Why is Portfolio Management So Successful in the Pharmaceutical Industry?
R&D portfolio management has been embraced by the pharmaceutical and biotech industries more than any other because of the unique characteristics of drug development: Huge investments, long development timelines, extremely high risk, and a large number of products in the pipeline. Other industries possess some of these characteristics, but it is the combination of all of them that provides both ample time and motivation to actively manage the portfolio. For example, airplane manufacturers have both long lead times and high investment requirements, but they only develop a few planes at a time, so managing the “portfolio” is primarily achieved by managing the individual projects.
Conversely, consumer electronics companies produce many somewhat risky products, but the R&D investment in each individual product is relatively low and the timelines are rather short so the penalty for a few inappropriate investments is not severe. With a single pharmaceutical firm simultaneously developing dozens (or hundreds) of products that can cost hundreds of millions of dollars over 5-15 years and fail most of the time, the ability of portfolio management to improve decision-making can have a significant impact on the bottom line.
What Benefits Does Portfolio Management Provide to Pharmaceutical R&D Organizations?
Promoting the Winners and Stopping the Losers
R&D portfolio management, at its very core, is about selecting which projects should be funded–and how they should be funded–and which should be killed. At first glance it may appear that the former is more important; potential winners can’t be allowed to slip through the cracks! As any politician knows, however, it’s far easier to say yes to spending money than to rescind funding from an ongoing program. Continuing to fund “zombie” projects drains resources from better alternatives, causing resource shortages that lead to project delays, higher costs, and forgone revenue. Portfolio management provides processes and tools that enable organizations to not only highlight the potential blockbusters but also to understand the opportunity costs of continuing to fund projects with poor prospects. We’ve seen many cases where organizations, in their first-ever portfolio review, kill projects that had been lingering for years.
Ensuring Balance and Strategic Alignment
Start-up pharmaceuticals and biotechs develop their first products with a laser-like focus, making whatever decisions are in the best interests of each product in isolation. As these companies grow, they continue making product decisions in isolation, unaware of the implications for their other products. At some point this leads to a crisis, typically a dearth of early-stage products. Portfolio management’s holistic view across the R&D pipeline ensures that funding decisions aren’t made solely on the basis of a product potential peak sales; instead, projects may be funded because they add value from a timing (e.g. filling a gap in the early-stage pipeline ) or market (e.g. growing a key therapeutic area) perspective.
Providing Transparency Into Development and Marketing Plans
One of the tenets of R&D portfolio management is that projects must be valued consistently, allowing investments to be aggregated across the portfolio or compared against each other on an “apples-to-apples” basis. In the absence of portfolio management, these valuations tend to be conducted independently by the finance or project management representatives assigned to each project, with nothing to dissuade the financial methods employed from being tweaked from project to project. By virtue of implementing a portfolio management process, consistency is enforced and the metrics made more credible. In addition, the assumptions move from being squirreled away on someone’s hard drive to the light of day, allowing greater transparency into the assumptions and higher degree of validation as they can be much more easily compared across projects.
How Do I Get Started Implementing Portfolio Management in My Organization?
With apologies for the cliché, portfolio management is a journey, not a destination. We’ve seen companies reap tremendous benefit by starting with a very simple process. Depending on the nature of the decisions that need to be made, that simple process may sufficient, or the process may need refinement over time. Here are some tips for getting started:
- Generate a list of current and potential R&D projects. In addition to the projects currently funded, which—both internal and external—could be initiated should investment become available? Compiling and discussing a complete list of funded and ongoing projects is a huge lift, with correspondingly large benefits, for most organizations. Don’t neglect this step!
- Determine the strategic goals of the organization. Most organizations don’t have these written down anywhere, but it’s typically evident whether executives are focused on building up a new therapeutic area, plugging a short-term revenue gap, investing in innovative products that will generate long-term value, or all of the above. Looking at the currently funded projects will imply a strategy; though it may not align with the strategy circulated at the last strategic planning meeting.
- Collect data about the projects. While it’s tempting to begin by re-doing valuations for all the projects, this consumes an enormous amount of resources without communicating a clear goal to the participants. Instead, start by pulling together whatever data you have and—in the next step—let the results dictate where to focus data refinement efforts.
- Roll up the data across projects and compare against budgets/targets. The first pass will primarily serve as a data validation exercise. Identify the most critical gaps and inconsistencies and use them to highlight areas for operational and strategic improvements. A second pass can then provide an understanding of the types of decisions to be made: Do we anticipate under- or over-spending our budget this year? Which strategic objectives are going to be easily met and which will require deep changes to the portfolio?
- Conduct a portfolio review. The primary purpose of the review is to make tough decisions about which projects to add to the portfolio, which to remove, and which should receive more/less funding. There are many techniques for informing these decisions; the key is to focus on selecting the portfolio that best achieves the strategic objectives determined in step 2.
The Future of R&D Portfolio Management in Pharmaceuticals
With increased pressure on R&D performance, sound portfolio management practices are now de rigueur in the pharmaceutical industry. The best processes are viewed as a competitive advantage by the firms that employ them, where they have become an integral part of strategic planning and management. There is a big trend toward “evergreen” processes that inform ongoing decisions throughout the year, driving demand for real-time dashboards also available on mobile devices andlinkages between portfolio management tools and other planning and reporting tools, Given the high-stakes of drug development and how well it lends itself to portfolio management techniques, we anticipate that the role of pharmaceutical portfolio management will only continue to grow.
Our cloud-based software, the Enrich Analytics Platform, is employed by leading pharmaceutical and biotechnology firms for Strategic R&D Portfolio Management. For more information, contact us or follow us on Twitter. Read more: Free White Paper: Eight Rules of Effective R&D Portfolio Management R&D Portfolio Management for Pipeline Strategy Wasted Effort in R&D Portfolio Management