PORTFOLIO MANAGEMENT

PHARMACEUTICALPORTFOLIO MANAGEMENT

INNOVATION AND MARKETING

BISHWJIT GHOSHAL09 MBA (2ND SEM)

PRESENTED TO:DR. ANAND SHARMA

FLOW OF PRESENTATION

• Definition• Importance of portfolio management• Goals of portfolio management Value Maximization Balance Strategic Direction Right Number of Projects

• Product portfolio value gap• Putting the portfolio tools to work• Portfolio execution issues• Portfolio optimization • Conclusion

DEFINITION

• Product portfolio is a dynamic decision making process, whereby, business’s list of active new products and (development projects) is constantly updated and revised.

• In this process, New projects are evaluated, selected and prioritized Existing projects may be accelerated, killed or de-

prioritized Resources are allocated and re allocated to active

projects

IMPORTANCE OF PORTFOLIO MANAGEMENT

To maximize return; to maximize R & D productivity; to achieve financial goals

To maintain the competitive position of the business- to increase sales and market share

To properly and efficiently allocate scarce resources

To forge the link between project selection and business strategy

To achieve focus- not doing too many projects for the limited resources available; and to resource the great projects

To achieve balance between the long term and the short term projects and high risk & low risk ones

To better communicate priorities within the organizations, both vertically and horizontally

GOALS OF PORTFOLIO MANAGEMENT

PORTFOLIO MANAGEMENT

VALUE MAXIMIZATION

RIGHT NUMBER OF PROJECTS

STRATEGIC DIRECTION

BALANCE

GOAL 1Maximizing the value of portfolio

NET PRESENT VALUE METHO

D

EXPECTED COMMERCIAL VALUE

METHOD

PRODUCTIVITY INDEX SCORING

MODELS

VALUE MAXIMIZATION

TECHNIQUES OF VALUE MAXIMIZATION

NET PRESENT VALUE METHOD

• In this, we calculate the NPV of each project on a spreadsheet and then arrange them based upon these values.

• GO projects are at the top of the list.• In this method, we keep on adding projects until we run out of

resources. ADVANTAGES: It is the simplest method. DISADVANTAGES: Ignores probabilities and risks. Assumes only financial goals as important and no consideration given

to strategies Fails to deal with constrained resources Assumes an all or none investment decision, whereas in new projects,

the process of investment is an incremental one.

NET PRESENT VALUE METHOD

• Let’s explain this by way of a simple example. A company must decide whether to approve a recently requested project. The project has the following cash flow profile.

• Cash outflow of £100,000 which is an up-front investment in the project.• Years 1 – 6: Cash outflow of £5,000 per year• Years 1 – 6: Cash inflow of £30,000 per year due to new revenue streams• No further inflows or outflows after year 6. (Discount Rate=10%)


• Seeks to maximize the value or commercial worth of portfolio subject to budget constraints

• Introduces the notion of risks and probabilities.• Calculation of ECV based on decision tree analysis.• Considerations:o Future stream of earning from the projecto Probabilities of both commercial success and technical successo Commercialization costs and development costs


ECV=[(PV* Pcs- C) * Pts] – D

EXPECTED COMMERCIAL VALUEProject Name

PV Probability of Technical

Success

Probability of

Commercial Success

Development Cost

Commercial Cost

ECV

Alpha 30 0.80 0.50 3 5 5.0

Beta 63.75 0.50 0.80 5 2 19.5

Gamma 8.62 0.75 0.75 2 1 2.1

Delta 3 1.00 1.00 1 0.5 1.5

Echo 50 0.60 0.75 5 3 15.7

Foxtrot 66.25 0.50 0.80 10 2 15.5

•PV income stream assumes commercial success which is not 100%. Thus PV needs to be multiplied by probability of commercial success. (PV*Pcs)•But, to get to market, firm needs to commercialize the project that would involve commercialization cost. The firm must spend C dollars on the project. (PV*Pcs)-C•Before commercialization can occur, project must be a technical success. Thus, the above value must be multiplied with probability of technical success. [(PV*Pcs)-C]*Pts•To get to a technical success, the firm must spend first on development of the project. Thus, development cost must be deducted from the above eqn. {[(PV*Pcs)-C]*Pts}-D


• ADVANTAGES: Go/Kill decision is an incremental one (the notion of purchasing

options) All monetary amounts are discounted to today (not just to launch

date) Deals with the issue of constrained resources

• DISADVANTAGES: Dependence on excessive financial and other quantitative data Accurate estimates for all the variables must be available which is not

possible in most of the cases Does not look at the balance of the portfolio i.e. balance between

high cost and low cost across various markets and technologies Considers a single financial criterion for maximization

PRODUCTIVITY INDEX

• Productivity Index can be mathematically expressed as the following ratio:

PI= ECV*Pts-R&D / R&D• In productivity index, ECV is a probability adjusted NPV.

