14 BioProcess International 13(11) December 2015

B i o P r o c e s s EXECUTIVE

Accounting for Portfolio Risk Creating an Analytical Framework for Optimizing the Portfolio Mix

Leslie Sandberg Orne

Product Focus: All Biologics

Process Focus: Development

Who should read: Risk mAnAgeRs, quAlity mAnAgeRs, coRpoRAte executive officeRs, pRocess mAnAgeRs

KeyWords: pRocess Development, pRocess optimizAtion, poRtfolio mAnAgement, monte cARlo simulAtion

level: inteRmeDiAte

I n the biopharmaceutical industry, portfolio risk is categorized as clinical/technical or commercial (Figure 1). Both types pose

challenges to quantify. Portfolio managers tasked with optimizing the mix of products in a company’s pipeline often struggle to create apples-to-apples frameworks that can consistently compare risk across asset categories. The framework described herein can help you account for both technical and commercial risk using simple analytical tools.

The foundational analytical element of portfolio management is traditionally the asset forecast: a composite best estimate of the most likely product profile. It is an assessment of the commercial market in which a product will play and is hoped to include some market research to determine that product’s value proposition in the marketplace.

Although it is an important exercise in its own right, the forecast alone cannot be the single metric on which portfolio optimization is based. A potentially high-value asset is an important component of any portfolio. But the forecast alone does not do enough to quantify the risk inherent in an asset, either clinically or commercially.

Clinical or technical risk describes a product’s likelihood of progressing past each trial milestone and of ultimately achieving approval by regulators (e.g., US Food and Drug Administration or European Medicines Agency). It is best quantified by a decision-tree format with each node of the tree representing a clinical or technical outcome (Figure 2).

A probability of success (PoS) can be applied to each phase of

development (based on historical outcomes from representative products) and then matched to a therapy area (e.g., neuroscience or oncology) and type of product (e.g., small molecule or biologic). The PoS at each node is then multiplied by the product’s net present value (NPV) at that point in development (accounting for the clinical/commercial investments and product return associated with that outcome). Note that this risk-adjusted NPV (rNPV or eNPV) is not equal to simply multiplying the product’s overall PoS by the forecasted NPV. It accounts for the appropriate matching of costs by scenario.

It is crucial to identify where the value inflection points fall, as well as the points after which rNPV value jumps significantly (Figure 3). For

Figure 1: Sources of risk for portfolio assets

Clinical/Technical Risk Commercial Risk

Probability of Technicaland Reguatory Success (PTRS)

Probability of Events A�ecting Postlaunch Revenues

Success: 61%

AssetA Failure:

39%

Failure:59%

Success:41%

Success:78%

Success:85%

Failure:22%

Failure:15%

17%Cumulative

PTRS

Product Pro�le Variations(e.g., actual labeling or expected)

Market Dynamics(e.g, pricing, payer controls)

Infrastructure, Resources, and Execution(e.g, sales force FTEs)

16 BioProcess International 13(11) December 2015

example, is that jump after phase 2 or phase 3? These points are indicators of how much investment will be necessary before value is created or the asset is “derisked.” Ideally, a company’s full portfolio will include a number of derisked assets or pathways to balance potentially riskier opportunities.

Commercial risk stems from inherent unknowns in both what a product will ultimately deliver and what market dynamics will be at launch. This risk can be handled in many ways: as an upside/downside forecast assessment (Figure 4) or in a more sophisticated Monte Carlo simulation (Figure 5). Either option works for the purpose. It is the mentality behind the assumptions that is the more important exercise. You must ask yourself, “Have we done enough market research to understand the range of outcomes associated with our product? What is the worst-case (but approvable) forecast? What is the best?” The absolute value of the range between best and worst is the most important metric with which to make comparisons between assets.

Finding Balance

When you juxtapose clinical and commercial risk of either a portfolio of assets or a range of development opportunities for the same asset, the goal (as in any investing) is to have a balanced portfolio. High-risk, high-reward opportunities are not bad if they are balanced by less risky alternatives in the portfolio and if

Figure 2: Quantifying clinical/technical risk using a decision tree; PTRS = probability of technical and regulatory success; NPV = net present value

“Typical” drug development probabilities

Pay for expensive phase 3 trial and then fail . . .

16.6%Commercialize

$700 M

Cumulative PTRS

At this point, overall development expenses is often <$100 MM

61%Success

39%Failure

41% Success

59%Failure

78%Success

22%Failure

85%Success

15%Failure

16.6% 27% 66% 85% 100%

Sources: Tufts Center for Drug Development estimates used in �owchart. Note that certain factors (MOA, delivery mechanism, disease state, and so on) could cause PRTS to vary.

