Decision Analysis &
Portfolio Management
Pharmaceutical Portfolio Management
Kazuo J. Ezawa
Bristol-Myers Squibb Company
DAAG - San Francisco
February 25, 2004
Decision Analysis &
Portfolio Management
Outline
Pharmaceutical Industry R&D Challenges
Asset Evaluation - Application of Decision Analysis
Portfolio Analysis & Management
Decision Analysis &
Portfolio Management
No economy of scale in drug discovery productivity
Decision Analysis &
Portfolio Management
Overall probability of success has been declining over the
last decade
Decision Analysis &
Portfolio ManagementSource: Tufts CSDD 2002
The drug discovery & development costs have been increasing
significantly over the decades
84
214
336
54
104
466
0
100
200
300
400
500
600
700
800
900
1970s Approvals 1980s Approvals 1990s Approvals
$ m
illi
on
(20
00
US
$)
Clinical Cost ($M)
Non-Clinical Costs ($M)
138
318
802
Decision Analysis &
Portfolio Management
It takes more than 10 years to develop a drug to market.
3.64.5
5.2 5.2
2.8
4.4
5.86.5
2.4
2.1
2.81.9
0
2
4
6
8
10
12
14
16
1960s 1970s 1980s 1990s
Ye
ars Approval Phase
Clinical Phase
Pre-Clinical Phase
8.8
11.0
13.813.6
Source: Tufts CSDD 2002
Decision Analysis &
Portfolio Management
Only limited number of drugs will have positive return on
investment
Average Clinical Development Cost
Decision Analysis &
Portfolio Management
Outline
Pharmaceutical Industry R&D Challenges
Asset Evaluation - Application of Decision Analysis
Portfolio Analysis & Management
Decision Analysis &
Portfolio Management
Asset Evaluation Process
• Define success
criteria and assess
probabilities
• Assess time to
market
• Define development
program
assumptions
• Estimate
development costs
• Assess market
size, share and
price
• Assess competitor
dynamics
• Assess
commercial costs
• Identify key
commercial value
drivers
• Brainstorm options
for each decision
• Define strategic
alternatives for
evaluation
• Create a rationale
for each strategic
alternative
• Develop Expected
Target Profiles
(ETPs)
• Define/confirm
current plan
• Define project
scope
ETP/Asset
Valuation
Strategic Alternative
Generation
• Calculate expected
value and
productivity
for each alternative
• Develop analysis
insights
• Draft
recommendations for
Steering Committee
review
Commercial
Analysis
Final
Valuation
Situation
AssessmentAlternative
Development
Technical
and Cost
Analysis
Decision
Analysis
Decision Analysis &
Portfolio Management
Outline
Pharmaceutical Industry R&D Challenges
Asset Evaluation - Application of Decision Analysis
Portfolio Analysis & Management
Decision Analysis &
Portfolio Management
Portfolio Management Process
Phase IIIsuccess
Failure
.70
.85
.15
.30
Regulatorysuccess
Failure
Cash Flows
Asset A - Option 1
Phase IIIsuccess
Failure
.70
.85
.15
.30
Regulatorysuccess
Failure
Cash Flows
Asset A - Option 3
Phase IIIsuccess
Failure
.70
.85
.15
.30
Regulatorysuccess
Failure
Cash Flows
Asset Z Option n
Portfolio
Management
System
Portfolio
Decision
Making
Strategic
considerations
Partner
commitments
Multi-year budget &
resource constraints
• Max ENPV
given constraints,
strategic choices
& risk
preferences
• Portfolio- level
tradeoff analyses
Short vs. long-
term tradeoffs
•
•
Phase IIIsuccess
Failure
.70
.85
.15
.30
Regulatorysuccess
Failure
Cash Flows
In-licensing Asset
•
Decision Analysis &
