Analysis of R&D portfolio management

Portfolio management carves niche for itself in resource-constrained pharmaceutical market

02-May-2003

At the core of portfolio management lies the need to identify and prioritise the most profitable products/projects in the R&D pipeline with the aim of maximising return on investment. For the pharmaceutical industry, the difficulty of quantifying the uncertainties associated with product development and of accurately assessing projects at different stages of fruition makes the task of portfolio management an especially challenging one. According to latest analysis by growth consultants Frost & Sullivan, pharmaceutical companies today have extensively incorporated portfolio management as a decision process. A spate of mergers and acquisitions (M&As) and the rising costs linked to product development have provided further impetus to R&D portfolio management. pressure from stock markets has made it incumbent on pharmaceutical companies to retain a profitable profile. Here, the positive co-relation between a company's stock market value and the performance of its products has meant that companies not only have to capitalise on current product offerings but also have to plug any gaps in their product pipeline. In many cases, the effort to maintain profitability has been addressed by M&As. The restructuring of portfolios after recent M&As has compelled companies to adopt a more direct approach to portfolio management. For instance, a flurry of in- and out-licensing agreements ensuing from M&A activity has required large-scale portfolio management. "While the link between product performance and market value of companies is well established, the role for portfolio management to facilitate a more gentle transition, when key products lose patent, is equally important," says Morten Soegaard, research analyst at Frost & Sullivan. A case in point was the declining market value of Eli Lilly following the emergence of generic competition to its blockbuster Prozac. Since then, Eli Lilly has begun the grueling task of compensating for the Prozac patent loss through augmented revenue from a new host of products such as Zyprexa, Evista and Gemzar. Mr. Soegaard adds: "Companies seeking to compensate for losses due to patent expiries, are restrained by reduced R&D productivity across the industry. Some see these circumstances as a driver for further consolidation in the industry, which, in turn, will further promote the importance of portfolio management in the pharmaceutical industry". Effective resource management in product portfolios has been a corollary of escalating product development costs. Declining R&D productivity since the late 80s-with growth in R&D investments outstripping corresponding increases in revenues-has created an important role for portfolio management in improving future revenues through optimising current R&D outlays. In a parallel development, the declining output of new chemical entities (NCEs) even as R&D costs have risen, has driven the expanding use of portfolio management. It is being seen as a way to recognise products with low commercial potential before they reach the stage of expensive clinical trials. This is likely to enable early resource allocation to projects with brighter market prospects. At present, financial models, such as net present value and decision trees, form the primary basis for decision-making analysis. Non-financial approaches, especially strategic models and risk-reward charts, have also achieved a degree of popularity. However, there remains a great deal of doubt regarding the correct model to follow for project prioritisation. "The current focus on using financial models is at risk of blurring the decision-making process, as the complexity of choosing the optimal product portfolio seldom boils down to a single financial output. Overall, approaches to portfolio management should be more focused towards the process of acquiring data and choosing optimal models and approaches," notes Mr. Soegaard. The emergence of complex models has underpinned the current progress in portfolio management and of decision analysis, in particular. These, however, have offered enhanced value over existing approaches only in specific cases. In the near term, real-time availability of information and a focus on obtaining quality inputs to expedite decisions are anticipated to improve portfolio management capabilities. Better tools such as real-time portfolio management are likely to set the stage for shorter response times to shifting market dynamics. However, investment in and implementation of these advanced tools might be deferred due to the complexity of quantifying the impact portfolio management has on business bottom lines. Inserting a cautionary note, Mr. Soegaard concludes: "Strategic guidance in terms of corporate goals is needed for meaningful portfolio management. Simply looking at how to make the most of products in the pipeline today will not necessarily produce the most competitive pipeline for the future. In general, there is a strong need for better, forward-looking procedures for portfolio management, which will allow portfolio management and strategic direction to complement each other."

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