Biomedical Engineering Reference
In-Depth Information
Grewal et al. ( 2008 ) use an alternative approach, measuring the value of new
drug portfolios using shareholder expectations derived from stock market-based
indicators (Tobin's Q). They argue that the absence of historical performance for
new drug portfolios makes it challenging to measure value, and propose four
descriptors of portfolios that may be associated with shareholder expectations:
Portfolio breadth: Number of different markets (therapeutic categories) targeted
by a firm's new drug portfolio.
Portfolio depth: Variation in the number of diseases targeted across therapeutic
categories. This definition of depth is slightly different from a traditional notion
in that it captures variation in the intensity of resource allocation rather than
absolute number of diseases in a given category.
Blockbuster strategy: Portfolio targeting a few diseases with high expected mar-
ket potential.
Stages of drug development: Earlier stages (preclinical trials, Phase I of clinical
trials) and later stages (Phases II and III of clinical trials).
Grewal et al. ( 2008 ) show that shareholders have positive expectations of firms
with higher portfolio breadth and a blockbuster strategy . For most firms, they find
that the final stage of the drug development process is most critical for shareholders
to form their expectations and portfolio depth is usually de-emphasized. However,
for a minority of mostly small firms, the earlier stages of drug development process
and portfolio depth are also valued by shareholders.
While the set of four descriptors is valuable to capture the taxonomy of portfolio
strategies, the limitation of this research is that only 1 year of data was available
from 308 firms. Capturing within-firm market value changes over time akin to
Girotra et al. ( 2007 ) may add further insights. In general, the literature in the area of
developing suitable descriptors to measure market value of portfolios is sparse, and
future research can expand upon models and data from financial markets to con-
struct more detailed descriptors.
3.2.3
Portfolio Risk
Thus far, we discussed the valuation of portfolios. However, managers are also
concerned with the riskiness or spread of possible outcomes in their portfolios, and
their preferences are linked to the overall strategies of the business. A small entre-
preneurial biotechnology firm may place all bets on a small number of projects due
to capital constraints and the desire to achieve high returns by the owner-entrepreneur.
In contrast, a large pharmaceutical firm can be faced with agency issues due to sepa-
ration of owners (shareholders) from managers who may be risk-averse. Thus, we
may observe diversification of new drug portfolios as noted from the examples of
GSK and Pfizer.
Search WWH ::




Custom Search