Biomedical Engineering Reference
In-Depth Information
pharmaceutical industry requires best-in-class methods to maximize value creation
for stakeholders ranging from shareowners to patients.
Portfolio management can be generally classified into two areas: portfolio evalu-
ation and portfolio optimization. Portfolio evaluation is the measurement of the
state of a portfolio against specified metrics, such as value and risk. Portfolio opti-
mization comprises the optimal selection of strategies available to the firm to fulfill
the given objectives. In this chapter, we summarize the existing practices and
research in both these areas and discuss open questions for further research. In addi-
tion, we also discuss execution issues that are often faced by firms when implement-
ing portfolio optimization strategies, such as organizational structure and incentive
design. We do not, however, focus on the specifics of managing clinical trials with
multiple new drugs and refer the reader to Senn (
2007
) for a comprehensive sum-
mary of statistical methods in drug development.
3.1.2
Drivers of Pharmaceutical Portfolio Management
The pharmaceutical industry leads all industries in terms of R&D spend. Jaruzelski
et al. (
2011
) report that four out of the top five global R&D spends and eight out of
the top twenty global R&D spends are by pharmaceutical firms. Of these firms, six
(Roche, Pfizer, Novartis, Merck, GlaxoSmithKline, and AstraZeneca) increased
R&D spend from 2009 to 2010 (ranging from 0.3 to 53 % increase) despite volatile
global economic conditions. This suggests that pharmaceutical firms continue to
invest heavily in their portfolios with the top eight spending between $5 billion and
$10 billion per year, translating to between 11 and 21 % of annual sales.
Two unique aspects of pharmaceutical innovation worth highlighting are the
long drug development cycle times (from 4 to 16 years according to Rodriguez
1998
) and high probabilities of failure at every stage of development (from
Discovery through Phase III). Thus, the impact of last decade's R&D portfolio is
felt today, and the impact of the current portfolio will be felt 4-16 years into the
future. The reality for R&D leaders in the pharmaceutical industry is that portfolios
have to be constructed and evaluated in the face of extreme uncertainty about tech-
nological capability, competitive forces, and market potential.
Research using historical data on returns and costs for pharmaceutical firms sug-
gests that both returns (Grabowski and Vernon
1990
,
1994
; Grabowski et al.
2002
)
and costs (DiMasi et al.
1991
,
2003
) have increased since 1970. Additionally,
research from the 1970s to 1990s consistently finds a highly skewed distribution
pattern of returns and a mean industry internal rate of return (IRR) modestly in
excess of the cost-of-capital. Per Grabowski et al. (
2002
), these findings support a
model of intensive R&D-based competition by pharmaceutical firms to gain eco-
nomic advantage through product innovation and differentiation.
Part of the reason for increasing costs comes from increasingly stringent regula-
tions on clinical trials (e.g., The FDA Amendments Act 2007), such that an
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