When the numbers matter, a financial model helps to clarify what operational changes are needed to affect financial performance.
Brightleaf Consulting Group’s Quantitative Business Models go beyond a standard financial model to show the impact of changes in various business elements on business performance.
Our models simulate business operations – revenues from multiple sources, expenses, and factors that may require additional capital spending or hiring. This greatly assists the planning process and clarifies business management.
Our models have been used in:
Budgeting for annual expenses and capital investment
Pro Forma generation for business plans
Legal negotiations for financial settlements
Decision models for business expansion and lease options
Case Study
The Situation:
The United States division of an international pharmaceutical company had two projects in their pipeline. One project had reached a milestone where overall evaluation of the project was necessary. The unmet need for this project was well established and the potential market was projected to be in excess of $3Billion USD. The industry was well aware of this and competition was growing quickly. Industry expectations were that that there would be a large number of similar products once the drug would reach the market; nonetheless, gaining even a small portion of the market share would be enough to make the drug profitable.
Before the drug candidate could be sold, several studies were necessary to qualify it for human use. Three potential options had been outlined.
Option 1: Run sequential studies, with the choice to continue based on the outcome of preceding stages – this would be less costly, but would also get the final product to market later and likely decrease market share.
Option 2: Run simultaneous studies in order to get to market faster, though at a greater initial cost.
Option 3: Terminate the project altogether.
The Need:
The client needed to extend beyond a scientific evaluation and consider the financial outcomes for the three options. Completely understanding the risks and opportunities around the decision required an analysis of the market potential of the product in addition to a scientific analysis of their options. The economic analysis need to take into account competitors and other industry and financial variables. A framework was needed to organize the available financial data and evaluate the likelihood of possible outcomes so that the risks and rewards could be put into better perspective.
The Solution:
Brightleaf gathered the available data and information regarding the different options, and worked with the company to estimate the costs and the probability of success of each option. A framework was created around the data and a sensitivity analysis was performed on all major decision points. A market analysis was then used to determine the market share that could be expected for the product upon release. Once these analyses were completed, the projections were entered into the decision model to determine if the costs outweighed the potential revenue.
When considering the current chances of success and development costs, it was determined that the project was very likely to end up costing more than it would earn. The analysis clearly showed that one event in particular made the project more likely to fail to produce profits even if it was scientifically successful. If the likelihood of this event could be improved then it would be economically viable to continue with the project; otherwise, the project should be retired. Brightleaf did not believe that the uncertainty of this event could ever reliably be resolved and recommended that the option to terminate this project would be best for the company. The funds and resources saved by terminating this project could then be directed towards the other project.
The Outcome:
The client evaluated our analysis and ultimately decided to terminate the project. Brightleaf provided a clear quantitative case for terminating the project, aligning well with their own qualitative analyses, giving them more confidence in their decision. Furthermore, terminating this project enabled them to save millions of dollars in testing and to direct those funds towards the other project that had a higher chance of profitability.
The work performed by Brightleaf also allowed the client to gain an enhanced understanding of what factors dominate the economic viability of their projects. They are now able to use this framework to better evaluate projects internally and to improve the use of their resources.