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Weighing the benefits of a deeper quantitative review for pharma.
Drug developers rely on regular cycles of R&D portfolio review to decide how to allocate resources across current and potential projects-but in most companies, it is qualitative, highly subjective, and focused on near-term budget constraints. This article describes a way to inject a dose of strategy into the process.
THE PROBLEM: Activities are mainly budget allocation tools
Over several decades, many key principles of R&D portfolio planning have been codified by scholars in operations management and put into practice in pharmaceutical and other R&D-focused industries. Drug companies use these processes to “force rank” projects by various elements of cost, risk, and reward; allocate funds and personnel; and track resource utilization.
The problem is that most R&D portfolio planning approaches are primarily short-term budgeting tools, not strategic ones. Budgeting exercises are critical in pharma, but they do little to help companies objectively define their portfolio goals over broader time horizons and track performance against them. This lack of well-articulated, long-term aspirations supported by quantitative metrics creates challenges for executives who want to enact a long-term-focused R&D strategy and explain it to employees, investors, and journalists.
THE SOLUTION: A parallel process focused on strategic goals
One solution to this problem is to implement an independent but complementary strategic R&D portfolio review, which can run alongside current budgeting activities. Although the two processes share superficial similarities, the strategic review has three unique features:
An example of the analytic outputs of this sort of strategic review process is shown in Figure 1. This anonymized example is based on work with a not-for-profit organization that currently deploys over $100 million of funding to diverse R&D activities across materials sciences, life sciences, and other areas-but it is easy to imagine a similar output from a pharma company working across multiple therapeutic areas.
This particular organization convened an external advisory board to score each of its R&D programs on over a dozen distinct metrics, such as expected economic value, team capabilities, and existing scientific validation, according to specified criteria. These scores were then mathematically combined and aggregated for “value” and “feasibility,” based on differential weightings of the metrics according to the management team’s determination of their relative strategic significance. The organization’s executives also defined the minimal and “stretch” targets for each distinct metric, which led to placement of thresholds to determine which projects were within the expected performance and aspirational vision.
The result was a familiar “2x2” matrix, easily interpreted within and outside the organization: the upper right quadrant represents high-value, high-feasibility projects, while the lower left quadrant contains underperforming projects. When the organization repeated the process in subsequent years and tracked the portfolio’s evolution over time, it examined more closely the projects in the less desirable quadrants, and adjusted its project funding processes to systematically reduce its investment in underperforming quadrants. It was also able to clearly communicate its strategic goals and progress to its external funders, which helped sustain support for the organization among key stakeholders.
This particular organization also looked more closely at common attributes of projects in less desirable quadrants-which provides a strategic view currently missing in most pharma R&D portfolio reviews. In this case, a deeper analysis of low-performing projects revealed that they scored poorly on metrics related to commercialization feasibility, which was weighted as one of the organization’s top strategic priorities. Much of the gap in this domain related to the involvement of academic collaborators, who were less focused on projects that could deliver economic returns.
Over the following year, the organization refocused its prioritization criteria to drive a higher concentration of projects into the high-value, high-feasibility quadrant, and it was able to quantify its progress in the following year’s portfolio analysis.
A key element of this process that warrants highlighting is the involvement of an external advisory board. Although many organizations fear the loss of control from involving outsiders in their decision-making process, an external perspective, including subject matter experts with no affiliation with the organization, provides critical benefits for strategic R&D portfolio planning. When pharma companies rely solely on either employees or external parties with longstanding relationships to evaluate research programs, they frequently obtain biased assessments and skewed results. In addition, combining various perspectives on the evaluation board allows an organization to obtain a much broader view of the quality and direction of its portfolio.
The strategic portfolio assessment process described here can provide several advantages for pharma companies. First, it operates alongside and complements existing portfolio reviews-which remain critical to allocate budget and track resources-without adding undue administrative burden to R&D staff or senior managers.
Second, it provides a quantitative, reproducible method to define the aspirational “ideal” balance of cost, risk, and reward; track performance toward it over time; and motivate the organization and its leaders to be accountable for the portfolio’s objective performance.
Third, it provides strategic context for evaluating the potential impact of pursuing specific new R&D programs, whether sourced internally or through licensing and acquisition.
Fourth, because the process is transparent, reproducible, and reliant on prespecified criteria and external assessors, it enables executives to objectively and dispassionately evaluate the portfolio’s distribution across disparate R&D areas (e.g., oncology vs. immunology).
And finally, it yields a simple, visual summary that clearly conveys the firm’s R&D priorities and performance to employees, directors, and investors.
Frank S. David, MD PhD, is founder and managing director at Pharmagellan LLC. He can be reached at email@example.com. Greg Belogolovsky is associate director at Navigant. He can be reached at firstname.lastname@example.org