Portfolio Management
Asset Opportunity Ranking by Expected Internal Rate of
Return (EIRR)
Assets
Opportunity ID PTRS ENPV EIRR
Assets
Opportunity ID PTRS ENPV EIRR
1 92% 370 535% 25 6% 3 29%
2 78% 120 345% 26 48% 411 29%
3 20% 250 318% 27 25% 129 27%
4 80% 182 301% 28 10% 71 27%
5 74% 80 230% 29 82% 837 26%
6 58% 80 230% 30 63% 288 26%
7 30% 250 210% 31 40% 12 26%
8 85% 80 90% 32 14% 116 24%
9 27% 90 83% 33 21% 137 24%
10 53% 18 83% 34 21% 132 24%
11 81% 23 76% 35 43% 183 24%
12 26% 214 59% 36 14% 80 23%
13 59% 582 58% 37 35% 151 22%
14 72% 87 54% 38 45% 12 20%
15 62% 1,400 48% 39 35% 8 19%
16 36% 77 42% 40 46% 230 19%
17 40% 27 41% 41 19% 28 19%
18 24% 371 40% 42 60% 3 19%
19 26% 102 40% 43 42% 123 19%
20 89% 1,538 35% 44 8% 15 18%
21 55% 633 34% 45 31% 52 18%
22 7% 100 33% 46 7% 22 17%
23 24% 152 31% 47 18% 7 15%
24 64% 272 30% 48 38% 6 13%
ENPV: Expected Net Present Value
PTRS: Probability of Technical & Regulatory Success
Decision Analysis &
Portfolio Management
Overall Portfolio Expected Net Present Value (ENPV) continues to increase
given additional R&D spending (ranked by EIRR)
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
0 50 100 150 200 250 300 350 400 450 500
Cumulative Spend* (2004 Direct $M)
Cu
mu
lati
ve
EN
PV
* ($
M)
8000
8200
8400
8600
8800
9000
9200
9400
9600
9800
10000
350 370 390 410 430 450
Cumulative Spend* (2004 Direct $M)
Cu
mu
lati
ve
EN
PV
* ($
M)
Decision Analysis &
Portfolio Management
Portfolio Analysis -- Objective, Benefits, and Challenges
Objective:
Find the “best” portfolio that meet short & long term strategic
objectives of the company given coming year’s Budget & Resource
Constraints
Benefits:
Financial metric ranking (EIRR) or optimization (ENPV) provides
clear prioritization of the assets.
Relatively simple to explain the recommendations
Challenges:
Gross budget has a little relevance to actual spending - due to R&D
spending uncertainty
Financial metric provides information related to “return”, but does
not characterize the risk of portfolio sufficiently, (e.g., there is a
systemic bias against early assets.)
Decision Analysis &
Portfolio Management
Portfolio Analysis Challenges
There are significant fundamental differences between the financial market
portfolio and that of the pharmaceutical portfolio (Pipeline)
Huge development uncertainty (high mortality rate as opposed to
relatively stable financial assets)
Perishable nature of assets (limited patent life)
Maintenance of healthy pipeline is requirement for staying in business
Substantial lead time and transaction costs in modifying portfolio
Substantial cost in building and maintaining therapeutic area franchise
Shift in R&D/corporate strategy will have significant impact to the
portfolio (e.g., potential attrition of assets, cost of acquiring new assets,
rebuilding of portfolio and franchise)
Not all assets are tradable, nor available (inefficient market, arbitrage
opportunity exists)
Decision Analysis &
Portfolio Management
Almost opposite relationship exists between risk and return from
standard financial market relationship.
EIRR v.s. STDV/ENPV
0%
20%
40%
60%
80%
100%
0% 50% 100% 150% 200% 250% 300% 350% 400%
STDV/ENPV(Risk)
EIR
R(R
etu
rn)
Standard Financial
Portfolio Efficient
Frontier
“Risk & Return” are inversely
correlated, I.e., higher the risk,
lower the return!
