Forecasts and Avalanches - Living with Risk

Notes from the East Woods
musings on opportunities in the life science marketplace

February 2009

Greetings!

Here we take a look at how avalanches can help us better understand the risk in our forecasts. Please have a read and feel free to let me know what you think. Thanks.

Regards,

Paul Danis
Founder and Principal

This Month's Features

Avalanches and Forecasts - Living with Risk

Life Science Market Update

Avalanches and Forecasts - Living with Risk

I was having one of those post-card days skiing in Vail recently when my chairlift mate said, "That slope over there avalanched last month." Like most people, I brushed off the comment and avoided the fact that there was some chance of getting hurt. The truth is that I am quite aware of the risks since someone got killed last year on the other side of the hill from where we were skiing. Granted skiing on patrolled slopes is far safer than searching for the "out of bounds" experience, but it made me wonder why people take such risks even though the dangers are well advertised. The truth is, people think that bad things happen to someone else.

Similarly one of the biggest problems with forecasts is that the risks are usually ignored. If we look at avalanche safety, there are actually some good lessons to apply to forecasting in general. Whether it is the next quarter sales or the market size in 2010, the downside of forecasts is usually given short shrift. Maybe it's that we are all optimists, but reality eventually will win out.

One of the first things to realize is that an avalanche forecast is an assessment of the level of hazard; it is the chance that something (in this case, bad) will happen. Similarly the 14% revenue growth next year is a wonderful forecast, but it needs to be framed within the likelihood that it will happen.

Once you have the avalanche forecast in hand, travel in the area requires that you have complete awareness of your surroundings. The initial action is to look for obvious clues that will help reveal the amount of hazard. Signs of recent avalanches and cracking snow are foreshadows of trouble. Similarly when the revenue starts to veer off the forecast, you need to heed this warning and take action. If sales cycles get longer, then your ears should perk up. Also if you are ahead of plan, first smile, then ask why.

You can use test slopes or dig snow pits to assess the stability of the snow pack. When building the forecast you obviously spent time doing the right things such as talking with potential customers, and looking at historical data. However, after the forecast is set and people are moving with these goals in mind, it is still important to be testing the slopes to better understand the certainty.

Safe travel in avalanche terrain is critical to being on the right side of things. Stay away from cornices, travel one at a time, and have an escape route planned. When creating and then operating on your forecast, be sure to look at alternatives. Have contingencies in place for surprises that happen in either direction.

The last subject is, of course, deciding what to do if you or a friend gets caught in an avalanche. Statistics are not on your side so I won't belabor this scenario. Clearly avoidance is the overwhelmingly preferred path to take. But only by taking heed of the level of certainty and risk in the forecast will you safely reach your destination.

So, when you finally put the pens down and declare your forecast for next quarter solid, be sure to keep in mind that you are traveling in avalanche terrain. Great joy (and success) can be had if you maintain perspective on the risk and keep a vigilant eye on your surroundings.

Life Science Market Update

Index	January Value	Change YTD	Yearly High	Yearly Low
EC BioTools	437	-2%	437	437
EC BigPharma	607	-3%	607	607
EC Biotech	568	-1%	568	568

Fortunately the year has started in less dramatic fashion than it ended. The small changes in the indices from the end of 2008 are a welcome respite from last fall.

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Many of the life science indices currently available are a mixture of various types of companies. In order to better assess the situation in the different segments, Eastwoods Consulting has created these price-weighted indices for the sectors of large pharmaceutical companies, biotech companies, and life science research tools companies.

EC BioTools Index - A, ACCL, AFFX, BEC, BIO, BRKR, CALP, DNEX, HBIO, HLCS, ILMN, LIFE, LMNX, PKI, QGEN, SIAL, TMO, VARI, WAT

EC BigPharma Index - JNJ, PFE, GSK, NVS, SNY, MRK, ABT, LLY, AZN, WYE, BMY, NVO, BAX, TEVA, SGP, RHHBY.PK

EB Biotech Index - DNA, AMGN, GENZ, BIIB, CEPH, GILD, BMRN, AMLN, IDXX, SEPR, OSIP, PDLI, CPHD, ALKS, REGN, MEDX, THRX, HGSI, SGMO, NKTR

Prices are taken at the close of each month.

About Eastwoods Consulting

Eastwoods Consulting helps companies connect their technologies and products with the life science marketplace. By focusing on the most valuable opportunities, efficiency is increased, and profits grow.

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