Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 89

towards real options analysis (Nichols 1994 ), which accounts for the value of
managerial flexibility in phase-by-phase decision making in drug development.
To simplify the implementation of real options analysis, decision trees (Loch and
Bode-Greuel 2001 ) are often constructed to model the choices and outcomes avail-
able, which allows for a flexible representation of risks and uncertainties.
The innovation portfolio dashboard of firms often includes metrics that indicate
resource allocation/portfolio balance, process effectiveness, and performance out-
comes. For instance, resource allocation can include R&D spend, human capital,
distribution of projects from incremental to radical, and ratio of outside to inside
sourced ideas. Process effectiveness metrics include time spent in each phase of
development, and progress versus budget and target deadlines. Performance out-
comes include financial measures that are only usually known after the drug is
launched in the market, at which point it is managed in a business unit as opposed
to research and development.
These metrics, while useful indicators of overall activity, are still at the discretion
of managers who ultimately determine the appropriate portfolio management
actions. Management is able to track whether strategic goals match the reality of
how the portfolio is executed. Empirical evidence from Vincent et al. ( 2004 ) and
Tellis et al. ( 2009 ) suggest that firm culture may be a strong driver of innovation
performance. Interestingly, most of the metrics in a dashboard revolve around
“hard” quantities rather than “softer” cultural descriptors.
Portfolio optimization typically involves holding a diverse portfolio of com-
pounds and projects for large pharmaceutical firms. Bubble-chart analysis of risk
versus return (Blau et al. 2004 ; Day 2007 ), strategic bucketing of various types of
innovation programs (Chao and Kavadias 2008 ), and organizational design (Argyres
and Silverman 2004 ) are typically used as decision levers by firms.
As an illustration, we provide a snapshot of GSK's portfolio at the end of the year
2010 in Fig. 3.2 . GSK is a representative, large pharmaceutical firm with over $6
billion in R&D expenditure in 2010, translating to about 14 % of sales. From
Fig. 3.2 , a total of 147 projects across 13 therapeutic areas are spread across differ-
ent stages of development. 3
GSK has 34 projects in Phase I, 56 projects in Phase II, 36 projects in Phase III,
10 projects under application for approval, and 11 projects approved for launch.
This totals tens of billions of dollars in investment over several years in GSK's R&D
portfolio. Such a portfolio is representative of several other large pharmaceutical
firms, such as Pfizer (Fig. 3.3 ).
To find new ways to boost R&D productivity, GSK has continually explored new
organizational structures to facilitate new drug development. In 2001, GSK reorga-
nized its new product development units into Centers of Excellence for Drug
3 Note that pharmaceutical companies typically report their projects starting from Phase I and do
not provide details about preclinical/discovery projects, since these are still in the early stage of
development. This is the reason for the discrepancy between the 289 total compounds in GSK's
portfolio versus the 147 projects spanning Phase I through launch.