Looking beyond pharma for portfolio optimisation

Trevor Brown and Stephen Allport

Premark Services Limited

Within an increasingly challenging environment, there is significant debate in the pharmaceutical industry directed at how to determine the most appropriate balance in the portfolio of discovery, development and marketed products to deliver future sustainable value.

This debate is driven by four key factors:

Changes in industry structure. This is not only evidenced by major mergers and acquisitions but also in the rapidly increasing numbers of alliances formed with research partners, wholesale outsourcing of significant functions, increasing focus on emerging markets and movement away from reliance on blockbuster medicines.

Dissatisfaction with current practices. According to a recent BCG survey¹, only 36% of organisations surveyed within the pharma/biotech sector are satisfied with their return on innovation investment. This is attributed to excessive development time, a risk averse culture, poor idea selection, lack of in-company co-ordination and poor customer insight.

Failure to replenish pipelines. According to a study of pipeline replacement ratio², in 2012 the top 14 global drug makers will generate an average of 26 cents from new products (launched during the prior five years) for every dollar lost from declining products. This represents a 65 percent drop from the 2007 level of 77 cents.

Reduced business growth rate. Mckinsey³ estimates that the average return on R&amp,D investment for a typical small molecule compound is below the cost of capital with an NPV of -$65 million and an IRR of 7.5%. A typical biologic, currently, returns an NPV of $1.26 billion and an IRR of 13%.

These four factors are all either drivers of or manifestations of the need to change portfolio management practices.

Is the current focus on small molecules or the developing focus on large molecules the answer? To what extent are vaccines, diagnostics or even healthcare provision a vision of the future and how should they be incorporated into conventional portfolio management?

To obtain the optimum selection and balance in a portfolio we must first understand where and how markets will develop over the medium and long term. Understanding the customer is therefore of key importance. One of the key dimensions is how distinctions are made between the different types of customer and how these are then reflected within an organisation’s strategy and its associated future research and development plans.

From a pharmaceutical perspective, this encompasses a spectrum of customers including the payer (i.e. central government, local authorities, insurance companies, individuals), prescriber, patient, carer and patient associations. Additionally, how companies identify the relative importance/influence of these different customers and the weighting of their needs is important together with how their variance over time can be accommodated.

 

“To obtain the optimum selection and balance in a portfolio we must first understand where and how markets will develop over the medium and long term”

 

Understanding future opportunities is however only the start of the challenge. How are these, possibly contradictory, opportunities to be encompassed within a development portfolio? Balancing risk versus return, making trade-offs between opportunities often at different stages of development, in different business or therapeutic areas and between internal and external development compounds is problematic.

Important issues such as these can be debated within the pharmaceutical industry in the hope that all the answers can be gleaned from our total experience. Alternatively, we can look outside the industry at other high technology sectors that face, or have already successfully faced, many, if not all, of the same challenges. A consortium of pharmaceutical companies has reached the initial conclusion that, whilst not ignoring the collective industry experience, the latter approach is likely to lead to deeper, transferable insights.

A research programme, sponsored and driven by the consortium members, and led by Premark Services and the University of Cambridge’s Centre for Technology Management has been established with the aim of identifying, reviewing, comparing and contrasting the project selection and portfolio management practices of pharma/biotech organisations and selected additional non-pharma companies.

The project will provide participants with an insight into their own practices in comparison with other pharma and non-pharma companies and the opportunity to translate key learnings from other industries.

An initial meeting of consortium members agreed the key issues to be addressed in the project. These fall into four main areas:

Portfolio design – how the portfolio management process links in house activity, the market and the technology base

Understanding the customer – how the needs of the customer are understood and how they influence the design of the portfolio

Balancing the product portfolio – what tools, techniques and metrics are used to balance the portfolio from research through to marketed products

The portfolio management process – the mechanics of the process used, frequency of review, what different approaches and techniques are used for earlier and later stage projects and technologies

Each of these areas is now being explored in more detail with participants using a structured questionnaire and follow up interviews. The mix of participants ensures that the full range of practices across all sectors and size of company is examined, tested and understood. The project will conclude with an intensive two day workshop for participating organisations from pharma and other industry sectors. The workshop will explore in detail how participants can take best practices in each of the key areas, from whatever sector, and adopt them internally so enhancing value, benefit and competitive advantage.

 

“…pharma is not the first industry sector to diversify or continually revitalise its portfolio of technologies to ensure future value delivery”

 

So how will this project help pharma companies to ensure sustainable value?

Firstly companies from other industry sectors participating in the project have been through the restructuring, downsizing and reshaping now so prevalent in the pharma sector. They have adapted and grown their portfolio management processes to ensure that they will thrive in their new environments. It is anticipated that many of these practices and approaches will be transferable to pharma and biotech.

Secondly, though most sectors express some degree of dissatisfaction with return on innovation investment, it is less significantly marked in sectors such as automotive than in pharma which suggests that there are lessons to be learned from other sectors.

Thirdly, the level of pipeline erosion is clearly unsustainable. Other sectors’ market focus has ensured a flow of incremental product improvements allied to major, even game changing, new entries so ensuring a steady pipeline growth. Pharma can adopt and adapt the approaches used elsewhere to ensure sustainability.

Fourthly pharma is not the first industry sector to diversify or continually revitalise its portfolio of technologies to ensure future value delivery. The project will help identify how other sectors have done this and the portfolio management techniques they use to stay ahead of the game.

The project is expected to run through to the end of 2010. Participants will receive individual reports showing how they can bring their portfolio management capabilities to best in class level. They will also have participated with leading companies from many industry sectors in ensuring that their portfolio management practices facilitate company growth and deliver sustainable value.

We look forward to seeing what conclusions come from this study and will be reporting back some of the highlights once it is concluded!

References:

1. Innovation 2008 – Is The Tide turning? Boston Consulting Group 2008 at http://www.bcg.com/documents/file15299.pdf and Measuring Innovation 2008 – Squandered Opportunities. Boston Consulting Group 2008 at http://www.bcg.com/documents/file15302.pdf

2. http://www.pharmalot.com/2008/08/replenishing-the-pipeline-and-the-winner-is/

3. David E., Tramontin T., Zemmel R., The Road to Positive R&amp,D Returns. McKinsey Quarterly, February 2010.

Highlights from the project will be reported on pharmaphorum once complete.

About the author:

Premark Services were established in 1992 specialising in the provision of strategic marketing services to the pharma industry. The company has extensive experience of bringing added value to new product development by gaining early insights into the key strategic issues which will determine commercial success.

Premark liaises with international clinical experts and strategic payers to determine the clinical and economic endpoints which will impart added value to products in early development. Through applied epidemiology studies the holistic needs of patients are identified and communicated through peer review publication. Early market understanding based on what might be achieved rather than current perspectives informs the evaluation of products during the portfolio evaluation process.

For more information on this research programme contact tbrown@premarkservices.com.

www.premarkservices.com

What portfolio management tricks can pharma learn from other industries?