Launch Risk Risk Analysis Case Study

Launch @ Risk: the Case of Glenmark Generics Inc.

Glenmark faces four risk-management options: to proceed with the launch @ risk, to negotiate with Sanofi-Aventis for a settlement, to take out an insurance policy for launch @ risk, and to forego the launch @ risk altogether. The subsequent sections discuss the risks associated with each of these options to identify the most plausible option for the company.

To Proceed with the Launch @ Risk

In determining whether to proceed with the Launch @ Risk, Glenmark would need to consider the risks involved in navigating the legal maze and the possible effects of litigation on pricing and gross margins. The company had committed an initial capital outlay of $0.5 million in developing Tarka. Sales revenues are projected at $18.9 million during the six-month exclusivity period, assuming the worst case scenario that it sells 10 percent less units than the projected 10 million capsules at a unit price of $2.10 (9 million units @ $2.10). This would translate to a gross profit margin of 97 percent of sales (gross profit of $18.4 million/$18.9million). Thus, the company stands to make a huge financial reward from this option. However, the risk of financial loss arising from litigation costs is high since the company would have to settle Sanofi-Aventis in the event that they lose the case.

Looking at the industry-wide litigation trends in exhibit 4, launches @ risk are less popular than settlements and generics authorized by manufacturers. This suggests that they are more risky relative to the other two options. Furthermore, the industry-wide legal track record shows that Glenmark has an almost 50 percent chance of losing, in which case the company would have to pay damages to Sanofi-Aventis determined by the volume of sales. Glenmark could minimize the amount it is likely to pay in damages by selling fewer units at a higher price. However, the feasibility of this plan is limited because the patented manufacturer’s price is $3 per capsule, and having the generic price closer to this price would significantly reduce sales and profit margins.

Take out an insurance policy for Launch @ Risk

Glenmark could choose to proceed with the launch @ risk but take out an insurance policy to minimize the financial risk in the event that they lose the case. An insurer would set the premium based on the location of the court and past rulings. While New Jersey courts seem relatively friendly to generic manufacturers, the industry track record as well as Glenmark’s point to a 48 to 50 percent chance of success. This points to an almost equal chance of failure or success and the insurer is, thus likely to set the premium at between 35 and 38 percent of gross profit. Assuming the worst case scenario that the premium is pegged at 38 percent of the gross profit or profit before income and tax of $140.04 million as per the income statement; Glenmark would pay $53 million in premiums (38% x $140.04). The maximum sales that the company expects to realize from the launch @ risk assuming sales of 11 million capsules is $23.1 million (11 million units x $2.10), which is less than the amount it would pay in premiums to eliminate the financial risk. Thus, taking out an insurance policy for the launch @ risk may not be a plausible option.

Forego the Launch @ Risk

Foregoing the launch @ risk means that the company completely loses out on potential sales revenues that could have been realized during the six-month exclusivity period. The move would also have a negative effect on the drug industry by reducing the levels of competition faced by innovator companies. This would negatively impact citizens’ welfare, particularly low-income earners, as they may not afford the costly drugs in the absence of generic alternatives. Thus, this would be the least viable option for the company.

Negotiate with Sanofi-Aventis for a settlement