Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 99

3.3.1 Overall R&D investment

A key decision for the pharmaceutical firm is to select the overall R&D spend year-after-
year. This then determines the number and variety of programs and therapeutic areas can
be funded. While the popular business press (e.g., Jaruzelski et al. 2011 ) tends to report
R&D spend as a percentage of sales (top players spending about 11-21 % of annual
sales on R&D), these decisions also tend to be driven by competition.
Using a dynamic game, Ofek and Sarvary ( 2003 ) show that when success
enhances R&D competence, the leader firm increases R&D investment relative
to rivals to sustain its position with higher probability. In contrast, when success
enhances reputation (such as through brand value), the leader firm tends to
expend less R&D effort relative to followers. The implication to pharmaceutical
firms is obvious: increased R&D competence and market reputation from com-
mercializing a molecule for an indication can allow for “follow-on” drugs based
on similar technology. In some sense, the success of a blockbuster drug may
impede the development of future blockbusters as a firm looks to capitalize on
possible extensions. On the other hand, the expiration of blockbuster drugs'
patents may reduce the ability of a firm to continue R&D investment and eventu-
ally lead to a merger or sale to another pharmaceutical firm. Hence, strategic
investments in R&D portfolios can make or break a firm's future as an indepen-
dent entity.
The intensity of competition also drives R&D investment. Recent work in the
dynamic oligopoly literature (Goettler and Gordon 2011 ) has found that competi-
tion dampens the rate of innovation compared to a monopolist. In the context of the
pharmaceutical industry, a firm which enjoys a monopoly position for a given drug
and indication would be more inclined to reinvest more of the profit from being a
monopolist (which enables higher prices to be set). Once “me-too” drugs are intro-
duced, the incentive to innovate in that indication is lowered as the profitability is
decreased due to competitors' entry. Hence, the optimal amount of investment in
R&D may depend on level of competition rather than being a fixed percentage of
sales, which is often a benchmark in the industry. Further research can examine the
optimality of basing R&D on a percentage of sales basis rather than in response to
competitive conditions.

3.3.2 Portfolio Composition

Selecting the appropriate balance between incremental and radical innovation and
having the right mix of short, medium, and long-term developments requires a “big
picture” view of the new drug portfolio and how it fits with corporate objectives.
A plethora of tools exist in the form of checklists, scoring models, and mapping
tools (e.g., bubble charts) to guide managers and their teams to make decisions
about portfolio strategy. Day ( 2007 ) discusses the “Is it Real? Can We Win? Is It