It is the probability weighted stream of cash flows from the project, discounted to the present, and assuming technical success, less remaining R & D costs.

• Projects are ranked according to this productivity index in order to arrive at the preferred portfolio with projects at the bottom of the list on hold.

SCORING MODELS

• Projects scored on number of criteria by the management. Typical main criteria include:

Strategic alignment Product advantage Market attractiveness Ability to leverage core competencies Technical feasibility Reward vs risk

• The weighted addition of item ratings becomes the basis for developing a rank ordered list of projects.

SCORING MODELS

Project Leader Strat.Fit

Prod.Advrtsng

MarketAttract

CoreComp

TechFeasib

Reward ProjectAttractScore

Status

Epsilon Peters 9 9 10 10 9 9 93.3 Active

Gamma Cooper 10 10 7 7 7 7 80 Active

Alpha Smith 8 7 7 8 8 9 75 Active

Delta Scott 7 7 9 9 8 5 74 Active

Beta Jones 7 7 6 6 8 6 66.7 Hold

Omicron Bailey 8 6 6 8 7 5 66.7 Hold

A RANK ORDERED LIST

GOAL 2A balanced portfolio

• To achieve balance of projects in terms of many parameters; for example:

Long term projects vs short term projects High risk vs low risk projects Balance across various markets, technologies, product

categories and product types

Techniques of balancing portfolios

VISUAL CHARTS

MONTE CARLO SIMULATION

BCG MATRIX

RISK REWARD BUBBLE

DIAGRAM

RISK-REWARD BUBBLE DIAGRAM

RISK-REWARD BUBBLE DIAGRAM

• There are 4 quadrants in risk reward bubble diagram.Pearls (Upper left quadrant) These are potential star products, projects with a high likelihood of

success, and expected to yield a high reward. The bigger circle is provided more resources.

Oysters (Lower left) These are the long shot projects, projects with high expected payoffs,

but low likelihoods of technical success.Bread and Butter (Upper right) These are small, simple projects, projects with high likelihood of success,

but low reward.White Elephants (Lower right) These are the low probability and low reward projects.

BCG MATRIX

BCG MATRIX

• There are 4 quadrants in the BCG matrix. Stars (Upper left quadrant) These are units with a high market share in a fast growing industry. Cash cows (Lower left) These units have a high market share in slow growing industry. These generate

cash in excess to the amount needed to run the business. Question mark (Upper right) These are the products running in a high growth market but have a low share in

that market. They have potential to gain market share and become STARS and when the market growth slows, can turn to CASH COWS.

Dogs (Lower right) These products have a low market share in a mature, slow growing market. These

products achieve only the break even point and do not generate any profit for the company.

BCG MATRIX

QUADRANT STRATEGY

STAR HOLD / INVEST

CASH COW HOLD

QUESTION MARK HOLD / DISINVEST

DOGS HOLD / QUIT


• Monte Carlo simulation is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making.

• Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities that will occur for any choice of action.

• It shows the extreme possibilities—the outcomes of going for broke and for the most conservative decision—along with all possible consequences for middle-of-the-road decisions.

HOW MONTE CARLO SIMULATION WORKS?• Monte Carlo simulation performs risk analysis by building models of possible

results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty.

• It then calculates results over and over, each time using a different set of random values from the probability functions.


• TYPES OF CURVES:NORMAL DISTRIBUTION CURVE Defines the mean or the expected value and a standard deviation to describe the variation about

the mean. LOG-NORMAL DISTRIBUTION CURVE Positively skewed, not symmetric. Used to represent values that don’t go below zero but have unlimited positive potential.


TRIANGULAR DISTRIBUTION CURVE In this, the user defines the minimum, most likely and maximum values.PERT CURVE The user defines the maximum, most likely and minimum value similar to triangular but values between most likely and extremes are more likely to occur than triangular.

GOAL 3Strategic Direction

• The mission, vision and strategy of the business is made operational through the decisions it makes about where to spend the money.

STRATEGIC DIRECTION

BOTTOM UPTOP

DOWN

STRATEGIC DIRECTION

1. BOTTOM UP APPROACH In this approach, strategic fit is attained simply by including

numerous strategic criteria into the GO / kill strategy or prioritization. The scoring model is the most commonly used technique in this approach.

2. TOP DOWN APPROACH In this approach, strategic buckets method is mainly used for

allocation of resources. This begins with the business’s strategy and then moves to setting aside funds- envelopes or buckets of money- destined for different types of projects.

