Project #29272 - Analytical nTools Busniess

The purpose of this assignment is to enhance students’ ability to frame a problem in the context of quantitative decision analysis, to organize and analyze data by using the appropriate quantitative tools and computer programs, and to present the results and implications of the results.  

 

  • Case Study

 

Students in ISDS 3711 are introduced to different quantitative tools. They practice how to apply these tools, how to formulate problems and how to solve them using Excel and different Excel add-ins in the HW assignments. Problems in HW assignments are typically well structured. The students are told which tool they should apply and they are provided with the data that they need. These structured HW assignments do not teach students how to approach an unstructured decision situation where it is not clear which tools to apply and which information to collect. The following HW assignment has been developed as a way for students to practice these important skills. 

 

The assignment is based on the Case: Project Portfolio Management at XYZ Pharma that was developed at London School of Economics. The case describes the R&D project selection and prioritization problem at a major pharmaceutical company, a recurrent issue of strategic importance to the company. Students will not be asked to conduct an actual quantitative analysis but to start thinking about how they would frame the project, which quantitative tools they might use and which information to collect.

 

Students will work on this assignment individually. They will be asked to read the case and then answer the following questions. We do not ask the students to actually conduct a quantitative analysis but we ask them to formulate the problem in the context a quantitative analysis.

 

Part  1 – Framing the Project Portfolio Management Problem 

Develop a decision framework for project portfolio management at XYZ: 

  • What are the objectives? 
  • What are the constraints? 
  • What are the risks involved? 
  • What are your alternatives? 
  • What information is required for project portfolio management at XYZ and how can it be collected? 

 

Part 2 – Project Valuation 

Before thinking about appropriate portfolio decisions, the value of each project in the portfolio needs to be determined. How would you determine the value of the following project (‘Project 1’) in XYZ’s portfolio, a project in the pre-clinical phase, part of the Oncology therapeutic area? What additional information would you collect? Which quantitative tool(s) might help you in determining the value of the project?

 

 

Part 3 – Project Risk 

When implementing project 1, you face technical and market risk. How would you assess the risks embedded in Project 1? What additional information would you collect? Which quantitative tool(s) might help you in determining the project risk?

 

Part 4 – Project Portfolio Decisions 

Suppose that next year’s R&D budget for the oncology area has been reduced to $50 million. How would you decide which projects to continue, and which to put on hold? What additional information would you collect? Which quantitative tool(s) might help you in determining the best portfolio?

 

 

Project Portfolio Management at XYZ Pharma

Early morning, Monday 29th August 2005. John Smith, head of portfolio management and strategic planning, was paging through the slides he had prepared for the Portfolio Management Board (PMB) meeting which would start at 9 am, and which was scheduled to last until Friday. “We have been preparing this meeting for weeks”, he thought, “and it seems the PMB has some tough decisions to make”.

The PMB of XYZ Pharma, the pharmaceutical division of XYZ, one of the world’s leading companies in the life science sector, convenes yearly in August to review the composition of the research and development (R&D) project portfolio. It also meets on a monthly basis to monitor the project portfolio and make decisions regarding new developments. According to John Smith, “The PMB is an important decision making body because it shapes the future of the company by determining its product pipeline”.

The PMB members include the CEO of XYZ, the CEO of XYZ Pharma, the heads of the different business units, the heads of Development, Research, Global Marketing and Strategic Planning, the regional heads for the US, Europe and Japan and the functional managers for Regulation, Clinical, Licensing, Technical Research and Development, and Patents.

The portfolio group, led by John Smith, had analysed the project portfolio carefully and had highlighted several potential threats that required action. According to John, “There will be an in- depth discussion of which projects will be allocated additional resources, and at expense of which other projects this will be”.

The Pharmaceutical Industry

The lion share of the pharmaceutical market is captured by approximately hundred manufacturers, which account for more than 90% of global sales. Exhibit 1 contains the top twenty pharmaceutical companies ranked by sales. Since the mid-1980s, the pharmaceutical industry has been characterized by large and frequent mergers and acquisitions (see Exhibit 2), which have had a dramatic impact on the pharmaceutical landscape. Nevertheless, each pharmaceutical “giant” only holds a relatively small share of the total drug market.

