How will sales for a blockbuster drug erode once
a comparable (but cheaper) alternative hits the
market? To what extent will increased competition
impact biosimilar drugs in the pipeline?
Forecasting
Pharma’s Future
The Science of Uncertainty
Adapted from “Forecasting for the Pharmaceutical
Industry” by Arthur G. Cook, Principal, ZS
PHARMACEUTICAL
Pharmaceutical companies con-stantly;try;to;predict;–
;or;“fore-cast”;–;answers;to;these;and
similar questions; answers that
affect crucial business decisions
today.;Financial;groups;make;R&D
investments based on anticipated
sales for a new drug. Marketing
teams forecast success ratios of
various tactics when planning a
go-to-market strategy. Members
of the C-suite look to forecasts to
provide accurate direction in product portfolio decisions.
Michael;Schrage,;an;MIT;Digi-
tal;Business;Research;Fellow,
wrote that “The most dangerous,
hideously misused and thought-
annihilating piece of technology
invented in the past 15 years [is]
the electronic spreadsheet. Every
day, millions of managers boot
Excel, twiddle a few numbers and
diligently sucker themselves into
thinking they’re forecasting the
future.”;He;says;that;forecasting
isn’t about predicting the future,
but;about;embracing;uncertainty;–
While forecasting has become
absolutely essential, the datasets
that contribute to it have become
immense and unwieldy. Just defin-
ing;forecasting;is;itself;a;task.;It;is;a
picture of the future, a framework
for interpreting events, an identi-
fier of assumptions and choices, an
aid in decision making, and more.
“Prediction is very
difficult, especially
about the future.” –
Niels Bohr
But in all these definitions there
are two basic concepts: the balance between user friendliness and
technical complexity, and educating decision makers about the uncertainty in the forecast numbers.
What’s the job of a forecaster?
To create a logical framework in
which future events can be quan-titatively;evaluated;–;to;create
stories that paint a picture of the
future.
Let’s look at an example. Consider
three;projects;–;A,;B,;and;C;–;that
forecast returns to the company,
with the expectations shown in the
figure below.
Project C has the higher risk-ad-justed net present value, so it looks
like the better option. But what
happens when we consider the
uncertainty around each forecast,
as shown in the next figure?
