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Looking at corporate value through a portfolio lens provides an astute and reliable path to genuine value creation.
This article outlines rationale for advocating portfolio perspectives in the shaping of corporate strategies that strive to create value through innovation. A portfolio approach also enables the realization of benefits that impact pipeline development, commercial execution, asset market performance, market coverage and customer access, notwithstanding organizational improvements and tangible corporate equity.
Organic Value Creation
The benefits of value-creating innovation developed through internal R&D cannot be overemphasized. As assets successfully overcome a sequence of clinical thresholds through randomized test / control clinical trials, valuations increase. Future financial contributions to a company’s cash flow are revised upward. Ensuing de-risking also makes for an increase in the potential for external partnerships or outright sale.
But innovating through internal R&D is expensive and challenging. For example, a number of studies estimate that it costs ~$2B to bring a single pharmaceutical / biotechnology product to market. Other studies have included time costs, i.e. expected returns that investors forego while a drug is in development, and costs for post-approval studies, which bring the total estimated R&D costs incurred for bringing one product to market to be between $2.6B to $2.9B. Such costs are incurred over a timeframe of six to ten years with about a 10% probability of success.1
Bringing a developmental asset to market fruition carries considerable risk as well. Such risk requires astute management and funding. Much of this risk is not directly related to the asset that is developed successfully, but stems from the de facto requirement for a successful asset to cover for costs related to failure of other developmental assets, sunk clinical trial costs, time, materials and overhead. The rising cost of capital required to fund development—unrelated to clinical success —also adds to developmental risk. This is especially vital for assets in a portfolio, where a modicum of clinical and commercial synergy among constituents is to be expected.2
Developmental costs among PhRMA members routinely average 20% to 25% of actual revenue from sales, with 17% to 20% of an asset’s sales are further expensed for costs related to its commercial activities and management. Sustaining a successful business that recovers costs through launching an asset that also compensates for the sales of assets that fail—while generating enough profit to sustain differentiating innovation—is at least as challenging as the science that is its raison d’être.
Value Creation Through External Initiatives
Anecdotal evidence and research-based survey data point to the all too real fact that pharmaceutical company value is effectively enhanced through external collaboration more so in comparison to organic development alone. Chart 1 represents a cohort of pharmaceutical companies that showed higher rates of revenue growth in comparison to other companies in the same sector over a 12 year time frame. A look at the sources of revenue in the years 2008 and 2015 indicates that the share of revenue from externally acquired assets grew from 19% to 53%, whereas, for the same cohort, revenue share from organic assets dropped from 54% to 31%. It is no secret to infer that pharmaceutical companies that actively look for external opportunities through a sustained and disciplined program are likely to find options in line with corporate strategy, which, in turn, will lead to successful collaborations and acquisitions that create value faster than organic development.
Established pharmaceutical firms are increasingly reliant on small and early clinical development stage firms for vital sources of assets that can create, enrich and revitalize product portfolios. Tried and tested processes spanning the clinical development pathway can increase chances of successful partnering. Key to such ventures is finding opportunities to collaborate early, including at stages where targets are identified, molecules matched and optimized for them, animal toxicity/efficacy studies are designed and pre-clinical, indication specific studies are planned. A portfolio view encapsulated in the corporate strategies of larger firms can facilitate and often expedite scan processes that identify potential partners at various stages of such development.
Equally important to the shaping of strategy and ensuring mutually productive partnering outcomes are factors such as constructing a shared vision, thinking through questions about cultural compatibility and streamlining a plan of execution during the diligence process. Successful partnering is often the best way to guaranteeing a licensing, merger or acquisition deal.3
While partnering as a bridge to M&A is a key aspiration toward structuring optimal portfolios, outright M&A plays are much more likely to satisfy more urgent corporate value generating goals. In 2021, biopharmaceutical M&A activity totaled $145B in value, generated from 165 transactions.4
Key reasons for spending on M&A have not changed fundamentally from years bygone. Solely relying on internal R&D engines to spawn assets that can flourish in their respective markets over a full lifecycle of 10 years or more is a risky proposition at best, influenced as it is by vagaries of achieving clinical trial success, securing regulatory approval, wide access and full reimbursement, and dealing with competition.
Strategies to acquire and commercialize assets via collaborative development or commercialization deals, licensing or partnerships have fast become a necessary corporate mandate in the service of sustaining or achieving corporate growth targets. While growth continues to be a key motive for firms looking for external opportunities, realizing supply chain efficiencies, tax benefits and organizational consolidation are other lesser benefits that also represent potential goals.
