Tag Archives: Monte Carlo

Life Sciences New Market Risk Alliances: Instinct or Monte Carlo Simulation?

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Be sure to listen to your ‘inner voice’ when assessing risk.

By:  Michael Kaiser

In the life sciences, as in other high-tech sectors, a New Market Risk Analysis (NMRA) is essential to the success of a new product development or business alliance. We can select two choices to undertake a NMRA: instinct based on experience or a Monte Carlo analytical simulation. In both cases there is one author: the human mind.

An imaginary NMRA  
The CEO of ABC, a medium-size public pharmaceutical company specializing in antibiotics wants to make a multi-million dollar investment in QED (1)a small biotech firm that has patented a new agent for the treatment of MRSA (Methicillin-Resistant Staphylococcus Aureus) detection. The ABC executive is aware that other companies are chasing QED as well. The potential for growth and revenue is impressive, given the fact that MRSA infections have become a serious health issue. QED has already benefited from a significant capital infusion from two VC’s and is starting a Phase III trial with a well known clinical research organization. The ABC executive has a lengthy meeting with his QED counterpart, who provides a convincing set of slides demonstrating the efficacy of their product in Phase I and II. Both parties had previously signed a CDA.

Upon his return, the ABC executive reports to his Board of Directors and his top executives. To their surprise, the CEO, a highly respected industry executive with a record of successful acquisitions with both his past and current employers, advises against investing in QED because he is not convinced that their product will remain a leader in the fight against MRSA, as well as carrying a considerable financial risk.  The Board Chairman of ABC asks the CEO if he signed a Master Services Agreement with QED during his visit, to which he answers that he did not because in all his successful 25+ years he has never been so uncomfortable about an investment, and therefore does not recommend it.

The Board has been very supportive of the CEO but fear that his experienced “gut feelings” will not convince ABC’s shareholders.  The CEO stands firm: his instinct tells him that something is not right with QED’s development program. In the end the Board decides to engage an experienced NMRA organization to conduct a Monte Carlo simulation of QED to confirm or contradict the CEO’s financial and scientific trepidations.  Once the results of the Monte Carlo simulation are in, they confirm the CEO’s feelings.  In the meantime, he moved to a top 10 global pharmaceutical company…

(1)   Latin for quod erat demonstrandum, to be demonstrated.


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