Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 103

Single Project Pipeline of Projects Portfolio of Projects

Single Stage Multi-Stage Single Stage Multi-Stage Single Stage Multi-Stage

No Firm-Comp Firm-Comp No Firm-Comp Firm-Comp No Firm-Comp Firm-Comp

Kamien and
Schwartz (1982)

Loury (1979) Dahan and

Mendelson (2001)

Vickers (1986)

Fox et al. (1984)
Souder (1973)

Ali et al. (1993)
Raubitschek (1988)
Reinganum (1983)

Reinganum (1981)

No Firm-Comp Firm-Comp No Firm-Comp Firm-Comp

No Firm-Comp Firm-Comp

Grossman and
Shapiro (1986)

Grossman and
Shapiro (1987)

Ding and
Eliashberg (2002)
Kavadias and Loch
(2003)

Childs and Triantis
(1999)

Deshumkh and
Chikte (1980)
Loch and
Kavadias (2002)

Blau et al. (2004)

Fig. 3.5 A taxonomy of project selection problem, updated from Fig. 3.1 in Ali et al. ( 1993 )

3.3.3 Optimal Project Selection and Prioritization

Once strategic choices are made regarding the areas and types of projects to under-
take, the resulting possibilities of projects to resource still require prioritization as
no one firm has unlimited resources to take on all potential projects. In this subsec-
tion, we review methods for optimal project selection and prioritization, and follow
up with a discussion on interactions among projects.
Ali et al. ( 1993 ) provides a nice summary of the models dealing with project
selection problems. We update their taxonomy to accommodate the recent studies
relevant to the pharmaceutical industry (Fig. 3.5 ).
In order to accommodate a wider range of approaches, we altered the taxonomy
as follows. In our taxonomy, “Single Stage” and “Multi-Stage” refer to the number
of decision stages (which need not correspond to the number of stages of the drug
development process). Moreover, the notation “No Firm-Comp” means no firm-
level competition is modeled; it does not necessarily mean the model assumes no
firm-level competition. Additionally, “Firm-Comp” means firm-level competition is
modeled.

3.3.3.1 Prioritization Using Optimization Methods

The Pearson index (Pearson 1972 ) and Gittins index (Gittins 1979 ) are two widely
used indices for prioritizing projects in a portfolio. An excellent summary of the
differences between these indices is provided in Talias ( 2007 ), who models an R&D
project as a Markov decision process.