Profit Forecast Calculator uses data on revenue and costs to output Gross Profit Margin, Profit Margin, and Net Income. This forecast model is a useful tool for preliminary assessment whether a product is worth developing.
Notably, when an NPV range is calculated for one input range, all other inputs are held constant at their Base values.
The underlying revenue algorithm is the same as the one in the
Revenue Forecast Calculator. If you are not sure how to select revenue parameters, we recommend testing the revenue calculator first.
In this calculator, users can get insights into how cost parameters influence Gross Profit Margin, Profit Margin, and Net Income.
- Overall, costs are calculated either as % of sales or as a total cost distributed over the specified number of years.
- Specifically, Royalties, Commercial Expenses in Perpetuity and General & Administrative (G&A) expenses are expressed as % of sales.
- In contrast, Research & Development (R&D) Expenses follow a normal distribution function, with the minimum in the current year and the maximum in the year before Launch (L-1). Typically, all R&D expenses are incurred before Launch (L). Usually, they comprise preclinical, clinical, manufacturing, and regulatory expenses.
- Similarly, Commercial Launch Expenses follow a bell-curve distribution, with the peak in year L. Here, we distribute costs over 6 years, from L-3 to L+2, inclusively. Alternatively, users can modify this range in Advanced Options. Typically, Commercial Launch expenses comprise Sales, Marketing, Pricing & Reimbursement, and relevant Medical Affairs expenses.
- Here, we call commercial expenses incurred after launch Expenses in Perpetuity and express them as % of sales. Hence, this expense is zero during years without revenue.
- Finally, the default value for the Corporate Tax Rate is 21%. However, it varies depending on geography and tax law.
- Importantly, users can further fine tune Cost parameters in Advanced Options.
Profit
Finally, the calculator outputs Gross Profit and Profit margins, as well as Net Income. Formulas for calculating these parameters are as follows.
- Gross Profit = Revenue – COGS – Royalties
- Gross Profit Margin = Gross Profit / Revenue
Usually, Milestones/Royalties are more complicated. Milestones include a variety of payments paid out overtime. Royalties are an example of variable cost and is part of COGS. Here, we express Royalties as % of sales without consideration of tiers.
- Profit = Gross Profit – Operating Expenses
- Profit Margin = Profit / Revenue
Specifically, Operating Expenses include R&D, Commercial, and G&A expenses. Importantly, Profit represents EBITDA (Earnings Before Interest, Taxes, Depreciation, Appreciation).
- Net Income = Profit – Tax
Similarly, here Net Income represents NOPAT (Net Operating Income After Tax).
Certainly, Profit assessment is important. However, Net Present Value (NPV) helps more accurately answer the question “is it worth developing a product?”. To estimate NPV, please visit our
non-risk adjusted and
risk-adjusted calculators.
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bioheights@pm.me.
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Disclaimer: This Profit Forecast Calculator is the property of BioHeights LLC. We designed this model only for educational purposes. Importantly, this is not a financial advice. BioHeights LLC and its members are not responsible for anybody’s actions, losses, or damages resulting from using this model.