GOAL 4Right number of projects

• Superimposed across all three goals, is resource constraints. The management must try to complete these goals but always wary of the fact that if too many projects are approved for the limited resources, the pipeline gridlock is the result.

• Two questions must be kept in mind when setting the number of projects.

Do you have enough of the right resources to handle projects currently in your pipeline?

Do you have enough resources to achieve your new product goals?

PRODUCT PORTFOLIO VALUE GAP

Defining Potential value and executing the right product portfolio

Many companies fail to realize the full potential available from

their portfolios

Too frequently , Inadequately Defined portfolios and poor project execution drain the value from products

Can’t take much advantage for newer products because they have difficulty in meeting their product development target.

PUTTING THE PORTFOLIO MODEL INTO WORK

PORTFOLIO MANAGEMENT INTEGRATING APPROACHES

GATES APPROACH

PORTFOLIO REVIEW

APPROACH

GATES APPROACH

•Best for larger firms in mature businesses.•Resource allocation methods are integrated into the gates•Focus is more on the in-depth reviews of individual projects•In the process, the gates are modified by displaying portfolio lists and charts at gates•Go/kill decisions are made on each gate.

PORTFOLIO REVIEW APPROACH

•Best suited to fast paced companies with dynamic portfolios.•In this method, all projects are up for 4 times a year•In this, all projects and all resources are on the table and then suitable decision is taken.

PORTFOLIO EXECUTION ISSUES

PORTFOLIO EXECUTION

ISSUES

Organization Design

Acquisition and Licensing

Incentive Design

Frequency of change in

organization

ORGANIZATION DESIGN

• In organization design the key question is to have either a “Centralized” or “Decentralized” design.

CENTRALIZED DECENTRALIZED

Distant Proximal

Capabilities-broadening search Capabilities-deepening search

Better for radical innovations Better for incremental innovations

Advantage: More synergy across programs

Advantage: Reduced levels of management hierarchy

FREQUENCY OF CHANGE

• The change includes personnel reshuffling from top to middle management leading to frequent modifications to projects within a portfolio and organization design.

• Firms should carefully consider the history of changes made in the R & D organization and in the portfolio to assess if the change will help or hinder overall performance.

• A balance is required between infrequent portfolio rebalancing and overly frequent rebalancing.

• Changes that are too frequent can drain organizational resources in simply managing the modifications as opposed to accelerating progress to deliver on objectives.

ACQUISITION AND LICENCING

• Two lines of thoughts: Acquisitions tend to hurt innovations because they may:o Distract managers from innovationso Compete for funds with existing innovation projectso Trigger the exodus of key employees

Acquisitions could be a tonic for innovations because:o Firms with better internal knowledge have higher ability to utilize

external knowledge from acquisitionso Firms experiencing the greatest deterioration in R&D productivity are

most likely to undertake the acquisition of a research-intensive firm to replenish their portfolio.

INCENTIVE DESIGN

• Incentives affect how organizational strategies are carried out by the people tasked with execution: managers and scientists.

• Substantial tolerance (or even reward) for early failure and reward for long-term success is needed for agents (such as managers or scientists) to explore riskier options.

• If short-term success is rewarded, then agents are more inclined to choose safer options (i.e., those which can lead to incremental innovations).

• Incentives should depend on interaction of project complexity and desired type of innovation.

• An organization focused on incremental innovation should set higher incentives for more complex projects.

• An organization focused on radical innovation should set lower incentives for more complex projects.

INCENTIVE DESIGN

• There are two different school of thoughts regarding incentives:

A. Complex problems are difficult to solve and incentives should be provided to enable managers to invest adequate effort.

B. Incentives result in lower performance for complex tasks.

• Another aspect involves motivating managers to kill right projects at the right time.

Rewarding success may mean that an agent persists with a project even if its prospects have dimmed since its inception.

Rewarding failure, on the other hand, undermines motivation for persisting to find solutions to challenging projects, as it could be “argued” that the project should be discontinued.

PORTFOLIO OPTIMIZATION

• Portfolio optimization is the process of choosing the proportions of various assets to be held in a portfolio, in such a way as to make the portfolio better than any other according to some criterion.

Overall Level of Investment

• Overall R & D investment

Type of project

• Balance between radical and incremental innovation

• Right mix of short, medium and long term developments

Strategy for optimal project selection

• Prioritization using optimization methods

• Prioritization using decision trees

• Interaction among projects

CONCLUSION

• Establishing an effective portfolio management processes

and infrastructure is a critical success factor in meeting

following objectives:

Increasing Product Profitability

Reducing Product Failures

Getting The Most Out Of Limited Resources

Achieving High Revenues And Margins

Documents

PORTFOLIO MANAGEMENT