Business Development for the Biotechnology and Pharmaceutical Industry martin austin

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Planning the Portfolio

Chapter

2

Portfolio management Every company can be thought of as following a broadly similar pattern to the three ages of man: birth, growth and then death. However, the company, unlike a person, can be rejuvenated even if its products fail: introduction of innovations through research and development, licensing or acquisition can bring new life to the company. New companies are started on the basis of innovative technologies and suffer all of the problems of young children. Children have no support without a parent, they are highly susceptible to diseases and accidents and in the early years are unsteady on their feet. The same is true of a fledgling company. Yet, with luck and judgement, growth can be rapid leading to significant value creation in a short period of time. When a child reaches adolescence, this rapid growth brings its own problems: finding sufficient food, clothes to wear and a role in life. The parallel for a rapidly growing company is the need for investments in manufacturing, larger premises for administration and a broader portfolio of products. When personal maturity comes to the young person, it brings with it a steady income yet many dependants: there is a need to consolidate investments and provide for the long term. On the other hand, for the mature public company there is no option to consolidate and still provide a nearly steady income. Only by continued growth can the company maintain or increase its value. This is the imperative under which most companies are run and is the stimulus for business development activities across the board. One of the key activities of the business development role is maintaining the portfolio of products within the company. It is therefore necessary to understand the objectives of the company and to plan accordingly. Depending on the scope of the business development role within the company, planning may also include the creation and maintenance of company strategy. Alternatively the business development person may be the agent of the strategy created by the CEO and the board. In the larger corporations business development takes on a pivotal role in both the creation and conversion of strategy into practical applications. Strategic planning as a function, therefore, should be examined in some detail.

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The most common evocation of strategic planning within a company is a 5-year plan produced annually with the objective of taking a longer view than just the next year in business. This is largely a financially driven document, yet it also describes the current state of the business portfolio and, therefore, the strategic gaps which exist and must be addressed by business development. Each plan starts by looking back at the sales growth of existing products and at their forecast sales for the coming year in fine detail with projections for the following 4 years. The aggregation of the numbers from all products will describe the company’s growth as a whole and so will usually be the mark by which the company’s value and its share price will be judged. The assimilation and integration of detailed information into the 5-year plan is therefore critical for decision-making regarding capital expenditure, human resource planning and promotional costs. It will also determine the need for product acquisitions, and, on a grander scale, company mergers and acquisitions. In order to generate the background information for the 5-year plan a complete examination of the existing portfolio is required: a review of all activities which affect the conduct of the business. A number of different perspectives are required in order to describe the company’s evolution to the current point. These will include activities at subsidiary level and by therapeutic area. They examine activities from the perspective of research, development, manufacturing and marketing. The company’s performance will be studied intrinsically and also against competitive benchmarks: at product level, therapeutic area level and corporate level.

Evaluating the company’s products A holistic view of the company’s activities is required if one is to examine each component’s contribution to the business and to determine which elements are contributing the most to growth and which elements are hindering growth. The sources of information for this review are found throughout the company. Essentially a pharmaceutical company template will include inputs from the CEO, corporate finance, corporate marketing, research, development, manufacturing, supply chain, medical and regulatory, and legal and intellectual property groups. Affiliate companies will generate their own 5-year plans which will be added to the overall view. These contributions will be aggregated into an overall view of the company’s potential. From a marketing perspective a now traditional method of viewing the company’s products is to produce a sales and growth quadrant analysis of the portfolio and categorize the products into one of four types: cows, stars, opportunities and dogs. This is shown in Figure 2.1.

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Relative market share High

Market growth rate

High

Low

?