This case is written by Bert De Reyck, Associate Professor of Decision Sciences at London Business School, Zeger Degraeve, Professor of Decision Sciences, and Pascale Crama, doctoral candidate. The case is prepared solely as the basis for class discussion, and is not intended to serve as a source of primary data, or as an illustration of effective or ineffective management.

Copyright © 2005 by London Business School. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of London Business School.

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Project Portfolio Management at XYZ Pharma

The pharmaceutical market is characterized by increasing competition between brand-name drugs, illustrated by the shrinking time span in which a drug is the sole drug for a specific therapeutic class. Also, the profitable lifetime for drugs has substantially decreased over the last decade, largely due to quick approvals of generic copies of brand-name drugs, virtually eliminating the time lag between patent expiration and entry of generic competitors into the market.

The pharmaceutical industry is increasingly multinational in scope, with most research-based companies marketing products globally. Approximately 47% of R&D is performed in the United States, followed by Japan with 13%, the United Kingdom with 9%, France with 8% and Germany with 7% (see Exhibit 3). Approximately 45% of drugs developed are from U.S. origin, 14% originated from the U.K., 9% from Switzerland, 7% from Germany and Japan and 5% from Belgium (see Exhibit 4). The US is by far the largest market, accounting for almost half of global sales, which totalled $550 billion in 2004 (see Exhibit 5).1

The Drug Development Process

Drug discovery and development is an extremely risky, time-consuming and expensive process. The average time from compound to market has grown from 8.1 years in the 1960s, to 11.6 years in the 1970s, to 14.2 years in the 1980s and 1990s.2 Lengthening development times also increase development costs. Recent estimates indicate that the cost of developing a medicine is around $800 million3, significantly higher when compared to 1990, due to a substantial increase in important cost drivers such as the number of required clinical trials and patients per trial. This has resulted in a doubling of development costs since 1991, and a threefold increase since 1980. In contrast, the cost of demonstrating bio-equivalence of a generic product, the key requirement for approval of a generic drug, is currently estimated at $1 million4. Global R&D expenditures by research-based pharmaceutical companies is estimated at around $40 billion in 2001, increasing at around 15% per year (Figure 1). As a percentage of sales, R&D expenditures have risen from around 11% in the 1970s to approximately 16% in 2004.5

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40,000 35,000 30,000 25,000 20,000 15,000 10,000

5,000

0 1970

1975

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1995

20%

15%

10%

5%

0% 2000 2005

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Figure 1. Worldwide R&D Expenditures ($ millions, inflation adjusted)

1 The Pharmaceutical Market Outlook to 2015: Implementing innovative, long-term strategies for sustainable future growth, Business Insights (citing IMS), May 2005.
2 Joseph A. DiMasi, Director of Economic Analysis, Tufts Center for the Study of Drug Development, Tufts University, Boston, Massachusetts, testimony before the House Committee on Commerce, Subcommittee on health and the Environment, 105th Congress, 1st Session (April 23, 1997).
3 A Methodology for Counting Costs for Pharmaceutical R&Ds, Tufts Center for the Study of Drug Development, Nov. 2001.
4 Barfield, C.E. and C. Beltz, Balancing and Rebalancing the National Interest in the Patent System, American Enterprise Institute, Oct. 1995.
5 Pharmaceutical Industry Profile 2004, PhRMA, Pharmaceutical Research and Manufacturers of America.

