Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 88

Therefore, an increasing trend in larger firms is to balance self-originated and
acquired compounds, leading to several waves of merger and acquisition activity in
the early 1970s, late 1980s, and the mid to late 1990s (DiMasi 2000 ).
Acquisition activity has again picked up in the 2008-2010 period with large
deals such as Pfizer's acquisition of Wyeth for $67.9 billion and the $41 billion
valued merger of Merck and Schering-Plough. The trend for further acquisitions
and licensing deals appears positive, spurred by low interest rates and firms' cash
reserves. In particular, therapeutic areas such as oncology, central nervous system
disorders, diabetes, and immunology are expected to be target areas for firms to
“shop” for mid-to-late stage compounds to add to their portfolios (IMAP 2011 ).
As R&D productivity levels decline (Garnier 2008 ; Munos 2009 ), pharmaceuti-
cal firms are expected to pursue a combination of the following options: (1) acquisi-
tions, (2) large horizontal mergers, (3) improve internal R&D effectiveness, and (4)
increase alliance agreements (Higgins and Rodriguez 2006 ).
Public sector research institutions (PSRIs) such as universities, nonprofit research
institutes, and hospitals constitute another type of player in the industry. Historically
these institutions have focused on fundamental scientific research in drug develop-
ment, though increasingly the boundary between public and private firms is becom-
ing grey as even PSRIs file for patents to protect their intellectual property as a
result of the Bayh-Dole Act of 1980 which allowed such institutes to own the intel-
lectual property from federally funded research. Stevens et al. ( 2011 ) quantified the
impact of PSRIs, stating that in the last 40 years, 153 new FDA-approved drugs,
vaccines. and new indications for existing drugs were discovered from research in
PSRIs. The most prolific PSRIs are the National Institutes of Health (NIH), the
University of California system, and the Memorial Sloan-Kettering Cancer Center.
The NIH also plays a major role in drug development by allocating its funds
across a portfolio, though it does not have the same objective as pharmaceutical
firms which seek to profit from their innovation activities. Recently, the NIH has
established a new center for advancing translational sciences (NIH 2012 ) to address
bottlenecks in the drug development process, noting that drugs currently exist for
only about 250 of over 4,400 conditions with defined molecular causes.
We suggest that the ensuing discussion of portfolio management applies equally
well to small firms and public research institutes, though their strategies and
resources may differ. In addition, while much of the discussion focuses on self-
originated drug compounds, we also specifically address the topic of acquisitions
and licensing of compounds.

3.1.4 Portfolio Management Practices in the Pharmaceutical

Industry

To value portfolios, pharmaceutical firms use financial tools such as discounted
cash flow (DCF) analysis or real options analysis at an individual project level.
Through the course of the 1990s, pharmaceutical firms have increasing shifted