The Dynamics of Value Creation
in Biopharmaceutical Research and Development
Martin U. GroBmann
MLT. System Dynamics Group
30 Memorial Drive, E60 - 383, Cambridge MA, 02139
Fax: 617-258-7579, e-mail: mugrossm@mit.edu
Presentation Outline’
I. Purpose of a formal evaluation framework for biopharmaceutical research companies
a. Evaluation framework to measure royalty expectations
b. Royalty expectations as limited by corporate policies
c. Framework application in mature biopharmaceutical companies
II, Components of a formal evaluation framework to measure value creations
a. Flow of drug candidates through R&D pipelines
b. Present values of expected returns and future costs from drug candidates
c. Net present values to measure value creations
III. Parameter assumptions and estimations to calculate net present values
a, Revenue expectations as average and constant values
b. Transfer probabilities to move drug candidates through R&D pipelines
c. Cost of capital estimations derived by the Capital Asset Pricing Model
IV. Leverage concepts to understand the dynamics of cost of capital for R&D projects
in the pharmaceutical industry
a, Financial leverage and its risk amplifying effects for equity investors
b. R&D leverage as an analogy to financial leverage
c. Simulating the dynamics of cost of capital for research projects in the
biopharmaceutical industry
The following figures are causal loop diagrams and simulation runs to be presented at the
conference. Space limitations do not allow a satisfactory discussion of the topic and the
interested reader is referred to the author’s conference presentation and the working paper
mentioned in the footnote. In addition, the parameter assumptions used for simulations are
proprietary and can currently no be revealed.
The presentation outline is also the table of contents for a working paper to be finished for both the
M.LT. system dynamics group and the M.I.T. Program on the Pharmaceutical Industry (Departmental
Memorandum, D-4682). Basic knowledge on pharmaceutical R&D is required in order to understand the
paper completely, which is an excerpt of the authors Ph.D. dissertation. He is a Visiting Scholar at the
M.LT. System Dynamics Group from Mannheim University (Germany) where his thesis is supervised by
Professor Dr. G. v. Kortzfleisch.
693
-
I. Major dynamic hypotheses causing and limiting growth for Biotech companies
Major reinforcing loop causing growth for Biotech companies
a res
eats
a i
‘Technologies
ence, 7
Limits to growth as caused by optimal research capacities
andes
we yo “eS
Research Capacity Limits
"Financial come
Chie
+ gy online
UL. Decision rules on target research capacities and their time path
ei: a Graph or Desired Asay Capciy
id a py AS - -
=a
694
Ill. Structure on research capacity supply chain and consequences of various
expansion decisions
Research capacity supply chain for assay development
Decision rule, which causes oscillations around
Decision rule, which insures smooth adoption of ie soul io es aoe pany oon
research capacity to the goal
TV. Consequences of research capacities on new collaborations and on drug
candidates in the R&D pipeline
Aggressive capacity expansions transfer Drugs in discovery research, development, the
oscillations into the rate of new collaborations entire R&D pipeline, and in the markets
i
oe
{
=
[
“t
695
i
fod
V. Evaluation framework for drug candidates and value creation for
biopharmaceutical research companies
Components of a formal evaluation framework Value creation and value sensitivity
References
Brealey, Richard A. and Steward C. Myers: Principles of Corporate Finance, Sth ed.,
1996, McGraw-Hill, New York et al.
Forrester, Jay, W.: Industrial Dyanmics: 1961, Productivity Press, Portland, Oregon
Graves, S. B. and Nan S. Langowitz: Innovative productivity and returns to scale in the
pharmaceutical industry, Strategic Management Journal, Vol. 14, 1993, p. 593-605.
GroBmann, Martin, U.: Designing Policies to Achieve Sustainable Growth for
Biotechnology Companies in the Pharmaceutical Industry, upcoming Ph.D. Dissertation,
1997.
Hines, Jim and Leap Tee: Molecules of Structure. Building Blocks for System Dynamics
Models, 1996.
Lyneis, James, M.: Corporate Planning and Policy Design: A System Dynamics
Approach, 3" ed., 1988, Cambridge, Massachusetts
O.T.A., 1992, U.S. Congress, Office of Technology Assessment: Pharmaceutical R&D:
Costs, Risks and Rewards, OTA-H-522, Washington, D.C.: U.S. Government Printing
Office, February 1993.
Sterman, J. D.: Modeling Managerial Behavior: Misperceptions of Feedback in a
Dynamic Decision Making Experiment, Management Science, Vol. 35, No. 3, 1989.
696
CC BY-NC-SA 4.0