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R&D Expenditure

R&D Expenditure as % of Sales

Project Portfolio Management at XYZ Pharma

Newly developed drugs are protected by patents, providing pharmaceutical companies with the opportunity to recuperate their investments and create profits during a period of market exclusivity. Typically, 20-year patents are granted, although in general this results in a post-approval patent life of approximately 12 years. After a patent has expired, generic drugs identical to the newly developed drug can be freely sold without the need for extensive clinical trials.6

The drug registration process is heavily regulated. Stringent scientific procedures have to be followed to ensure patient safety in distinct stages, including pre-clinical and clinical tests, before a medicine can be approved for production and marketing. The drug development process in the United States is monitored by the U.S. Food and Drug Administration (FDA). Comparable institutions exist in other countries around the world. The EU created a pan-European equivalent, the European Agency for the Evaluation of Medicinal Products (EMEA) which grants marketing authorisation for the whole EU. The US drug development and review process is typically as follows (a similar process is followed in Europe):7

Basic Research (approximately 2 years) In this phase, numerous compounds are synthesized, extracted and tested in a combinatorial and iterative manner in order to discover new substances with beneficial effects. This stage lasts for about two years, costs around $30 to $50 million, and on average only 40 out of an initial 10,000 compounds are taken to the next stage of pre-clinical testing.

Pre-Clinical Testing (approximately 3 years) In this phase, drug safety and toxicology is established through animal testing, while data is also gathered on the biological effects. The development of a drug is terminated when tests suggest that it poses a significant risk for humans, especially in the areas of organ damage, genetic defects, birth defects or cancer. On average, only one in four drugs passes this phase.

Human Clinical Trials (approximately 6 years) Drugs for which the pre-clinical animal data does not show an unacceptable safety risk for humans, termed “Investigational New Drugs” (INDs), are then subjected to human clinical trials, the most stringent and time-consuming process, in which people are observed for adverse effects. All harmful reactions result in termination of the drug, or are incorporated in the drug’s package labelling if the adverse effect is deemed acceptable. On average, one in four drugs passes this stage to move on to the FDA review. This phase entails approximately 70 clinical trials involving 4,000 volunteers, with total costs often exceeding $200 million. It is composed of three sub-phases:

  • Phase I Safety Trials (1 year)
    This phase involves testing highest tolerated doses and toxicity, typically done with a few dozen healthy volunteers (50-100).

  • Phase II Safety & Efficacy Trials (2 years)
    In phase II, efficacy and long-term safety of the drug are tested with hundreds (200-300) of volunteer patients with a control group receiving placebos.

  • Phase III Long-Term Safety & Efficacy Trials (3 years)
    Phase III is the longest and most expensive phase, where the drug is tested on thousands (more than 3,000) of volunteer patients (including elderly people, patients with multiple diseases and patients with impaired organs) for long-term safety, optimum dosage levels and more subtle adverse effects.

    FDA Review (approximately 1-2 years) In this phase, a New Drug Application (NDA) document is submitted to the FDA with data on each treated patient, and with production plans. An NDA documents typically contains thousands of pages, and takes up to two years to review by the FDA. The FDA continues to monitor the process after approval is granted for production and marketing. On average, eight out of ten drugs make it through this phase.

    6 In some countries, including Argentina, Brazil, Mexico, India, Egypt and South Africa, patent piracy, where protected drugs are copied without compensation, has sometimes been a major problem. However, many of these countries have recently tightened their patent protection to international standards.
    7 Based on data from the Center for the Study of Drug Development, Tufts University, 1995.

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Project Portfolio Management at XYZ Pharma

 

Phase Probability of Advancing

to next Stage

Probability of approval

Proportion of Total R&D Costs

 
 

Basic Research 0.4% 0.02% 24%

 

Pre-Clinical 25% 5% 12%

 

Clinical Phase 25% 20% 29%

 

FDA Review 80% 80% 35%

 

Table 1. Probability of passing each of the drug development phases

Table 1 illustrates the high risks that are inherent to the pharmaceutical industry. On average, only one in five drugs entering clinical trials is launched on the market8. Overall, only one in five thousand developed compounds in the research phase makes it to the market. As a consequence, a large portion of all development costs are spent on drugs that never reach the market, illustrating the high technical risks involved. Even of the drugs that reach the market, only 30% achieve the commercial success necessary to recover the (after-tax) development costs to yield a healthy return, illustrating the additional commercial risks involved. Generally, the top 20% of the products with the highest revenues generate 70% of the returns. Thus, companies must rely on a limited number of highly successful products to finance their continuing R&D.9 Nevertheless, pharmaceutical companies in recent years have been able to report healthy profits, of about 20% on gross revenues. Roughly, production costs account for 10%-15% of total manufacturing costs, R&D for 20%, taxes for 15%, 30% for advertising and marketing, leaving approximately 20% profit.10

