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GENENTECH- CAPACITY PLANNING 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

Capacity/Tank Batches/y Kg/Batch Kg/Batch Recovered Tanks Liters r 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

4000 3000 2000

Trial successful

1000

Trials fail 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0 Trial successful

 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) Amount Total stockholders equity 6520.3 Total debt 2216 Total Assets Debt to equity ratio

8736.2

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

Product Sales 4500 3840.9

4000 3500 3000

2621.4

2500 2000

2163.6 1742.9

Product Sales

1500 1000 500 0 2001

2002

2003

2004

 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

Operational Time Technology

Minimum 5 year 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

Location, human resource and cost effectiveness.

1)Vacavile

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

Improving process

current Taking over competitive firm in Spain Within 5 years within 2-3 years Here also the A competitive firm technology can be would be acquired improved but its hence not only wil very risky.more over there be an approval from FDA advantage of there will take a lot of time existing technology, negating the first Genentech’s own movers advantage robust model can be applied easily and make the plant operational quickly. 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 Here as well same problem will be faced as not only the strength of employees increase,making the management difficult. it will be 10

2)Spain

3)other place

Financial Feasibility

potential risk reducing employee efficieny.It will be cost effective nonetheless It would be cost effective here as well but then the operational time would increase and thus canceling the first in market advantage 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 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

cost effective nonetheless

-

-

-

-

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

financially

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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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APPENDIX 100% successful trial :

Adapted from Exhibit 1

Estimated Number of Patients Using Avastin

Expected Penetration Cancer Patients

2005

2010

2015

2005

2010

2015

24,000

26,000

Colorectal Cancer Treatment front-line second-line other

40,000

55%

60%

65%

22,000

20,000

35%

35%

35%

7,000

7,000

7,000

1,20,000

5%

10%

15%

6,000

12,000

18,000

35,000

43,000

51,000

0.375

0.375

0.375

20

20

20

7.5

7.5

7.5

2,62,500

3,22,500

3,82,500

263

323

383

Grams per dose Doses per year Total grams per patient treated Total grams for colorectal patients Total kg for colorectal patients

Other Cancer indications

Trial 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

front-line

100%

1,40,000

30%

30%

0

42,000

42,000

other

100%

80,000

15%

15%

0

12,000

12,000

front-line

100%

18,000

30%

30%

0

5,400

5,400

other

100%

18,000

15%

15%

0

2,700

2,700

front-line

100%

16,000

30%

30%

0

4,800

4,800

other

100%

16,000

15%

15%

0

2,400

2,400

front-line

100%

25,000

15%

30%

0

3,750

7,500

other

100%

25,000

8%

15%

0

2,000

3,750

4,450

1,02,800

1,08,300

0.75

0.75

0.75

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

Breast

Kidney

Pancreatic

Other

Total patients Grams per dose Doses per year

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Total kg to treat other cancer indications

40

925

975

303

1248

1357

Total kg required for colorectal and other cancer indications

2011 561.6 842.4 1170 234

2012 561.6 842.4 1170 234

Rituxan Outsource

752.36 1202.06 1651.76 2101.47 1640.97 2090.67 1235.64

380.61

Herceptin Outsource

214.74

343.10

471.46

599.81

468.37

596.73

352.68

108.63

2013 561.6 842.4 1170 234 474.43 135.41

Genentech Capacity Outsource Capacity Total Capacity

1638 967.1 2605.1

1638 1545.2 3183.2

1638 2123.2 3761.2

1638 2701.3 4339.3

2808 2109.3 4917.3

2808 2687.4 5495.4

2808 1588.3 4396.3

2808 489.24 3297.2

2808 -609.8 2198.2

Avastin Demand Other Drug Demand Omnitarg Total Expected Demand

303 1000 0

492 1050 50

681 1100 100

870 1150 150

1059 1200 200

1248 1250 250

998 1000 200

749 750 150

499 500 100

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

SSF CCP1 CCP2 CCP3 Porrino

2005 561.6 842.4 234

2006 561.6 842.4 234

2007 561.6 842.4 234

2008 561.6 842.4 234

2009 561.6 842.4 1170 234

2010 561.6 842.4 1170 234

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