The successful release of the drug or any biopharmaceutical product onto the market relies on approval by authorized drug committees like Food and Drug Administration (FDA). In order to approach this final stage, a drug needs to survive in all clinical trials which in turn might depend on cash flows in the form of funding.
During this time-consuming stage, it is reasonable to make predictions regarding drug approvals which in the present context is about two patented oncology drugs Xcytrin and Lutrin of a pharmaceutical company, Pharmacyclics (PCYC) (Malcolm Baker & Richard Ruback, 2003).
Xcytrin has received funding from several venture firms that made it enter phase III clinical trial in September 1998, which may indicate good cash inflow. If PCYC continues to obtain funds, then for the subsequent years it may foresee a remarkable development. It could protect the funds and make it utilize for the additional expenses in the subsequent crucial years. Say, in the fiscal year 2000, it may complete phase III clinical trial and PCYC might get ready for approval by FDA. During this vital stage, FDA might ask PCYC to conduct additional tests if the results of the clinical trials are not satisfactory.
Therefore, there is a possibility that in 2000 and 2001, PCYC gets engaged in clinical trials that require additional R& D expenses. In case of satisfactory clinical trials and approval by the FDA, PCYC may need to concentrate on tasks like production, marketing, and Post -marketing testing. This is because if we assume the approval of this drug by the FDA, in 2002 its usage would be expected in 2% of the 170,000 radiation treatments for brain metastases in the United States. So, there is a need to monitor the efficacy of the drug by selecting the subjects exposed to Xcytrin again which in turn might need R&D funding. Here, it may indicate that the cash inflow may become the foundation for cash outflow services like R& D contracts, outsourcing the manufacture of compounds used in testing, and motivating the employees.
Therefore, this forecast may support the projected R&D expenses, 27.5, 48.5 38.0 (millions of dollars) for the fiscal years 2000, 2001, and 2002, respectively. In contrast, if Xcytrin is not approved by FDA, PCYC may engage in investigations with the objective of rectifying or evaluating the limitations that might have interfered with the approval. If PCYC is determined in its motive, it may restart clinical trials which require huge cash inflow from venture firms. A fresh selection of human volunteers may be required. This would subsequently demand high R&D expenses again in the fiscal years 2000, 2001, and 2002.
Next, Lutrin is another important drug that treats cancer by improving the effectiveness of photodynamic therapy (PDT). This drug is reported to enter the phase IIb trial. If it gets approval by FDA it may generate a large cash inflow from the venture firms in late 2000 to start production by employing manpower. In the fiscal year 2001, PCYC may concentrate on marketing by investing funds and raising shares in the market. This would make it a recognized candidate for cancer treatment options, and in 2002 the anticipated contribution to pre–tax income would be nearly $ 3 million. So, these cash inflows may again concomitantly increase the cash outflow services in the R&D as mentioned previously.
If Lutrin is disapproved by FDA in 1999, although there may not be investments, PCYC could reattempt for approval by studying the pitfalls encountered during the clinical trials or result interpretation in 2000. This might in turn prompt fresh experiments and remotivation of employees. However, PCYC may need to look for funding either from its own side or outside to withstand the effect of disapproval on the subsequent fiscal years 2001 and 2002. Hence, the approval and disapproval of Lutrin appear similar to Xcytrin.
In view of the above forecast information, it can be inferred that approval of both the drugs, Xcytrin and Lutrin may reflect huge net cash flows for the fiscal years 2000, 2001, and 2002.
Several venture firms may play a vital role in influencing the pre and post-drug approval period. Disapproval may also affect fiscal years by imposing an additional financial burden.
References
Malcolm Baker and Richard Ruback (2003). Pharmacyclics: Financing Research & Development case. Harvard Business School Case 201- 506. Web.