The Financial Impact of Biotech Product Launch Delays, and the Consequences of Not Having a Bridging Strategy
June 12, 2017
By Jeffrey Matthews
Developing and launching a new product is not only exciting for a company, but it is also crucial to its continued success in today’s ultra-competitive environment. Many firms have an overabundance of projects competing for a limited R&D budget. Therefore, companies must carefully choose the projects in which they want to invest, with many factors impacting each decision. Projects are approved on a certain set of assumptions, but often these assumptions change over a project’s life.
In the medical devices field, product launch decisions require a careful evaluation of investment in both financial and resource terms. A project is approved based on a number of key criteria including:
- Market share growth
- Revenue potential
- Time to market
- Profit targets
- R&D costs
- Development risk
- Gross margin potential
- Manufacturing costs
The business case to gain approval is often overly ambitious: Revenue projections are too high, time to market is too short, and R&D investment is too low. This combination might make for a great NPV on paper, but unrealistic input criteria will cost companies in the long term.
Let’s take a closer look at the financial impact of a biotech product launch delay and the result of not having an adequate bridging strategy. A bridging strategy is the development and implementation of a pre-determined interim solution should a particular “what-if” scenario come to fruition. Common bridging strategies are customer incentives and price breaks in order to retain market share.
I-Knead is a medical device company that develops, manufactures and sells medical devices. However, it does not yet have the in-house capability to produce product G-Widgets. Therefore, I-Knead contracts with We-Make-It to manufacture and distribute G-Widgets. The long-term plan for I-Knead is to develop an in-house solution to manufacture and distribute G-Widgets. I-Knead develops a business case based on a certain R&D investment, revenue projections and time to market. The NPV is strong, and the project gets approved. The manufacturing and distribution contract with We-Make-It expires in 2 years, so it becomes critical to have the new product launched before the contract expires.
One year into the project, I-Knead realizes that the original launch date was overly ambitious and it must extend the launch date. The revised date is after the contract with We-Make-It expires. To complicate matters further, the product proves much more challenging to develop than originally anticipated, and more R&D investment is required. I-Knead now scrambles for a bridging strategy. It approaches We-Make-It to extend the original contract, hoping to buy valuable time until the in-house solution is available. However, We-Make-It has entered into additional agreements with other firms and can no longer supply the required quantity that We-Make-It needs.
The contract is extended, but at a lower supply volume. Since We-Make-It is the sole supplier of G-Widgets, I-Knead is forced to lower its sales volume. This means lower revenue, lower gross margin and increased R&D expenses, resulting in lower operating profit. Moreover, because its inventory is reduced, I-Knead will likely lose customers to competitors.
I-Knead finally launches product G-Widget 2 years late, but with a lower revenue potential due to customer loss, as well as lower profit and lower market share. The company’s reputation in the marketplace has also been damaged, and it may not be able to win back lost customers. Long-term ramifications include the inability to meet corporate revenue and profit targets for the project’s duration. This may also translate to spending cuts for other projects, cutting variable spending, and even reducing headcount.
I-Knead appears to have implemented its bridging strategy as events developed. Had it examined the potential pitfalls from the project’s onset and created a more robust bridging strategy, it could have either avoided or, at worst, mitigated most, if not all, of these adverse outcomes.
As a finance professional you might ask yourself, “What can I do to avoid I-Knead-type results?” Become involved at the project’s inception by meeting with team members from marketing, research, sales and other interested parties. Review what-if scenarios, and develop robust bridging strategies to successfully transition resources where and when needed.
A good place to start is by challenging the business case assumptions. Look at the revenue projections. Are they too aggressive; too conservative? Examine the R&D spending projection. Review similar projects that have gone to market, and perform a “sanity check” to determine if the proposed R&D project budget looks reasonable. A solid, multi-year projection on product costs that takes into account the annual production volume, product design, material costs, labor hours, and overhead greatly impacts post-launch profits. If you focus on the key inputs of sales volume, revenue, cost of goods and R&D investment, you will have a sound business case. Other factors, such as marketing and distribution, general and administrative costs, and royalties can be computed using a percentage of sales ratio.
Product launch delays impact a firm’s ability to deliver maximum financial value. Sales loss to the existing customer base as well as incremental sales loss leads to stunted growth overall. Profit is reduced by lower sales and the inability to apply reduced cost of goods as early as anticipated.
Successfully developing and implementing bridging strategies lead to increased coordination efforts. Proper management of product launches is essential to minimize negative financial impacts. By challenging business case assumptions, finance professionals can play a crucial role in the company’s business decisions.
Jeffrey Matthews, M.B.A., is a finance professional in the biotech sector. He has more than 20 years of experience in private industry, with a focus on operations finance, financial planning and analysis, business planning, divisional finance, and supporting life-cycle teams. He spent more than 3 years as an expat at a European biotech firm and now works in the Bay Area of California.
Catalyst - Summer 2017