The all too real consequence of M&A as a value generator, however, is not borne out in fact. Like the facts surrounding R&D productivity, learning from analyses of M&A casts doubt on its reliability as a panacea to stem declines in (or accelerate) growth and enhance corporate value. Several studies have estimated the failure rates of M&A as being anywhere from 70% to 90%. Desirable consequences of M&A can, and ideally should, be achievable by focusing on vital basics,5,6 such as:
Patient and provider-focused innovations in products and services within the current portfolio
• Enhancing the quality and depth of resources required to deliver such innovations
• Adopting differentiated business models that represent unanticipated, profitable disruptions to the status quo, and
• Leveraging excess capacities to improve customer satisfaction and expand the customer base.6
Value Creation with a Portfolio Orientation
Developing assets—whether homegrown or acquired—with a strategy that seeks to build, maintain, optimize and grow a portfolio of assets offers a reliable path to reducing risks presented by organic development or through external mechanisms such as M&As. The benefits of achieving growth with a portfolio strategy span the asset life cycle continuum, from influencing asset development programs, shaping investment decisions, determining commercialization choices, informing launch planning and driving corporate priorities. In its essence, a portfolio view of corporate strategy:
• Treats individual assets as parts of a collection of assets that evolves in value over time
• Focuses on identifying and creating synergies among portfolio assets, so that their combined value is higher than the sum of their individual values
• Includes assets in all stages of a product lifecycle such as discovery, development, commercialization and in the market
• Holds the potential for enabling superior returns on investments compared to when individual assets are treated separately
A portfolio view of R&D strategy executed well also promises an alignment of seemingly disparate R&D goals under the rubric of corporate strategy, key parts of which mandate corporate success as a direct function of R&D achievement. Approaching R&D decisions through the portfolio prism holds the promise of:
• Clear, non-overlapping and simultaneous development paths for multiple assets in a variety of stages
• Effective development of complex asset offerings, some of which may be in the process of external clinical testing – such as the development of theranostics, i.e. a therapeutic plus a diagnostic such as a biomarker test
• Developing a regimen of complimentary products treating sequentially severe stages of a chronic disease - such as advancing multiple sclerosis, osteoporosis or HIV
• Effective resource allocation across multiple developmental and commercial assets according to transparent criteria that is meaningful to the organization, rather than specific departments alone.7
• Effective design and management of clinical trials that avoid redundancies in samples representing targeted sub-populations; increase representativeness and overall respondent quality through proactive, portfolio based controls; increase the effectiveness of site selection processes; enhance depth and breadth of studying subpopulations without increasing duplication, overlaps and repetition; and lays the foundation for an organization to establish a unique corporate brand on the basis of one or more portfolios.
A portfolio view of strategy can (and in the best of circumstances should) influence the design and execution of commercial strategies. For example, an organization with in-market brands that are part of an optimized portfolio can expect to:
• Reduce revenue losses due to product cannibalization
• Streamline customer outreach through operational efficiencies in sales-force customer targeting, sales-force sizing, structure and call planning
• Develop clear, simple and effective brand positioning platforms in line with a portfolio thematic that further reinforces a singular corporate brand
• Enable brand cross-selling to common targets and de facto create new opportunities with customers who may not otherwise be using other brands in the portfolio
• Provide leverage with large customer accounts (such as insurers, hospitals, ACOs, GPOs) through purchase contracts that offer differential, brand-level discounting and incremental service benefits in exchange for terms favoring as many products in the portfolio as may be of use to the account, particularly as alternatives to competition.
• Using assets in the portfolio as a springboard to assuring a ready market for future, yet to be launched assets – reducing the need to incur additional expense related to new product launch, while building up on portfolio level equity.
In summary, a portfolio view encompassing effective development and commercialization also addresses operational and organizational barriers to corporate success.8
Value Enhancement through Portfolio Optimization
In recent times progressive pharmaceutical firms have increasingly relied upon the development and optimization of product portfolios as a central component of strategies that emphasize value generation. Some of such action can be attributed to astute, forward-looking thinking that anticipates corporate benefits due to a portfolio orientation.
A few firms, on the other hand, often have found themselves faced with the onerous task of managing, by default, a portfolio of products that was formed through well intentioned opportunity, but which now has grown and matured - with little portfolio insight and management over time.
Some firms find that developmental assets that evolved into standalone products and provided good returns on their investment for a finite time now need to be managed for longer life cycles through a viable portfolio strategy. In such situations lifecycle management of mature brands through a host of actions such as launching line extensions, dosing & delivery enhancements, engaging in extended customer contracting laced with financial discounts and seeking new geographic markets are common strategies with incremental returns at best.
