Pharma companies produce chemical-based vaccines and medicines, while biotech companies manufacture medicines and other products using live organisms. Companies like Pfizer, Johnson & Johnson are top companies that excel in both fields.
Pharmaceutical companies take time during the research and development phase and need massive investment. But once the drug becomes a hit, it will also provide a high return on investment for the company. However, small and medium pharma may not recover from heavy losses if the development is unsuccessful. The medical society may not support the use of your medicines or vaccines. It can be a hit-or-miss effort.
On the other hand, large pharma companies seem to cope with this situation since they already have various existing medicines and vaccines out in the market. They can simultaneously do research and development for new products and improve the current ones. Investors for pharma companies are willing to take high risks in return for high returns for their investments.
When assessing the financial feasibility of your pharma company, there are critical factors to consider. Let’s discuss these key points below.
1. Sources of Revenue
Sources of revenue for pharma companies will vary from product sales, licensing, and milestone payments. Product sales have higher returns than licensing, but you also need to incur costs for the selling, promotions, and logistics. When you opt for licensing, distributors will do the logistics and distribution for you. Your return is lower but also means minimal workloads and staffing on your part. Milestone payments are from buyers you sign a contract with to deliver the products in the agreed time. Payments can be in tranches, and the buyers will pay in full upon final delivery.
2. Portfolio of Products
Since investing in a pharma company is riskier than other business ventures, you should have a portfolio of products instead of focusing on one or a few products. These will diversify the risks if one or some of the products are a failure.
3. Success Probability
A company may spend years developing the products, but there is no assurance whether a drug or vaccine will succeed. Also, a drug may be successfully made, but the medical community and society may find it controversial. To be more conservative in your projections, putting a success probability rate per product will help you evaluate how it affects the company’s overall revenue. Products in early phases have a lower probability, 100% for those already out in the market.
4. Research and Development (R&D)
R&D is the significant cost incurred for a pharma company. It takes years to develop a drug or vaccine and go through different phases and approvals before it is out in the market. R&D can either be capitalized or accounted as an outright expense. Capitalized R&D will be amortized for several years. So, when we say that the costs will be capitalized for ten years, the costs are divided into ten years, and only a portion is recorded per year until the end of the amortization period. When it is accounted as an outright expense, it is recorded when incurred. Recording as an outright expense may result in a loss in your Income Statement, especially if the business is only starting. It will also mean no taxes to be paid on that losing year. The capitalization approach will spread the amount, thus minimizing the recorded expenses annually.
5. Patents or Generics
Whether you will produce patent medicines or generic will depend on the direction you want your company to take. Patent medicines and vaccines command higher prices than generic drugs. Producing patent products will require more investments for the R&D, but once it becomes successful, it will also have a higher return. Usually, the patent period is 20 years. Once patents expire, the prices of the products will drop since you don’t already have the exclusive rights to produce.
On the other hand, producing generic drugs does not need a lot of investment, and you can produce similar products out in the market with no patents. Due to steep competition for generic drugs, prices are generally lower.
Presented above are the critical factors to consider when planning to start or expand a pharma company. Financial planning for a pharma company is more complicated. Utilizing a financial model template will be helpful, especially those financial models with well-thought structures and critical metrics for financial planning tasks.
You can check eFinancialModels, a leading website providing financial model templates. It offers a pharma biotech financial model template that is easy to use and fully editable for your project evaluation.