Pipeline and Portfolio Management

The top management of XYZ is committed to a vigorous growth in total sales and the creation of shareholder value. Because the global pharmaceutical industry is increasingly competitive, a constant stream of product introductions has to be maintained. “A well-managed product pipeline is essential to support sales and profits, making product or project portfolio management a crucial success factor”, says John Smith. “And because of the long R&D lead time, a good performance today is actually determined to a large extent by which decisions have been made 10 years ago.”

The XYZ Pharmaceutical product pipeline is one of the broadest in the industry and currently comprises a total of 69 projects in clinical development, and 106 projects from the pre-clinical stage onwards. According to the CEO: “XYZ’s pipeline is already one of the strongest in the industry.” He added: “We have a number of strong pipeline compounds as well as limited patent expiry exposure”.

The projects in the pipeline include both new molecular entities (NMEs) and additional indications or formulations for marketed products. Overall, there are 27 projects in late-stage development (Phase III or FDA review), to sustain mid-term growth, and 32 projects in Phase II. XYZ expects to be able to launch one or two NMEs per year and plans to introduce new products at a sustained pace.

XYZ Pharma Research is working in a wide range of therapeutic areas, in research centres all over the world. Each therapeutic area is a separate business unit, responsible for its own performance. Each of the business units is allocated a research fund from corporate headquarters, based on a commitment to contribute a certain profit to the Pharma division. Additional profits beyond the agreed value can be re-used to fund research, or can be transferred to headquarters, resulting in bonuses for the unit’s employees. Unlike some of its more focused competitors, XYZ Pharma’s products span a wide range of therapeutic areas, including immunology, inflammatory diseases, central nervous system disorders, cardiovascular, endocrine and metabolic diseases, oncology, dermatology and asthma. In recent years, however, XYZ has been focusing on both cardiovascular diseases and cancer. “This strategy has paid off”, confirmed John Smith, “We boast a strong portfolio in both those areas, driven by blockbusters for a few years to come.” However, other areas of the portfolio have

8 Industry Profile 2003, www.phrma.org
9 Henry G. Grabowski and John M. Vernon. Returns to R&D on New Drug Introductions in the 1980s, Journal of Health Economics, 13, 383-406, 1994.
10 P. Barry, “What’s behind high drug prices in the U.S.?”, AARP Bulletin, 41 (4), April 2000.

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Project Portfolio Management at XYZ Pharma

suffered some setbacks: late-stage trials had to be terminated and some applications had trouble in the regulatory arena. This has hit the central nervous system unit especially hard, which is not expected to be a major growth driver anymore.

The Portfolio Management Board

Decisions concerning the project pipeline are taken by the Portfolio Management Board or PMB. “The PMB has two important functions: At its yearly meeting in August, it decides on the shape and content of the project pipeline by accelerating and delaying projects, and, on a regular basis, the PMB checks its evolution”, says John Smith. “My role is to prepare the portfolio data for these meetings, and integrate the requirements from the different business units into a single portfolio from a company perspective”. Before the meeting, each of the business units submits individual business plans with capital and resource requirements based on the projects within the unit. Input from Project Teams (resources, milestones, risks), Strategic Marketing (market performance and potential revenue streams) and Strategic Planning (disease area audits and benchmarking) begins in early December. The portfolio group, led by John Smith, consolidates the business plans of the business units. “It was a hectic time this year, but we managed to finalise everything and build a provisional project budget in two weeks time to be ready for the PMB meeting”, remembers John. “We needed to allow the PMB five working days to review the documentation associated with the annual strategic plan.“

The yearly PMB meeting deals with an annual budget of more than US$5 billion and considers approximately 150 projects executed in ten development sites worldwide. Its main purpose is to decide which compounds to develop and their priority. “The resulting development budget for every business unit is the basis for a contract“, explains John. Any individual project can be singled out for special attention concerning its expected profitability, strategic fit and contribution to portfolio or pipeline balance. The projects are subsequently monitored by the PMB in quasi-monthly meetings, which are held to evaluate the performance of the projects against the objectives established in August.

