Coping with constraints--a program expense model, DCF model, variance, varience, budgeting, and budget analysis.






Case Studies





Case Studies

  • Expense Model

This expense model case study is based on a mid-stage, patented oncology drug cocktail [real world, sanitized data].  The expense model will get us to the expected net income of the product and from there we can move forward with calculating our expected cash flows, terminal values, and net present values.


Developing an accurate COGS model is an important part of managing your profitability.Once we have a sound revenue model in place we can move forward with the integration of the expense model and two of the first issues we deal with is 'Returns, Discounts & Allowances' and 'COGS'.  The line item 'Returns, Discounts & Allowances' can be a simple percentage of total revenues or raw data whose genesis is from expert opinion, empirical data, or sales force estimates.  COGS, on the other hand, is typically a calculated value that changes with time.  Generally, we build a COGS calculator to keep the values as transparent as possible.  Many of the inputs come from our revenue model while other data originate directly from manufacturing firms and expert opinion. 


After the COGS are derived and applied, we begin to develop our partnering and licensing section.  Upfront payments, milestone payments and schedule, and royalty rates are defined and calculated.  Please see our Licensing and Partnering page for more details on deal term modeling. 


We then account for capital expenditures and depreciate these costs accordingly, later, in the net income section of the expense model and in the cash flow model.


Pharmaceutical expenses are dramatically increasing and must be adequately forecasted, planned, and controlled.Personnel costs have a unique aspect to them; they are truly dependent on regional pay rates.  For instance, a sales representative in one region may expect a totally different compensation package than a sales representative in a different region.  And, of course, the total cost for these different compensation packages will not be equal.  Personnel costs make up a significant portion of the overall expense associated with a specific product.  Therefore it is critically important that these costs are accurately modeled.  Otherwise there exists the potential to either dangerously underestimate the total expenses and thereby under fund the capitalization requirements of the project or to frivolously overestimate Licensing Deals: The Role of Economic Analysis and modeling.the total expenses and scare away potential investors by reflecting narrower profit margins.


Other costs are the remaining expenses that need to be modeled.  Promotional expenses, drug sample costs, an array of medical fees and expenses, product directed headquarters' costs, and product distribution are part of this case study.  There are any number of additional expenses that other projects will require.  Some of these items are simple, non-calculated vales, while others are calculated by dependent functions.


Licensing model components: Quantitative models generally include estimates for revenue, cost of goods sold, licensing and other partnership payments, clinical trials cost, sales, general and administrative costs, and taxes, and calculations such as net cash flows, net present value (NPV) and internal rate of return (IRR).Once we have compiled all of our projected expenses and projected revenues over a time period ranging from a few months to a few decades, we can begin to calculate our pro forma net income.  The reporting of net income values occurs at the intervals that were used for the other projected values.  The intervals can be any time period but are usually in years.  Often the models will have shorter reporting periods of quarters or months when dealing with a marketed product.  It is at this point where the non-cash items such as 'Amortization of Net Milestones' [see Licensing and Partnering for more details] and 'Depreciation of Capital Expenditures' are factored into our net income calculation.  Our 'Tax Expense' is calculated here using an SG Systems custom macro which accurately determines the tax benefit of loss carry forward.  This is a particularly important aspect of financial modeling because the carry forward effect has a direct effect on the future cash flows and could possibly have significant impact on the project capitalization requirements.


Now that we have the pro forma net income statement developed, we can build the cash flow model where we will gat a much better picture of what the value of the project is in today's dollars.


Contact SG Systems for more information or to arrange a consultation.




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