Making Every Dollar Count for the Pharma/Biotech Industry

By Michael Menke, PhD, Decision Strategies

Our industry faces unprecedented challenges to its long term sustainability with the loss of blockbuster products, thin pipelines, public scrutiny of marketing practices, soaring R&D costs and global price erosion. The first player to achieve a fundamental redesign of its overall business model will gain a huge competitive advantage.

A generation ago, the primary challenge was the R&D pipeline and the return o n R&D investment.  Introducing value-based portfolio management yielded substantial productivity gains and many blockbuster products.  Portfolio management is now widely accepted, with value added to projects and balance to the pipeline.  The result has been to substantially increase the value of individual compounds as well as to achieve better focus of development pipelines on the biggest potential winners.  In one early application SmithKline Beecham reported in the Harvard Business Review a gain in the value of their pipeline of $2.6 billion, the equivalent of discovering and successfully developing another blockbuster drug with no budget increase, which illustrates why R&D portfolio management is now so widespread.

R&D has high costs, high complexity, high risk & uncertainty and long time horizons, which has made a value-based approach using decision analysis nearly indispensable.  However, there are many other critical functions that are also costly, complex and uncertain, such as marketing, sales, supply chain and IT, where valuable opportunities also exceed available resources by a wide margin and therefore wise selection becomes paramount.  Our experience is that value-based portfolio management is used much less frequently, if at all, in these areas.   We believe that value gains similar to those demonstrated in R&D are available in these other functional portfolios as well.  Therefore one obvious idea to create new value is to extend the use of portfolio management into the other important functional portfolios.  A second step would be to apply portfolio management to allocate resources across the full range of functional portfolios—R&D, licensing, marketing, IT, sales etc.  A third step would be to apply portfolio management to allocate resources across therapeutic areas and regions.  If the organization is not a pure pharma/biotech company, corporate portfolio management could also be used to clarify resource allocation across human pharmaceuticals and each of the other competing businesses. 

The ultimate version of this is to apply portfolio management to all discretionary investments in the organization, i.e. true enterprise-wide portfolio management.  This would mean that all investments including expenses not absolutely required to operate the current business are considered discretionary and are in competition with all other opportunities throughout the organization to increase corporate returns.  To most boards and CEOs this must sound like the “impossible dream,” but several organizations are well on the way to achieving this dream.  One leading company that has declared its use of enterprise-wide portfolio management is American Express, as discussed in the recent book Optimizing Corporate Portfolio Management.

Amex is in year six of a journey to ensure the highest and best use of resources throughout their global enterprise.  It began in 2001 in the International Card Business (ICB) as an effort to allocate resources to the markets that best fit their strategic and financial goals.  They put together a simple but effective modeling system to compare, prioritize and select the best of several hundred investment opportunities.  They called the process Investment Optimization (IO).  When Amex’s CFO saw the results of this effort in ICB he realized that IO 1) provided a model that could be applied across all of American Express, 2) could facilitate the reallocation of resources to the best initiatives across organizational boundaries and 3) would help answer the CEO’s persistent question of “what the specific returns on the company’s investments are.”

Based on these observations and given that IO was already being used and delivering results inside an important part of the company, senior management decided to extend IO to all of American Express.  The senior VP of corporate planning and analysis was asked to make it a reality.  In 2002 building on ICB’s IO process, investment analyses were performed all across Amex, collected and reviewed.  For the first time there was a picture, however preliminary, of most of Amex’s discretionary investment with an assessment of the corresponding returns.  Each year since the process has been repeated and improved; each year people have become more confident in the process and the results.  By 2005 each business or function was asked to identify the lowest priority 10% of their discretionary budget and offer it up for comparison at the next higher level.  This has enabled significant reallocation of resources to more attractive opportunities which in fact occurred.  Also tracking and benefits realization began around this time.

In 2007 over 5000 discrete investments were analyzed representing about 1/3 of Amex’s operating expense base.  The process involves 9 global business, 8 utility groups and over 50 geographic markets.  Tens of millions of dollars were reallocated to higher return opportunities.  The business units find IO is helping them achieve better results, and senior management highlights IO as a competitive advantage when talking to analysts.  In addition the Amex IO process has been written up as a best practice by the CFO Executive Board and also won the Grand Prize in Baseline Magazine’s 2005 ROI Leadership competition with an ROI on the IO process of over 2700%!  The bottom line is that Amex has significantly outpaced its peers in stock market performance over the 5 year period 2002-2006. 

AAA of Northern California, Utah and Nevada has also reported excellent results from using enterprise portfolio management.  AAA, a member organization, is as different from Amex as they both are from the pharmaceutical industry.  Nonetheless, they have made impressive gains by setting up an enterprise-wide portfolio management process that compares all discretionary investment opportunities across the organization:  marketing, real estate, innovation, IT, member acquisition campaigns, new products and services etc.  They see portfolio management as part of a closed-loop system that translates strategic objectives into realized benefits via a well balanced portfolio of projects and programs.  By better selction of projects and load balancing across the portfolio, AAA has increased their p[roject success rate by over 80%, shortened the time to results and improved the percentage of ROI realized within 12 months after deployment from 33% to 75%.

It is tempting to say that pharma and biotech companies are so different from Amex and AAA that what worked for them won’t work for us.  However, the greatest difference among these three industries is probably in R&D and innovation, where portfolio management has already been widely accepted and quite successful in pharma.  IT in most industries is a service organization, so the portfolio problem is similar across many industries and even government agencies.  As for marketing, acquiring a new cardmember for years of profitable transactions is similar in concept to acquiring a new chronic disease patient for years of profitable prescriptions.  While the details of sales and marketing execution are quite different across pharmaceuticals, financial services and membership organizations, the concept of executing through projects that deliver costs and produce measurable benefits is very transferable.  In short, our opinion is that pharmaceutical and biotech companies can benefit immensely from extending their present competence in R&D portfolio management to the entire enterprise like Amex and AAA.  The shareholder value impact could be like getting several additional blockbuster drugs to market almost for free.