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Initial Production Capacity Investments for Commercializing Pharmaceutical Products

  • Author(s): Yuen, Ming Kwan
  • Advisor(s): Kaminsky, Philip M
  • Guo, Xin
  • et al.
Abstract

This thesis is motivated by the investment problems pharmaceutical manufacturing firms face when introducing new drug products.

We consider two different types of resources that play a role in determining the initial production capacity in pharmaceutical manufacturing:

generic production resources, and specialized facilities and equipment.

Due to the differences in availability of {each resources} type and the dynamics of information the firm receives with respect to the underlying uncertainties,

the investment problems posed by these two resource types are very different.

We build two separate dynamic optimization models to analyze the respective investment strategies.

For procurement of generic resources, we consider the firm facing random demand while the drug approval arrives at a random time.

The firm can either increase or decrease inventory of the resources by buying or selling on a spot market where price fluctuates randomly over time.

The firm's goal on this operation is to maximize expected discounted profit over the procurement process.

We first show that this optimization problem is equivalent to a two-dimensional singular control problem.

We then show that the optimal policy is completely characterized by a simple price-dependent two-threshold policy.

For specialized equipment, we consider a model where the firm must balance two conflicting objectives: on one hand, the delay in scaling-up production once the product is approved must be minimized, and on the other hand, the risk of investing in ultimately unused capacity must be minimized. We develop a stylized model of this type of capacity investment problem, where the firm re-evaluates its capacity investment strategy as information about the potential success of the product is continually updated (for example, via clinical trial results).

We identify settings in which by continually reviewing the building strategy, the firm can substantially reduce both the delay of the commercial launch of the new product, and the risk of lost investment.

Although, our focus here is on the investment decisions in introducing a new drug product in the pharmaceutical industry,

the models described in the following subsections can be applied to the introduction of products which require specialized equipment

to manufacture and have a long research and development phase.

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