The PMB’s decision process consists of two parts (Figure 2). The preparation of the yearly business plan takes place during the planning period, from June until August, followed by the implementation and control of the plan during the budgetary year, from January to January. The planning process starts with the evaluation of the options in the light of the strategic plan and the analysis of perceived opportunities. On the basis of this information, the decision makers agree on targets and the optimal portfolio that enables them to reach their proposed objectives. These decisions are recorded in the annual business plan at the PMB meeting end of August. During the execution of the plan, milestones may be reached or opportunities and threats identified, requiring decisions to be taken. The quasi-monthly meetings are held for that purpose and allow flexible project execution.

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Project Portfolio Management at XYZ Pharma

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Figure 2. Representation of the Decision Making Process Portfolio Review Criteria

XYZ’s CEO had recently announced his expectations of double-digit growth rates for XYZ’s pharmaceutical division, which is significantly above the industry average, and one of the PMB’s main concerns was on how to reach that target. To maintain growth, XYZ needed to deliver on its pipeline and introduce new successful products, compensating for the decline in sales of mature and launched products. “Also, to sustain a continuous growth, the pipeline has to be balanced”, says John Smith. Balance is determined relative to the pipeline “fill” that is required to maintain the flow of product launches given historic attrition rates of projects in the R&D funnel. The projects in the pipeline can be subdivided into innovative and life cycle management projects, or NME versus LCM products. Though R&D into new molecular entities are less likely make it to market, the reward is typically higher, and blockbusters are usually found amongst NME projects rather than life cycle management projects.

Although XYZ’s pharmaceutical division boasts a healthy profit margin, it is heavily reliant on a few drugs that will recuperate their R&D expenses. The portfolio review group requires that all projects asking for funds be accompanied by a Net Present Value (NPV) analysis. A project’s potential value is derived from the estimation of future resource requirements, timing of the R&D stages and market launch, and the projections of sales revenues and associated marketing costs generated by the Strategic Marketing Group. The sales forecasts are made based on a number of assumptions concerning the indication and label of the drug, the disease population, the reimbursement potential of the drug, potential market share and pricing.

“Next to financial criteria, we also consider the strategic fit of any project under consideration”, says John Smith. Strategic alignment is assessed based on the strategic plan in which therapy areas of interest have been highlighted as a result of a disease area and competitor analysis. As population composition and disease prevalence change, pharmaceutical companies adapt their research focus. “This explains why many companies have been concentrating on chronic diseases such as hypertension and cholesterol control since the mid-1990s”, said John. “However, even though most

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Project Portfolio Management at XYZ Pharma

pharmaceutical companies have a strategic focus, they cannot necessarily enforce it, because the R&D process is essentially opportunistic: funding of research in the strategic focus area does not guarantee discovery of interesting compounds.”

Pharmaceutical R&D activities are subject to a high level of risk, which is an essential ingredient of all the reports presented to the PMB: project values are expressed as expected values, weighted with the probabilities of reaching the successive stages and ultimately the market. According to John, “In PMB meetings, we only discuss expected values, e.g. expected sales or expected NPV. It is meaningless to talk about a potential 5 billion drug without taking into account the probability of the drug ever reaching the market. Unfortunately, there is little that can be done about the technical success or failure of a project. Requiring a higher success probability before starting a project would effectively rule out most projects, especially NMEs. Hence we rely on portfolio diversification. However, it is essential that we monitor the risk in the portfolio, making sure that any decision taken results in acceptable risk limits.”

