully and with a full understanding of the risks and opportunities they may face when developing new products.

Captum Capital Limited, a life sciences and health care industry consulting company, specializes in the valuation of early stage companies, and apply quantitative risk analysis to assist in life science technology valuation.“Captum has developed a number of @RISK models to value technology projects, in several different ways,” says Dr. Michael Brand, Director of Captum Capital. They use @RISK to model the development of a new product from concept through to market, and the different stages involved in that trajectory. “There are success and failure probabilities at each stage, and uncertainties in timing and costs,” says Brand.

An example of how he uses @RISK software   is ‘Rejuven8,’ a dummy technology he uses for a teaching example in Captum’s MasterClass series, a one-day professional training course that provides an introduction to technology company valuation. This example requires conventional income and expense cash flows of a normal profit and loss statement, and incorporates the addition of risk probabilities associated with milestones in the development process.

After running the @RISK simulation, the graph outputs tell the user the mean rNPV—“but more importantly,” says Brand, “it gives you the 90% confidence range for the value. It also displays Tornado graphs which give some insight to which variable are influencing that rNVP.”

Brand uses @RISK and the DecisionTools Suite for all his class demonstrations as well as his consulting work with Captum.

Overall, the main reason for Captum’s use of Palisade products is summed up simply: “Ease of use is the most obvious benefit,” says Brand. “You don’t need to be an expert to convert a spreadsheet model to one including risks and probabilities. Some of our more advanced models for Real Option valuation are more difficult for the novice to understand conceptually, but the setting up of the @RISK model is relatively straightforward.”

Read the full case study here.

Using @RISK for a Drug Development Decision: a Classroom Example

Using @RISK for a Drug Development Decision: a Classroom Example At Illinois State University, Associate Professor of Finance Domingo Joaquin uses @RISK to demonstrate how simulation modeling can be employed to support the R&D decision of a pharmaceutical firm, illustrating countless risk evaluation examples to students.

Dr. Joaquin uses the example of the fictitious company “Drugco”, which has just successfully completed Phase I and Phase II clinical trials for a new pharmaceutical, “Newdrug”. Drugco must decide if it should proceed with Phase II, which takes two years to complete and requires an investment of $200 million. At completion of Phase III, a filing is made with the FDA, which then takes a year to assess the efficacy of Newdrug in treating the targeted ailment with acceptable levels of side-effects.

If the FDA approves, Drugco can either sell the rights to the drug for a pre-launch exit value of $400 million, or it can launch production by investing $70 million in fixed assets and $30 million in net working capital.

Clearly there is a great deal of uncertainty facing this hypothetical company, making it a perfect problem for @RISK to analyze. Dr. Joaquin has his students include key inputs, including: drug efficacy; market size and growth; initial and subsequent market share; initial and subsequent cost of goods sold to sales ratio, and terminal EBITDA.

After running these inputs through @RISK, students get histograms that depict key outcomes, including the Net Present Value (NPV), Internal Rate of Return (IRR), as well as the most serious risk drivers and influential inputs, as depicted by a tornado chart.

Net Present Value (NPV)

Net Present Value (NPV)

Internal Rate of Return (IRR)

Internal Rate of Return (IRR)

Tornado chart showing ranked inputs and their effect on NPV.

Tornado chart showing ranked inputs and their effect on NPV.

Dr. Joaquin uses @RISK in his classes to teach examples like the one described above, as well as many others, preferring @RISK over other competing products due to its versatility and power.“It makes the process of simulation very easy to do, as opposed to having to start the simulation using Excel,” he says.

Read the detailed case study here.