Vision Research has completed preliminary development of a new drug, code-named ClearView that corrects nearsightedness. This revolutionary new product could be completely developed and tested in time for release next year if the FDA approves the product. Although the drug works well for some patients, the overall success rate is marginal, and Vision Research is uncertain whether the FDA will approve the product. Because the ClearView project is a multimillion-dollar risk, Vision Research has decided to use Monte Carlo simulation to help decide whether to scrap the project or to proceed to develop and market this potentially profitable new drug.
Consider five sources of uncertainty: Testing Costs, Marketing Costs, Patients Cured (out a sample of 100), Growth Rate of Nearsightedness, and Market Penetration. So far, Vision Research has spent $10,000,000 developing Clear View.
By speaking with your coworkers and subject matter experts, you have determined the following information about each of the uncertain variables:
Testing Costs: Any value between $3,000,000 and $5,000,000 has an equal chance of being the actual cost of testing.
Marketing Costs: Vision Research expects to spend between $12,000,000 and $18,000,000, most likely $16,000,000.
Patients Cured: Preliminary testing shows a cure rate of 25% for 100 trials (binomial distribution).
Growth Rate of Nearsightedness: There is a 75% probability that the market will increase by 0-5%, but there is also a 25% chance that a competing product will be released on the market soon. This product would decrease Clear View’s potential market by 5% to 15%.
Market Penetration: Eventual share of the total market for the product will be normally distributed around a mean value of 8% with a standard deviation of 2%.
Create a Crystal Ball model that incorporates the uncertainty around each of these variables. Run a simulation using 5,000 trials. Select "Use Same sequence of random numbers" under "Run Preferences" with an initial seed value of 999.
What is the probability that Vision Research will break even on this project?
What is the probability that Vision Research will reach its expected Net Profit of $9.2 MM?
Should the company scrap the Clear View project or proceed to develop and market this new drug?
Which variable most affects the forecast? Could you change the distribution parameters of the key drivers to improve the forecast results? To view which of the assumptions had the greatest impact on a particular forecast, use the sensitivity chart.