Integrated approach to improving the value potential of biopharmaceutical R&D portfolios while mitigating risk

Abstract

Effective prioritisation of R&D portfolios under resource constraints is critical for biopharmaceutical companies to gain competitive advantage. This paper presents an application of a prototype software tool to assess the reward and risk associated with different drug portfolios in development. The tool adopts a hierarchical framework to incorporate the interactions between drug development activities, the available resources and databases. The valuation approach highlights the cash flow implications of diverse portfolios under uncertainty and uses efficient frontier analysis to prioritise portfolios for given constraints. A case study is presented to illustrate the application of this method where Monte Carlo simulations are used to capture the inherent uncertainties in drug development. The example addresses the portfolio management question of which antibody drug candidates to select for clinical development given finite levels of resources. The analysis highlighted the impact of different drug combinations on the expected portfolio profitability and risk. The simulation studies were used to generate efficient frontiers so as to identify the optimal portfolios at different levels of risk and budgetary constraint. This valuation method helps decision-makers to identify clearly where a company portfolio is positioned with regard to the risk-return characteristics of alternative product portfolios and hence facilitates investment decisions. © 2006 Society of Chemical Industry.