OverallProbability

NPV(Ilustrative)

Phase 1 Phase 2 Phase 3 Filing

2.9% –$250 M

5.5% –$200 M

36.0% –$75 M

39.0% –$20 M

Risk-Adjusted NPV(rNPV) = Σ

Figure 5: Assessing commercial risk through Monte Carlo simulation, which is a valuable tool for quantifying the risk profile of your assets, if the inputs are accurate.

Freq

uenc

y

High Std. Deviation Low Std. Deviation Risk Negative Risk Positive

$100

$200

$300

$400

$500

$600

$700

$800

$900

$100

$200

$300

$400

$500

$600

$700

$800

$900

Freq

uenc

y

What is the range ofsimulated forecast outputs?

Is there more overallupside or downside?

Base Base

Negative Skew Positive Skew

What does your risk exposure really look like? There may be more downside risks, especiallyfor earlier stage assets. Are you accounting for all possible variables and outcomes (e.g., product pro�les, epidemiologicalshifts, marketing resources and execution, payer restrictions, and manufacturing delays)?

Figure 3: Identifying value inflection points; rNPV = risk-adjusted net present value

Value In�ection Point

Stage of Development Completed

Preclinical Phase 1 Phase 2 Phase 3 Approval

Assets are “derisked” as they progress through clinical development, creating a value in�ection point after a major potential hurdle is cleared. Determinants include therapeutic area, prior precedence, clinical endpoints, and strength of existing data. For internal assets, knowing the value in�ection point can help maximize return on limited R&D spending. Your company’s tolerance for risk a�ects where you ideally buy or sell assets.

rNPV

($M

)

800

600

400

200

0

Figure 4: Assessing commercial risk through upside/downside forecasts

Downside Upside

Epidemiology

Pricing

Reimbursement

Resources

Market Share

they leverage your core competencies to the extent that your company is the best one to develop them. A simple plot of all products in your portfolio will help you visualize the comparison of value and risk, creating an apples-to-apples framework across divergent opportunities (Figure 6).

That framework will help you to engage in honest conversations with your stakeholders around the trade-off of value and risk, ultimately prioritizing promising assets and deprioritizing those that do not provide enough risk-adjusted value. Herein lies the art of determining your company’s threshold for risk (and financing) to make these decisions as expediently and objectively as possible. •

Leslie Sandberg Orne is a senior partner at Trinity Partners. She coleads the consulting group and is responsible for Trinity’s pharmaceutical, biotechnology, and medical device clients; 1-781-577-6313; lsandberg@trinitypartners.com.

For reprints, contact Rhonda Brown of Foster Printing Service, rhondab@fosterprinting.com, 1-866-879-9144 x194.

Further reading at WWW.BioProcessintl.com

Hutchinson N. Understanding and Controlling Sources of Process Variation. 12(9) 2014.

CMC Strategy Forum, Part 1: QbD and Risk Management. 13(1) 2015.

Little TA. Quality Risk Management for Drug Products and Drug Products. 12(4) 2014.

Locwin B. Quality Risk Assessment Strategies for Biopharmaceutical Companies. 11(11) 2013.

Peuker T, Monge M. Implementing Flexible, Scalable, and Cost-Efficient Bioprocess Platforms: A Proven Project Management Approach. 13(3) 2015.

Kilian R. Managing Contamination Risk While Maintaining Quality in Cell-Therapy Manufacturing. 11(3) 2013.

Davidson S. Risk Assessment and Business Impact Analysis of the Supply Chain. 11(1) 2013.

Figure 6: The composite of value and risk; is your portfolio optimized?

QuantitativeUnderstanding of Risk(Clinical + Commercial)

Diversi�cation AcrossAssets and Risk Pro�les Balanced Portfolio

Red Zone

Where does yourorganization’s risk

tolerance fall?

Ideal

rNPV

(MM

)Ba

sed

on C

linic

al R

isk

$700

$600

$500

$400

$300

$200

$100

$0Commercial Risk

BIOTECHMANUFACTURINGSOLUTIONS

EXPERIENCE QUALITY RELIABILITY PRODUCTIVITY4 YOUR SUCCESS

For further information please contact:SANDOZ Biopharmaceuticals, Biotech Cooperations6250 Kundl, Austria, Phone +43 (0)5338 200 2609biotech.cooperations@sandoz.com, www.sandoz.com

wao

.de

a Novartis company

Customized solutions forcGMP manufacture of recombinant Peptides,Proteins and Monoclonal Antibodies in FDA/EMEA/PMDA approved facilities

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