Instructor: Prof. Sanjay Kumar Gupta Submitted by: Garima Namdeo(20111015) Roma Goyal (20111047)

11/28/2011

Content

CONTENT............................................................................................................................................2

DECISION SUMMARY.............................................................................................................................3

SITUATION ANALYSIS: factors affecting decision making process........................................................3

Demand.................................................................................................................................................3

Technology Soundness..........................................................................................................................6

Financial Stability...................................................................................................................................6

Products in pipeline...............................................................................................................................7

Competitors and other manufactures………………………………………………………………………………………………..8

Location………………………………………………………………………………………………………………………………………………9

OVERALL EVALUATION………………… ……………………………………………………………………………………………………10

CONCLUSION……………………… ……………………………………………………………………………………………………………12

REFERENCES........................................................................................................................................12

APPENDIX............................................................................................................................................13

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Decision Summary

Genentech is an industry leader with an impressive history of being first in breakthrough medicines. In 2004, when FDA approved Avastin, in the first nine months of 2004 sales of Genentech , represented 15% of $2,684,000 million. Looking at the potential demand, Avastin’s effectiveness is being tested on other forms of cancer as well. If the results are positive and approved by FDA, it is estimate that Avastin could be $2-$4 billion drug annually for the company and it will double the company’s revenues in 5 years. Increasing Avastin production is imperative and in order to make a good capacity decision its size, timing, R & D cost and location need to be considered. Following options are being considered and evaluated:

1) Build a new production facility

2) Improve the current process

3) Acquire a competitive firm in Porrino, Spain (preferred option).

Factors affecting the decision making process

Demand

The most important factor effecting the decision is the demand which depends on potential market size. There would be a need to expand its capacity to meet demand which would require minimum 5 years. Most of the clinical trials for other indications are either just initiated or are not expected to finish very soon. Also it was difficult to estimate the potential market size. Demand depends on the penetration rate and Avastin’s effectiveness in different stages. The presence of other competitive drugs, alternate therapies available, demand of other drugs and usage by number of patient. Two extreme situations have been considered. We Refer to the excel attached. First, considering all the trials are 100% successful, Avastin’s demand due for other cancer treatment is 1.545 times(graph 1) that due to only collateral cancer, resulting in demand supply gap even after the establishment of new capacity(total capacity contribution and the amount of protein generated is shown in the table and the pie chart).

Second scenario is when the trials are not successful, still the demand of drug is more than capacity, and this capacity is inclusive of new plant capacity. Hence increasing the capacity is imperative. But we will keep capacity addition lower than the demand being on the conservative side making the company to be flexible to competitive realities. (graph2). The demand-supply gap for the two case is shown in graph 3

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Table 1 and pie chart

TanksCapacity/Tank Liters

Batches/yr Kg/batch

Kg/Batch Recovered

Kg/Batch Recovered Less Bad Batches

SSF 8 12000 15 9.0 5.9 4.7 CCP1 12 12000 15 9.0 5.9 4.7 CCP2 8 25000 15 18.8 12.2 9.8 CCP3 8 25000 15 18.8 12.2 9.8 Porrino 4 10000 15 7.5 4.9 3.9

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Graph 1

Graph 2

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Graph 3

20052006

20072008

20092010

20112012

20132014

2015

0

500

1000

1500

2000

2500

3000

3500

4000

Trial successfulTrials fail

Trial successfulTrials fail

Technology soundness

Genentech could use technology and improve its production at the same cost but it’s a grey area as not only FDA takes a lot of time to approve also the cost involved in research would increase. Such changes take time to evolve and not many companies would opt for this. Hence the new plant acquired would satisfy the requirement for drug production as compared to other options.

Financial stability

The new plant will require a capital investment of $600 million. Taking over competitive firm in Spain would be less costly as compared to setting up a new plant. Potential start up cost is reduced as not much is required to make it technologically sound also people with highly specialized training would be available from the existing plant.

From the balance sheet of Genentech (Exhibit 2) we can see that its capital structure is as follows.