Next to technological risks, XYZ Pharma also faces considerable uncertainty about the sales that the product will generate once launched. Initial projections are made for a distant future when the compounds characteristics are still relatively unknown. A typical NPV valuation is presented in Exhibit 6, in the format used by XYZ’s portfolio group. The cash flows are discounted using a company-wide weighted average cost of capital (WACC).

The Meeting

At the start of the meeting, the portfolio management group, represented by John Smith, presented a summary of the current state of the project portfolio and pipeline. Some of the presented slides are given in Exhibit 7. Slide 1 shows the number of current projects in each phase in the different business units. Slide 2 shows the expected NPV per phase in the different business units (in $millions). Slide 3 graphs the number of expected launches for the next 10 years. These figures take into account the probability to market of each of the drugs due to be launched in that year.

Slide 4 presents an overview of the net present value of all the projects in each business unit, represented by a cumulative probability distribution. The distributions show the likelihood of a particular net present value based on the technical success of the projects in the portfolio. For instance, Slide 4 shows that the net present value of the projects in therapy area 2 (the curve on the right) is between approximately $3 billion and $13 billion, and shows that the probability of a net present value of at least $7.5 billion is around 70%.

Several slides show the expected sales and sales growth, based on the median sales figure. John Smith commented: “We need to look at ranges when forecasting sales, instead of just focusing on the most likely sales figure. However, this is a major challenge for the marketing group.” The decomposition of expected sales into therapeutic area, project type or brand name is also communicated. The major drugs together account for about 40% of the sales of XYZ for the next 5 to 7 years, and John Smith claims that “[this] means that XYZ is more diversified than most of the other major pharmaceutical companies”.

XYZ is also looking into the respective sales of LCM and NME projects, and of General Practitioner (GP), Niche and Specialized products (Slides 5 and 6). John Smith adds: “Because our current blockbusters are pretty strong, they allow for interesting line extensions. However, XYZ also has other promising NME projects due to be released in the next 5 years, especially in the cardiovascular therapy area and the immune disorder and inflammation franchise.” GP products account for the majority of sales, but have a relatively low profitability, whereas Niche and Specialized products offer higher profitability for a smaller sales potential. Different type of products might also react differently to patent expiry: GP products are usually copied very quickly and market share loss can be severe.

Several slides contain financial information for each of the projects, such as NPV, expected NPV, peak sales and expected contribution to sales growth, as in Slide 7. As John Smith explained: “Last year was the first time they made decisions heavily based on financials”.

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Project Portfolio Management at XYZ Pharma

Based on the information contained in the previous slides, the decision makers assign projects to three different categories: Heavyweight projects, Key projects and Foundation projects. Heavyweight projects are typically close to market and have blockbuster potential, and have a high priority for accessing resources. Key projects are also important to the company and have potential, but are still far away from market. The Foundation projects comprise the bulk of the portfolio. If the budgetary requirement to continue all the projects in the portfolio exceeds the available funds, some projects are put on hold.

On Friday evening, John, exhausted, reflected back on the past week. The PMB meeting had decided on the route to take for the next year, with some projects put on hold and others pushed centre-stage. Despite the long discussions and lively debates, John felt it was a productive week, and that the decisions made by the PMB would gain support throughout the organization.

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Project Portfolio Management at XYZ Pharma

Exhibit 1 Top 20 Pharmaceutical Companies by Sales (in US$ millions)11

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Rank Company Country

  1. 1  Pfizer US

  2. 2  GlaxoSmithKline UK

  3. 3  Sanofi-Aventis France

  4. 4  Johnson & Johnson US

  5. 5  Merck US

  6. 6  AstraZeneca UK

  7. 7  Novartis Switzerland

  8. 8  Bristol-Myers Squibb US

  9. 9  Roche Switzerland

  10. 10  Eli Lilly US

  11. 11  Wyeth US

  12. 12  Abbott Laboratories US

  13. 13  Amgen US

  14. 14  Takeda Japan

  15. 15  Boehringer Ingelheim Germany

  16. 16  Schering-Plough US

  17. 17  Bayer Germany

  18. 18  Novo-Nordisk Denmark

  19. 19  Schering AG Germany

  20. 20  Sankyo Japan

Sales ($ billion)

