СOVID-19 Makes Pharmaceutical Financial Modeling More Important Than Ever
5 Min Read
As COVID-19 continues to alter our world in unimaginable ways, there is one industry that is both shaping the course of and being shaped by the pandemic at the same time: the pharmaceutical industry.
The COVID-19 pandemic is a global, humanitarian crisis, and the role played by pharmaceutical companies is crucial. With so many lives on the line and the foundations of our economy shifting beneath our feet, pharmaceutical companies are being forced to evolve and adapt with unprecedented speed to meet the changing needs of its patients, clients, and investors.
As the ways in which we do business are changing before our eyes, financial modeling has become more important to industries across the board. But to the pharmaceutical industry and the people who depend on it, it’s become a lifeline.
Why is financial modeling so important today? And how do pharmaceutical companies use it?
Planning for an unknown future
The world, and our economy, has never seen anything quite like COVID-19. There isn’t a single industry that hasn’t been affected by the global lockdown in some way or another.
From the air and travel industry (which is experiencing a negative effect on demand 5 to 6 times greater than after September 11, 2001) to insurance carriers experiencing reduced interest rates, small businesses and major corporations alike are struggling to stay afloat.
Financial modeling is nothing new: from the earliest spreadsheets to Excel, companies have long sought to calculate the impact of future events through the use of financial modeling.
But in our rapidly changing economy, static Excel spreadsheets are no longer enough, and unprecedented times call for innovative financial modeling tools.
The financial plans based on the past few years of relative market stability went out the window earlier this spring, and companies are scrambling to react. The problem is that no one knows how the global pandemic will play out or when it will end, so a reactive approach is not enough.
Companies need to take a proactive approach with powerful financial modeling tools that can help them map out the different scenarios of the pandemic’s course.
Financial planning teams should use these tools to create three to four scenarios of how the pandemic might play out in its given industry: a best-case (or optimistic) model, a worst-case (or pessimistic) model, a momentum case (which shows the state of things continuing on their current trajectory), and a most-likely case.
In the face of so much uncertainty, it’s critical that companies no longer settle for a “middle of the road” scenario and guesswork, but actively prepare for the equal likelihood of any of their possible outcomes based on precision modeling intelligence driven by real data.
So what does this level of uncertainty mean for the pharmaceutical industry?
An industry like no other
The barriers to entry for pharmaceutical companies in the United States are infamously high. From achieving Food and Drug Administration (FDA) approval to skyrocketing Research and Development (R&D) costs and intellectual property disputes, pharmaceutical companies face challenges unlike those in any other industry.
The pharmaceutical industry is characterized by high growth, high profits, binary risk, and volatility. This is largely due to the extremely high capital expenditures of the research and development of new drugs, and the long time period between initial research and finally getting a product to market.
In fact, recent studies have shown that it costs $2.8 billion, on average, for a pharmaceutical company to bring a new drug to market, and the entire process can take up to 15 years.
In the face of these extraordinary numbers, it’s no wonder that one of the biggest financial challenges pharmaceutical companies run into is cash flow problems.
When such a large portion of resources is dedicated to the development of a product that may take decades to hit the market, the key factor in the success of a pharmaceutical company is its ability to balance high levels of debt with known revenue and predicted profitability.
In this way, many pharmaceutical companies operate more like venture capitalists—making a series of risky investments that oftentimes fail (but sometimes succeed beyond all expectations)—than traditional companies with steady revenues from consistent products and services.
And as if this wasn’t challenging enough, pharmaceutical companies also face the possibility of intellectual property challenges which can rack up costly legal fees, and the inevitable reality of patents expiring, sometimes before the FDA has even approved the prescription, leading in some cases to the total loss of the initial R&D capital expenditure.
Pharma in the age of COVID-19
The COVID-19 pandemic has only increased the challenges of the pharmaceutical industry and raised the stakes.
Over the course of this global health crisis, pharmaceutical companies have been required to maintain their current production of life-saving medicines that people need and begin rapidly researching treatments and vaccines for an illness we don’t yet understand, all while adapting to the new normal of social distancing in their manufacturing and supply chains.
The challenges the pharmaceutical industry is facing during the COVID-19 pandemic are not just financial ones, but humanitarian ones as well. As the global lockdown has left countless workers jobless, many people are no longer able to afford the prescriptions that they rely on daily to survive.
Many pharmaceutical companies are taking center stage in this fight between life and loss. In the case of pharmaceutical company Eli Lilly, company leaders realized that for many of their insulin-dependent diabetic patients, loss of income could cause them to no longer afford their life-saving medication.
Eli Lilly proactively tackled the situation by investing in advertisements detailing how diabetics can access financial support during this unstable time, and offering a call center that encouraged patients to call in and discuss limiting their monthly prescription costs to ensure no interruption in their insulin supply.
But these kinds of humanitarian efforts don’t come without sacrifice. Pharmaceutical companies have to balance cost-saving measures for people in need with their revenue streams in order to continue producing the medicines that people’s lives depend on.
How can financial modeling help?
The key to pharma longevity and success
Between the extraordinarily high initial investment in R&D, revenues and profits delayed years in the future, setting prescription pricing sometimes a decade in advance, and a years-long product development process riddled with roadblocks and failure, pharmaceutical companies are very challenging to model.
Given this level of uncertainty in even more uncertain times, naysayers may claim that financial modeling for pharmaceutical companies isn’t worth it. This simply isn’t true.
It is precisely due to volatility, high risks, and big rewards that financial modeling for the pharmaceutical industry is mission critical. A product development process that is decades-long and moves through such uncertain and risky terrain requires the most accurate roadmap possible: a roadmap built from precision models based on real data.
It’s time for a better approach to financial modeling
The COVID-19 pandemic has only increased the need for accurate financial modeling. This pandemic has taught us how the structure of businesses can change overnight. All industries must take that knowledge and evolve their models to reflect the possibility of another pandemic in the future.
In the case of the pharmaceutical industry, in particular, how can humanitarian needs be balanced with revenue and operation costs?
How will social distancing measures in the workplace impact production in the next six months, the next year, or five years?
Remote working may reduce costs in some places, but the building of more manufacturing sites or decentralized distribution centers may raise them in others.
These countless questions and scenarios require powerful, intelligent financial modeling tools, such as Synario’s patented Multiverse Modeling technology that allows users to explore an unlimited number of scenarios or what-if questions from a single model. With layers of data-driven functionality, pharmaceutical companies can gain clarity and precision in their financial models like never before.
Our customer’s success stories are just the beginning. If you’d like to learn more about what Synario can do for your business, please set up a call with one of our specialists through the link below.