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Capital Structure for 2003 (figures in millions)

AmountTotal stockholders equity 6520.3Total debt 2216

Total Assets 8736.2

Debt to equity ratio 0.34

Genentech shows a weak debt-equity ratio(which ideally should be 2:1) hence the firm can raise funds through debt, without disappointing the stakeholders. The firm has also not paid any cash dividends in the last three years hence it has internal funds and reserves also which it can use for investment. All this would give the company more liquidity to spend on R&D. Genentech can also take advantage of demand supply gap the company-increase its price per dosage putting up breakthrough revenue figures.

Products in pipeline

Considering the products which are already conceptualized and in pipeline as shown in exhibit 4 given in the case, Genentech has to be proactive. By taking over a firm they would require less time to make it operational as compared to building up a new plant. Also as Genentech robust model allows changing inputs as per the forecast, the capacity at new plant would give them the immediate flexibility required for next 10 years incase Avastin trials fail. Graph 4 shows that Avastin forms approximately 24% of the total demand (trials successful) and Omnitarg demand is growing beyond 25% by 2015. So even if the trials are not successful the new plant can be used for the production of Omnitrang which is significant enough.

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Graph 4

Competitors and Other manufactures

Though there is always some risk involved in this business there is no immediate threat faced by company apropos to Avastin and with the plan becoming operational in lesser time as compared to operational time taken by other options. Genentech can gain the first movers advantage Forecasted sales have been shown in graph 6. Now as the new plant would be dedicated to the production Avastin only and contract manufactures bringing approximately 15% of the revenues (graph 5) genentech should continue contracts with these manufactures as they can fall back to revenues generated by them in case a major change is the estimated demand of avastin.

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Graph 5

Graph 6

2001 2002 2003 20040

500

1000

1500

2000

2500

3000

3500

4000

4500

1742.92163.6

2621.4

3840.9

Product Sales

Product Sales

Economic and operational feasibility w.r.t location

Locating the plant in Vacaville will consolidate Genentech’s maximum capacity in one city; this increases the risk factor because any natural calamity there can prove very lethal for them. Also management issues will come up because, with the establishment of CCP2 plant employee strength will be approximately 1000, a new plant here will add more labour force so employees may lose their sense of ownership, potential efficiency can reduce. But the scenario is different in Porrino as it’s a small plant and employees strength is small thus

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a plant over there can have positive impact. Also it’s cost effective due to presence of skilled man power.

Overall Evaluation of options

Building new plant Improving current process

Taking over competitive firm in Spain

Operational Time Minimum 5 year Within 5 years within 2-3 yearsTechnology If a new plant of

huge capacity is constructed then it should be made keeping in mind upcoming technologies and competition. It should be futuristic in its approach

Here also the technology can be improved but its very risky.more over approval from FDA will take a lot of time negating the first movers advantage

A competitive firm would be acquired hence not only wil there be an advantage of there existing technology, Genentech’s own robust model can be applied easily and make the plant operational quickly.

Location, human resource and cost effectiveness.

The new firm would be close to existing Genentech firm.The Porrino facility has less employees and not only can the expertise trained employees be used but it will also strengthen the work culture. it will be cost effective as not much would be required for training the employees

1)Vacavile The new plant will create a lot of employment resulting overburdening the employees present in the other plants and increasing the

Here as well same problem will be faced as not only the strength of employees increase,making the management difficult. it will be

-

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potential risk reducing employee efficieny.It will be cost effective nonetheless

cost effective nonetheless

2)Spain It would be cost effective here as well but then the operational time would increase and thus canceling the first in market advantage

- -

3)other place Not only the operational time increase it will also be a challenge to find a suitable location and huge capital wil be required to fund training of employees

- -

Financial Feasibility Company would require minimum $600 million which will be raised either via debt or its internal funds. Plus it would be required that new plant be futuristic in terms of its technology,adding up to a huge capital. This might lead to cutting down on its R & D budget which is backbone of the company

This option is financially feasible but again the operational time increases as approvals take a lot of time

It is financially feasible

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Conclusion

Taking over a competitive firm in Porrino, Spain is the recommended option. Company’s greatest strength lies in R & D. By building a new plant the company can be sacrificing its available funds for R & D. This risk is low in option recommended here. Also the time and other legalities for developing and approval of a higher yield process are problematic. By taking over a firm in Spain not only has economical and operational but also legal feasibility.

