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Portfolio planning and risk management in the pharmaceutical industry 2

Published on March 29, 2017   40 min

Other Talks in the Series: Hot Topics

We have now covered the assessment of individual projects, and I would now like to move on to discuss Portfolio Planning and Risk Management.
I will begin with a very simple portfolio, a portfolio made up of only two projects, project A, shown in blue, and project B, shown in red. On the chart, you see the already familiar graph of added value per completed milestone that I've shown already in a different context earlier. So you see for each project how value will develop when certain milestones have been reached. And initially, the project A, the blue one, has significantly more value than the project B. So if project A has approximately $95 million value and the red one has approximately $50 million value, you see that the value of the blue one is almost twice as high as one of the red project in the early pharmacology part of development. And if you would have to prioritize one project here at this stage, it would be project A and becomes a very important decision how to prioritize the project if, for example, you do not have the budget to develop both projects and you have to decide on only one and the other one has to be abandoned, so one will be continued and one will be abandoned. And based on this analysis, if you just look at the present value now at the pharmacology part of the development, you would probably decide on the blue one, to continue the blue one and to stop the red one. Now you may come to a different conclusion if you see the entire value development. So when you graph how much value would each project have after successfully finishing a particular developmental milestone, and you see that from phase I onwards, the red one contributes more value than the blue one. And further in phase III, the value contribution of the project B, the red one, is almost twice as high as for the blue one. And therefore, some managers might actually regard the red project as more attractive. So what I want to say here is that portfolio management decisions should not only look at the present analysis, it should actually engage in that time travel exercise and calculate future values to make a wise decision here. The actual decision, if you have to decide one project will actually depend on the entire portfolio context. So for the blue project, this is more like a typical me-too project. It has less risk, therefore, the value is initially higher, but also a lower sales potential, and therefore, it has a lower value as closer we get to a launch compared to the other project. So this is what would be a more typical me-too project, less risky, but also less exciting when it comes to the sales potential. The red project would be more like an innovative project, more risky, and therefore, lower value initially. But then, if we would move to phase III and have successfully passed all previous phases, possibly a very high sales potential, therefore, a very high value. So if you have many me-too projects, maybe you would like to, in this decision, support more risky, more valuable projects at later stages and support project B. If you have a portfolio composed of many risky projects, maybe then your decision would be to prefer project A, the less risky one, that has also a higher value right now. So decisions like those should not be made looking at one project in isolation, but always in the portfolio context. This is even more obvious when we take a look at the next slide.

Portfolio planning and risk management in the pharmaceutical industry 2

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