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Portfolio Optimisation: Can you really compare Apples to Oranges?
When someone uses the expression "you're comparing apples to oranges" they're really saying "Why are you trying to compare those things? You can't compare apples to oranges; they're just not the same thing. On further analysis, you could say, “They're both round. They're both sweet. They're both fruit. They're both the same. But they're not.”
One's an apple, and one's an orange. Is that all there is to it? One
tastes better. No it doesn't. Yes it does. How do you decide which one you
prefer over the other? How can you make that decision?
If we were to take this saying and
apply it in a Pharmaceutical or Healthcare context, we could potentially be
talking about a portfolio of
different products or brands which could be at various stages in their
lifecycle (i.e. pre-clinical through to in-market) along with varying utility
across a breadth of different diseases. With so many differences, the thought
of having to balance risk versus return, making trade-offs between internal and
external opportunities and potentially ranking them into a priority list for
the business, seems to appear a daunting and almost impossible task.
Do we really need to
review our portfolio of existing or future offerings?
Along with it not appearing to be a straight
forward exercise, many healthcare companies have shied away from putting a
rigorous portfolio process in place that enables them to make direct
comparisons between assets which they are currently developing and investing
significant funds into, in order to bring them to market.
If there
is so much investment money potentially riding on a decision that needs to
differentiate these assets based on the same level footing, why haven’t most
companies put something in place by now?
There are many
possible reasons which could be driving this:
· The fact
that they have never been required to do it previously or that it is not considered
a strategic imperative for the business
· There are
limited examples in the industry of companies doing this type of a review on a
regular basis
· The
perception that a review of future opportunities is not possible based on the
complexity of the task and lack of man-power or engagement within the business.
· Historically
companies had ample funds to support all opportunities being pursued by the R
& D function.
In a recent survey on
portfolio reviews with life science executives, 54% stated that the major
reason for narrowing their business portfolio was the lack of sufficient
capital and business resources to fund and support all viable opportunities.[1]
In this same survey, over half of the total respondents stated that they have
held onto assets too long, when they should have divested them.
What are the
advantages of a Portfolio Review & Optimisation?
If products were
able to be compared on a level playing field, there are significant benefits to
be gained by a Healthcare company doing this
type of portfolio optimisation review on a regular basis for future
opportunities. First and foremost, it enables a ranking to be done for short and
longer term opportunities along with an understanding of timing, return on
investment and risk, so that a portfolio of the most attractive opportunities
for investment can be built. It also allows different functions across the
business not only to be involved in the process and feed valuable information
into the decision-making process, but also allows these functions to challenge
the priorities and planned focus for the business in a structured and
evidence-based fashion. The process is also able to highlight any technical or
commercial challenges that the business will need to address, in order to
achieve the opportunity, and provide a rich understanding of the current and
future competitive environment. One of the critical outputs of this review is a
reference document that can be used to inform corporate strategy and underpin
transparent decision-making.
What should the process
be?
The process will be
very much dependent on the range and number of assets or opportunities that a
company will be comparing during the review. Very early portfolios of
pre-clinical assets could be performed using a stripped down process, whereas a
full clinical development portfolio may require more detail and support from
internal teams.
In either event, the
goal is to deliver a robust output, and this is likely to follow an interactive
process. Most reviews when comparing assets, include commercial aspects of the
potential product alongside technical or clinical aspects of the product – the
idea being that technical risk can be balanced against commercial viability.
For each aspect, a number of attributes can be assigned, products scored or
given a value and those attributes given a weighting according to how the
portfolio should best be aligned with the needs of the business.
Depending on the asset
maturity under consideration, commercial and technical aspects will be weighted
differently. For very early portfolios at the pre-clinical stage, the
commercial aspects may be as simple as understanding the market landscape in terms of patient numbers or potential price
point.
There is significant
flexibility in terms of the number and type of attributes that can be used but
some straightforward examples would be:
· Size of
the eligible population
· Competitive
intensity/threat
· Unmet
need/clinical utility
· Potential
price point
· Fit within
the healthcare management algorithm
· Potential
size of clinical trial required – R & D costings
More resource
intensive metrics would typically include:
·
Net Present Value calculations
(NPV) and risk adjusted NPVs
·
Internal rate of return (IRR)
·
Payback year
Once the attributes
have been defined, agreed and scored, there needs to be some weighting applied
to each of these attributes to make “the oranges into apples”. Of course,
anything can be thrown into the mix, but overall, most portfolios are then
built based on a balance and ranking against a number of different but equally
important metrics aligned with overall corporate strategy and direction.
What are the outputs
achieved?
The benefits of a
robust portfolio review process are many. The process itself adds a layer of
rigour and structure to an otherwise potentially chaotic work stream. By going
through the process and generating the inputs for the portfolio review, much
more tends to be known about a product, its potential market, key risks and
threats, likelihood of success, R&D costs, timing and contingency for when
things don’t go quite as planned. The process itself can also serve to
highlight gaps either internally that need to be filled through business development
or acquisition for the company to achieve its strategic goal, or to highlight
products within the portfolio that should be out-licensed if they no longer fit
with the overall company direction.
Essentially, a solid portfolio and optimisation review
process can help to generate an evolving “road-map
of the business”, based on inputs collected across business functions (i.e.
Marketing, R&D, Supply Chain), which have been agreed by the collective
team to deliver strategic focus to the business and clarity on what they are
striving to achieve and how to achieve it.
To gain the maximum value from the process, it is
important that it is run periodically during the year and just as a “one off” event. Ideally,
the portfolio should be reviewed whenever something critical happens or changes
within the market or business. This will enable the business to stay ahead of
any changes in the market, empower the team to make decisive adjustments
quickly and to refocus investment where needed in a timely fashion to deliver
the optimal value to the business.
So, whether you are a company with a group of
assets in development or with an armamentarium of products already being
promoted in the market, or both, the need to prioritise these opportunities and
provide timely focus to the business is even more paramount than ever before.
Black Swan Analysis has proprietary Portfolio Optimisation modelling
programmes that are able to accommodate a wide range of assets types, disease
areas or type of innovation (i.e. Therapeutic, Diagnostic or Medical Device).
Please contact the team at sales@blackswan-analysis.co.uk to learn more about how we can either
run the process for your company or help you to set up and embed a Portfolio
Review process to provide the guidance and insights to ensure that your
business stays ahead of the curve.
[1] EY
Life Sciences Global Corporate Divestment Study -2016
Contact
Website
Address:
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29-41 Moorbridge Road
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UK
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- When someone uses the expression "you're comparing apples to oranges" they're really saying "Why are you trying to compare those things? You can't compare apples to oranges; they're just not the same thing. On further analysis, you could say, “They're both round. They're both sweet. They're both fruit. They're both the same. But they're not.”
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