Low

Figure 2.1 Quadrant chart The combination of high growth and high sales is the most desirable star position in the quadrant, while the low growth and low sales products are represented as dogs. The opportunities have high growth but low sales, as is typical of new products, while older products with low growth are said to be the cows for milking. Depending on the balance of the portfolio, investment would be directed towards the opportunities and stars, reduced for cows and withdrawn for dogs. This is a simple but effective analysis tool at a high level for mature companies with a broad portfolio. It is less useful in the context of a younger company where the portfolio will tend to fall into one or two categories, leaving little strategic choice as to where to direct investment. The analysis is also restricted in its utility to marketed products. This is because development-level products and research projects have no performance to measure, only forecasts, and, understandably, the forecasts for all such projects will be good. It is therefore a good idea to take a different perspective when looking at the integrated portfolio of a larger company and to see the portfolio not only as a snapshot but as a continuum. Each project or product can be placed at a point along an axis of vintage and each cohort can be examined for the number of projects at that stage, along with their aggregate projected worth and the concentration of products in each

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therapeutic area. So the portfolio can be described as being weighted towards the early stage or the late stage, or perhaps as well balanced. The continuity of product supply to the market from the development portfolio is therefore a predictive factor for the company’s long-term growth prospects (see Figure 2.2). The relative strength or weakness of the company at each point in the development timeline will then be revealed. Each project’s contribution to company turnover, as it comes to market and then throughout its life cycle, becomes a more relevant measure of its potential worth. The combination of products both in terms of their financial contribution and of their financial requirements will also influence the financing requirements for the company as a whole. At one phase in the strategic planning process at Roche we came to realize that the timelines for many projects brought them to market within the same 18-month period. The implications for launch costs, field-force head count and recruitment programmes were extremely serious. As a consequence we attempted to make a risk assessment of the portfolio by asking the therapeutic area teams to assign to their projects a probability of success in reaching market. Not surprisingly their view was of almost uniform success, which was not helpful to us – we needed another method for gauging risk. Rather than going to external sources regarding these sensitive issues for benchmarks and the like, the views of the ten top function heads were taken in a modification of the Delphi research method. Each was asked to rate the projects on a scale of zero to ten on probability of success. Retrospectively we were able to judge the

Size and numbers

Launch

Mid-stage

Mature

Figure 2.2 Product cohorts by vintage

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value of those opinions and found them to be the most accurate guide from all our sources. While some argue that numeric analysis is preferable we became convinced that years of experience were a better arbiter.

Responding to changes in the market In the last 10 years the impact of patent expiry on pharmaceutical products has become more significant, and this is illustrated in Figure 2.3. For innovative, research-based companies, the sophistication of the generic drug manufacturing companies has had serious consequences on revenue. Twenty years ago, when a large product lost its patent protection the main erosion of market share that it suffered would take 2 to 3 years. Now, the aggressive pursuit of abbreviated new drug applications by generic companies both in the USA and in the rest of the world can mean a major product will now lose 80 per cent of its worldwide market share in less than 3 months. No longer is there a graceful degradation in what was once a quite steady market. The more successful the patented product has been, the greater the loss. This phenomenon has had a dramatic effect on strategic planning within large pharmaceutical companies. The resulting abrupt removal of several billion dollars in annual profits makes the maintenance of a strong research and development portfolio absolutely vital. Much has been written by equity analysts over the years about the relative strengths or weaknesses of companies’

Sales

Years Figure 2.3 Patent expiry

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portfolios, yet none of the larger companies has been able to demonstrate an adequate flow of new large products from its own research. The natural consequence of this has been an ever upward trend towards in-licensing of products. Looked at simply, if you have $10 billion in sales, then each year you must add another billion dollars in sales if you are to produce double-digit growth. The consolidation of the industry over the last 10 years has meant that corporations are now much larger than this and annual growth requirements may be as much as $5 billion. Combining these figures with an equal drop in revenues through patent expiries can mean a requirement to produce far more. Hence it is a safe prediction the company acquisitions will continue apace and that in-licensing will continue to dominate the market as the means to generate corporate growth. Nevertheless, internal research and development programmes continue to be a mainstay of expenditure among the larger organizations. However, this is risky: estimates of the success rate in drug discovery produce a picture of massive failure (see Figure 2.4). The number of chemical compounds which are potential drug candidates and which will need to be screened for activity in order to generate a possible compound will be in the tens of thousands. In former times it took many years to achieve success in this area and there was a low yield per thousand candidates. Today, despite new and massively automated screening techniques, there has been no significant increase in the number of candidates with the potential to become a drug. Even automated screening techniques have not significantly increased the number of candidates with the magical potential to become a

Targets

1000s

Preclinical

100s

Phase I

>10s

Phase II