As company will have first movers advantage and it can exploit the demand supply gap as per investment requirments and increase it the market share giving it a commanding position. Also as and when the FDA approves of the drugs in various phases they can start up with the manufacturing without having to waste any time.

Overall the future looks promising and inline with the mission of becoming a leading biotechnology company keeping the welfare of its shareholders and addressing significant unmet medical needs.

REFERENCES

Chase, R. B., Shankar, R., Jacobs, F. R., & Aquilano, N. J. (2010). Operations and Supply

Management (12th ed.). New Delhi: Tata McGraw Hill Education Private Limited.

Case: Genentech – Capacity Planning

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APPENDIX100% successful trial :

Adapted from Exhibit 1       Expected PenetrationEstimated Number of Patients

Using Avastin

 

    Cancer

2005 2010 2015 2005 2010 2015    Patients

                   

Colorectal Cancer Treatment                  

front-line     40,000 55% 60% 65% 22,000 24,000 26,000

second-line     20,000 35% 35% 35% 7,000 7,000 7,000

other     1,20,000 5% 10% 15% 6,000 12,000 18,000

              35,000 43,000 51,000

                   

Grams per dose             0.375 0.375 0.375

Doses per year             20 20 20

Total grams per patient treated             7.5 7.5 7.5

                   

Total grams for colorectal patients             2,62,500 3,22,500 3,82,500

Total kg for colorectal patients             263 323 383

                   

Other Cancer indicationsTrial Stage

Probability of Trial Success              

Lung                  

front-line   100% 75,000 5% 30% 30% 3,750 22,500 22,500

other   100% 35,000 2% 15% 15% 700 5,250 5,250

Breast                  

front-line   100% 1,40,000   30% 30% 0 42,000 42,000

other   100% 80,000   15% 15% 0 12,000 12,000

Kidney                  

front-line   100% 18,000   30% 30% 0 5,400 5,400

other   100% 18,000   15% 15% 0 2,700 2,700

Pancreatic                  

front-line   100% 16,000   30% 30% 0 4,800 4,800

other   100% 16,000   15% 15% 0 2,400 2,400

Other                  

front-line   100% 25,000   15% 30% 0 3,750 7,500

other   100% 25,000   8% 15% 0 2,000 3,750

                   

Total patients             4,450 1,02,800 1,08,300

                   

Grams per dose             0.75 0.75 0.75

Doses per year             12 12 12

total grams per patient treated             9 9 9

                   Total grams to treat other cancer indications             40,050 9,25,200 9,74,700

Total kg to treat other cancer indications             40 925 975

                   

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Total kg required for colorectal and other    

        303 1248 1357cancer indications    

                   

  2005 2006 2007 2008 2009 2010 2011 2012 2013

SSF561.

6 561.6 561.6 561.6 561.6 561.6 561.6561.

6561.

6

CCP1842.

4 842.4 842.4 842.4 842.4 842.4 842.4842.

4842.

4CCP2 - - - - 1170 1170 1170 1170 1170CCP3 - - - - - - - - -Porrino 234 234 234 234 234 234 234 234 234

Rituxan Outsource

752.36

1202.06

1651.76

2101.47

1640.97

2090.67

1235.64

380.61

-474.

43

Herceptin Outsource

214.74

343.10

471.46

599.81

468.37

596.73

352.68

108.63

-135.

41                   Genentech Capacity 1638 1638 1638 1638 2808 2808 2808 2808 2808

Outsource Capacity

967.1

1545.2

2123.2

2701.3

2109.3

2687.4

1588.3

489.24

-609.

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Total Capacity2605

.13183.

23761.

24339.

34917.

35495.

44396.

33297

.22198

.2                   Avastin Demand 303 492 681 870 1059 1248 998 749 499Other Drug Demand 1000 1050 1100 1150 1200 1250 1000 750 500Omnitarg 0 50 100 150 200 250 200 150 100Total Expected Demand 1303 1592 1881 2170 2459 2748 2198 1649 1099                   85%-ile demand 2605 3183 3761 4339 4917 5495 4396 3297 2198                   GAP -967 -1545 -2123 -2701 -2109 -2687 -1588 -489 610

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