A successful
asset moves
along this line
from right to
left as it moves
the
development
path.
EIRR: Expected Internal Rate of Return
PTRS: Probability of Technical & Regulatory Success
Decision Analysis &
Portfolio Management
There is a positive correlation between the Expected Internal Rate of Return
(EIRR) and the Probability of Technical and Regulatory Success (PTRS).
0%
20%
40%
60%
80%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
PTRS
EIR
R
EIRR: Expected Internal Rate of Return
PTRS: Probability of Technical & Regulatory Success
Decision Analysis &
Portfolio Management
The reasons for failure contain both decision
outcomes and uncertain outcomes.
Reasons for Failure
PC Phase I Phase II Phase III Registration Treatment in
Clinical Safety 2% 24% 16% 18% 33% benchmarks
Efficacy 8% 19% 49% 56% 44% exclude
Formulation 4% 3% 1% 0% 0% include
Market Potential 2% 5% 6% 5% 11%
PK/Bioavailability 4% 14% 4% 4% 0%
Strategic 10% 11% 14% 9% 11%
Resources 4% 0% 0% 0% 0%
Toxicology 56% 17% 3% 5% 0%
COGS 0% 1% 0% 0% 0%
Unknown 6% 4% 3% 4% 0%
Other 4% 3% 3% 0% 0%
TOTAL 100% 100% 100% 100% 100%
Subtotal excluded 16% 16% 20% 14% 22%
KMR PTRS Benchmark Implications
PC Phase I Phase II Phase III Registration Overall
Unadjusted 59% 49% 33% 56% 84% 4.5%
Adjusted 66% 57% 46% 62% 88% 9.5%
KMR
1998-2002
“Market Potential” has both decision and uncertainty elements, but
included as the decision component.
Decision Analysis &
Portfolio Management
R&D spending uncertainty can be modeled to gain insights
for operational and contingency planning
Incorporate the uncertainty of Budget & Resource
Constraints
Develop a Budget & Resource Estimation Model
– Explicit assessment of decision points of assets and their impact to the
budget and resources
– Explicit modeling of project delay / cost corrections for assets
Perform Multi-year Portfolio Analysis
Benefit
Better estimate & confidence to meet the budget & resource
constraints targets
Better contingency plans for future challenges
Decision Analysis &
Portfolio Management
Distribution of modeled year R&D spend
Expected Spending: $xyzM
.000
.250
.500
.750
1.000
$xxxM Potential Spend $zzzM
Decision Analysis &
Portfolio Management
Protection of early assets is a critical issue as a part of portfolio
allocation of assets in different stages of development.
Rational:
Pure financial measures penalizes early assets due to huge
technical and commercial uncertainty
There’s no simple financial measure to directly address this issue.
Solution:
Setting of optimization goals to maintain viable & healthy
pharmaceutical portfolio (pipeline), e.g.,
– Set long term number of NCE launch targets (5th year & beyond )
– Set long term cash flow and sales targets (around10th year)
Decision Analysis &
Portfolio Management
Concurrent Portfolio Management Tasks / Approaches
Diversification of Portfolio
Diversify across therapeutic areas and target classes
Diversify across technologies and sources of innovation
Portfolio Risk Reduction via Strategic Alliances & Partnership
Use alliances in discovery to
– diversify across therapeutic areas, targets and technologies
– maintain sufficient throughput of quality leads.
Use development alliances and partnering arrangements to
– reduce risk of late stage failures
– fill near and mid-term portfolio gaps
– access key areas of expertise or alleviate resource bottlenecks
– place some strategic, high risk, high return bets
Decision Analysis &
Portfolio Management
Summary
Pharmaceutical Industry has many challenges
Portfolio management plays a critical role to maintain viable & healthy pharmaceutical pipeline portfolio
Pharmaceutical pipeline portfolio requires innovative approaches to portfolio management in addition to the techniques available from the financial portfolio management.