Pharmaceutical Portfolio Management

1
Pharmaceutical Portfolio Management
Kazuo J. Ezawa Bristol-Myers Squibb Company DAAG
- San Francisco February 25, 2004
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Outline

• Pharmaceutical Industry RD Challenges
• Asset Evaluation - Application of Decision
  Analysis
• Portfolio Analysis Management

3
No economy of scale in drug discovery productivity
4
Overall probability of success has been declining
over the last decade
5
The drug discovery development costs have been
increasing significantly over the decades
900
802
800
700
600
466
500
Clinical Cost (M)
million (2000 US)
Non-Clinical Costs (M)
400
318
300
104
200
138
336
54
214
100
84
0
1970s Approvals
1980s Approvals
1990s Approvals
Source Tufts CSDD 2002
6
It takes more than 10 years to develop a drug to
market.
16
13.8
13.6
14
1.9
2.8
12
11.0
10
2.1
8.8
Approval Phase
6.5
5.8
Years
8
Clinical Phase
2.4
Pre-Clinical Phase
4.4
6
2.8
4
5.2
5.2
4.5
2
3.6
0
1960s
1970s
1980s
1990s
Source Tufts CSDD 2002
7
Only limited number of drugs will have positive
return on investment
Average Clinical Development Cost
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Outline

• Pharmaceutical Industry RD Challenges
• Asset Evaluation - Application of Decision
  Analysis
• Portfolio Analysis Management

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Asset Evaluation Process
Decision Analysis
ETP/Asset Valuation
Strategic Alternative Generation
Situation Assessment
Commercial Analysis
Final Valuation
Alternative Development
Technical and Cost Analysis

• 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

• Calculate expected value and productivity for
  each alternative
• Develop analysisinsights
• Draft recommendations for Steering Committee
  review

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Outline

• Pharmaceutical Industry RD Challenges
• Asset Evaluation - Application of Decision
  Analysis
• Portfolio Analysis Management

11
Portfolio Management Process
Asset A - Option 1
Regulatory
success
.85
Phase III
Cash Flows
success
.15
Multi-year budget resource constraints
Strategic considerations
.70
Failure
.30
Failure

Multiple investment options per asset
Asset A - Option 3
Regulatory

• Max ENPV given constraints, strategic choices
  risk preferences
• Portfolio- level tradeoff analyses

success

• Portfolio Management System

.85
Phase III
Cash Flows
success
.15
.70
Failure
Portfolio Decision Making
.30
Failure

Asset Z Option n
Regulatory
success
.85
Phase III
Cash Flows
success
.15
.70
Failure
.30
Failure

Short vs. long-term tradeoffs
Partner commitments
In-licensing Asset
Regulatory
success
.85
Improved analysis of near term constraints, long
term requirements, and therapeutic area gaps
Phase III
Cash Flows
success
.15
.70
Failure
.30
Failure
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Asset Opportunity Ranking by Expected Internal
Rate of Return (EIRR)
Illustrative
ENPV Expected Net Present Value PTRS
Probability of Technical Regulatory Success
13
Overall Portfolio Expected Net Present Value
(ENPV) continues to increase given additional RD
spending (ranked by EIRR)
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Portfolio Analysis -- Objective, Benefits, and
Challenges

• Objective
• Find the best portfolio that meet short long
  term strategic objectives of the company given
  coming years 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 RD 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.)

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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 RD/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)

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Almost opposite relationship exists between risk
and return from standard financial market
relationship.
Risk Return are inversely correlated, I.e.,
higher the risk, lower the return!
Standard Financial Portfolio Efficient Frontier
EIRR v.s. STDV/ENPV
100
80
EIRR(Return)
60
A successful asset moves along this line from
right to left as it moves the development path.
40
20
0
0
50
100
150
200
250
300
350
400
STDV/ENPV(Risk)
EIRR Expected Internal Rate of Return PTRS
Probability of Technical Regulatory Success
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There is a positive correlation between the
Expected Internal Rate of Return (EIRR) and the
Probability of Technical and Regulatory Success
(PTRS).
100
80
60
EIRR
40
20
0
0
10
20
30
40
50
60
70
80
90
100
PTRS
EIRR Expected Internal Rate of Return PTRS
Probability of Technical Regulatory Success
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The reasons for failure contain both decision
outcomes and uncertain outcomes.
KMR 1998-2002

• Market Potential has both decision and
  uncertainty elements, but included as the
  decision component.

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RD 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

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Distribution of modeled year RD spend
1.000
.750
Expected Spending xyzM
.500
.250
.000
xxxM
zzzM
Potential Spend
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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
• Theres 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)

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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

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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.