It is also not uncommon for mergers and acquisitions to result in the creation of an inefficient portfolio of products that seemingly compete with each other for resources rather than generate sales in excess of what they could as separate, stand-alone entities.9 Such situations call for the application of strategic analysis and pursuant action that bring back meaning and purpose to a modified portfolio.
Across multiple portfolio strategy engagements in therapy areas of importance to primary and specialty care, a key question of interest posed to this author by executives revolves around what in principle constitutes an effective and valuable pharmaceutical portfolio. When addressed in the context of a firm’s assets (both in development and inline) an answer to this question can lay the foundation for significant corporate, brand, operational and organizational changes. Mining insights from multiple engagements a few key guiding percepts come to the fore. Specifically, pharmaceutical product portfolios that generate more value than when its constituents are sold alone share the following traits:
1. The portfolio has a clear theme. Thematic alignment across assets in a portfolio increases synergy, promising enhanced, cumulative financial return over in-market life cycles. Unity in portfolio thematic also enables the realization of customer benefits that address expectations of high treatment utility while enabling lasting emotional connections
2. The portfolio includes a mix of mature and new, innovative assets. An asset mix that aligns with customer desire to provide continuity of care across sequentially severe disease states from prevention through control and long term wellness or palliation can encourage loyalty in the form of long-term contracts and value-enhancing relationships
3. The portfolio offers products that represent a wide range of pricing options. Offering flexibility in net purchase prices within a portfolio is a win/win proposition in that the portfolio manufacturer can balance low prices for mature products with higher pricing for new innovations within an expected profit envelope, while customers work within budgets to enhance the variety of choices available for treatment.
4. The portfolio mix offers opportunities for sustained corporate branding. Developing portfolios that signal specific scientific acumen, target highly characterized portfolio customer segments with consistent and authentic positioning, ensuring seamless and uninterrupted product supply with informative customer education when required de facto creates a corporate brand that, while hard to imitate, also increases goodwill and financial equity
5. The portfolio is offered with useful, customer-centric service offerings. Maintaining the inherent and observed value of a portfolio to its customers through customized service offerings such as training, infrastructure enhancements, record-keeping improvements, results of outcome assessments and scientific knowledge sharing can go a long way to sustain the intrinsic value of a product portfolio.
Creating value through innovation has long been the most important driver of corporate success. A portfolio mindset can spawn creative solutions that impact near term asset development, commercialization and life cycle management strategies, while, in parallel, shape a pharmaceutical organization and its priorities in ways that encourage common purpose and coordinated brand and functional strategies. Such endeavors can only make for a better, more productive firm poised for excellence in performance, offering genuine value to its customers.
References & Reading
1. Cost To Develop & Win Marketing Approval For A New Drug Is $2.6B (2014); Tufts Center for the Study of Drug Development, Tufts University, Nov. 18.
2. Rao, Sanjay K. (2022); Managing R&D Risk, Pharmaceutical Executive, Online, Feb. 2.
3. Boni, Arthur A. (2020); The “Art of Collaborations”: Understanding the Anatomy of Transformative Transactions in Biopharma; Journal of Commercial Biotechnology, December, v25 No. 3.
4. A Look At M&A And Alliance Activity Across The Biopharma, Medical Device And In Vitro Diagnostics Industries (2021); Biomedtracker Pharma Intelligence, October-December.
5. Kirchoff, M, & D. Schiereck (2011), Determinants of M&A Success In The Pharmaceutical & Biotechnology Industry, The IUP Journal of Business Strategy, v 8, no. 1.
6. Christensen, C. M, R. Alton, C Rising, & A. Waldeck (2011), The New M&A Playbook, Harvard Business Review, March.
7. Rao, Sanjay K., (2018), Marketing Science For Portfolio Analysis & Optimization; Presentation, Pharmaceutical Management Science Association (PMSA) Annual Meeting, San Antonio, Texas.
8. Rao, Sanjay K, (2022), Pharmaceutical Portfolio Development: Strategic Rationale, Challenges & Solutions, Journal of Commercial Biotechnology, March, v 27, no. 1.
9. Pennypacker, J. & J. Cabanis-Brewin (2003), Why Corporate Leaders Should Make Project Portfolio Management A Priority, Center for Business Practices, White Paper.
Sanjay K. Rao, Ph.D. has held executive positions at Amgen (Director), CRA Life Sciences (Vice President), SRI Inc. (Vice President) and Emergent Bio (Director).