A multinational pharmaceutical company has been conducting Phase III trials for its new drug CX125A. This highly promising product will halt the development of symptoms and thus have a significant impact on the quality of life of patients. The company knows that competitors are making progress with the development of improved previous versions of the drug and is therefore keen to minimise the new product’s time to market. The company is considering two main scenarios for the production of the drug. The first scenario involves assigning the production of the new drug to one of its existing facilities, albeit with necessary further investment for their expansion, adaptation or development of other new production facilities within these. For reasons related to patent and exclusivity, the likelihood of proceeding with this scenario is 85% and considerably higher to the 15% probability for outsourcing the production of CX125A to an external contract manufacturer. A business justification report was produced at the concept stage and identified two possible existing facilities. The first existing facility is the company’s clinical multi-product plant on site 2B in Oxfordshire. This has sufficient capacity for secondary operations (formulation, processing and packaging) as well as a well-established Research and Development (R&D) centre that can undertake Phase IV clinical trials. These advantages raise the probability of selecting this plant to 60%. However, the facility on site 2B does not have sufficient spare capacity for the production of the drug’s primary active pharmaceutical ingredient. Consequently, this investment decision explores the following two options. Expanding the clinical multi-product facility on site 2B. As it is unlikely that the expansion will be sufficient to cater for beyond initial launch output, it carries a low probability of 30%. The alternative option is to build a new facility on vacant land on site 2B with a probability of 70%. This option has higher capital costs and a longer lead time which could delay the launch of CX125A. The second existing facility being considered with a probability of 40% is the low variety high volume production plant on site 3F in South Yorkshire. This facility has spare capacity to produce the drug and meet forecasted demand; however, it would need to be fully revamped. Page 3 of 7 The timescales linked to the identified scenarios, associated costs and benefits are provided in Table 1 below. The benefits were calculated using corporate weighted quantitative and qualitative criteria which consider revenue as well as factors relating to corporate image, market share and competitive advantage, regulatory compliance inspections and shutdown times as applicable to the various options. The benefits listed in Table 1 are for a stable economy. Therefore, these benefits require adjustments by +10% in the case of an economic upturn or -10% in the case of an economic downturn. Table 1. Decision tree data – Pharmaceutical facility project. Option Timescale Total costs Total benefits (stable economy) Expand facilities on Site 2B 6 months -£1,870,500 Year 1 £1,500,000 Year 2 £1,960,000 Build new facility on Site 2B 2 years Year 1 -£4,500,000 Year 2 -£5,800,000 – Year 2 £7,800,000 Revamp facility on Site 3F 1 year -£5,350,500 Year 1 £980,000 Year 2 £6,600,400 Outsource to other manufacturer – Year 1 -£960,000 Year 2 -£1,250,000 Year 1 £1,350,000 Year 2 £1,750,000 Table notes: – All the above costs and benefits are in nominal values. – Inflation should be considered using the discount rate on annual basis and only in the case of costs/benefits incurred after 12 months. – The benefits listed above need adjustments in the case of economic states other than a stable economy. Economic forecasts indicate that there is 20% probability for an economic boom, 50% probability that the economy will remain stable and 30% probability for an economic downturn. These three economic states and a discount rate of 4% apply to all possible alternatives in this analysis. You are required to support the options appraisal and give reasoned advice to the pharmaceutical company on the optimum option to consider, configure further and progress to design development. You are to perform the following
: a) Construct a decision tree to map all possible decision paths and alternatives, as well as associated probabilities, costs and benefits for a 2-year planning horizon.
b) Carry out decision tree analysis to appraise the full set of options and recommend the most economically viable decision path.