46.13

31.42

29.60

22.13

21.49

21.43

18.50

15.48

13.84

13.06

13.02

11.46

9.98

8.54

7.67

6.42

5.53

4.85

4.17

4.15

Share of World Market

8.39%

5.71%

5.38%

4.02%

3.91%

3.90%

3.36%

2.81%

2.52%

2.37%

2.37%

2.08%

1.81%

1.55%

1.39%

1.17%

1.01%

0.88%

0.76%

0.75%

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11 2005 Top Companies (based on 2004 pharma revenues, in millions), http://www.contractpharma.com, July/August 2005. 9

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Project Portfolio Management at XYZ Pharma

Exhibit 2

Year

2005 2005

2005 2005

2004 2004

2003 2003

2002 2001

2001 2001

2001 2000

2000 2000

2000 2000

2000 2000

2000 1999

1999 1999

1998 1998

1998 1997

1997 1996

1996 1995

1995 1995

1995 1995

1994 1994

1994 1994

1994 1991

1990 1990

1989 1989

1988 1986

Mergers and Acquisitions in the Pharmaceutical Industry12

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Company 1

Vicuron Pharmaceuticals Inc

Fournier Pharma

Hexal AG

Fujisawa Pharmaceutical Co Ltd

Sanofi-Synthelabo

SICOR Inc

Scios Inc

Pharmacia Corp

Lek(Slovenia)

DuPont Pharmaceuticals Co

ALZA Corp

BioChem Pharma Inc

Knoll AG(BASF AG)

G.D. Searle (Monsanto)

SmithKline Beecham PLC

PathoGenesis Corp

Jones Pharmaceutical Inc

Warner-Lambert Co

Liposome Co Inc

-

Centecor

Genentech Inc

Agouron Pharmaceuticals Inc

Hoechst

Astra

Sanofi

Corange Ltd

Boehringer Mannheim

Amersham

Ciba-Geigy

Athena Neurosciences Inc

Hoechst-Roussel

Pharmacia

Fisons PLC

Boots

Wellcome PLC

American Cyanamid

Erbamont

Syntex Corp

Sterling (prescription)

Sterling Winthrop Inc

SmithKline

Kabi

Rorer

Squibb

Merrell-Dow

Kodak

Key

Company 2

Pfizer

Solvay SA

Novartis

Yamanouchi Pharmaceutical Co

Aventis

Teva Pharma Inds Ltd

Johnson & Johnson

Pfizer Inc

Novartis AG

Bristol-Myers Squibb Co

Johnson & Johnson

Shire Pharmaceuticals Grp PLC

Abbott Laboratories

Pharmacia & Upjohn

Glaxo Wellcome PLC

Chiron Corp

King Pharmaceuticals Inc

Pfizer Inc

Elan Corp PLC

Pasteur-Merieux Connaught

Johnson & Johnson

Roche Holding AG

Warner-Lambert Co

Rhone-Poulenc Rorer

Zeneca

Synthelabo

Roche Holding AG

Hoffman-La Roche

Nycomed

Sandoz

Elan Corp PLC

Marion Merrell Dow

Upjohn Co

Rhone-Poulenc Rorer Inc

Knoll

Glaxo Holdings PLC

American Home

Pharmacia

Roche Holding AG

Sanofi

SmithKline Beecham PLC

Beecham

Pharmacia

Rhone-Poulenc

Bristol-Myers

Marion

Sterling

Schering-Plough

New Name

Astellas Sanofi-Aventis

Pharmacia Corporation GlaxoSmithKline

Pfizer Inc

Aventis Pasteur

Aventis AG

AstraZeneca

Sanofi-Synthelabo

Novartis AG

Pharmacia & Upjohn

Glaxo Wellcome

SmithKline Beecham

Rhone-Poulenc Rorer Bristol-Myers-Squibb

Marion Merrell Dow

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12 Windhover’s Health Care Strategist, 2000 + Thomson Deal Database. 10

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Project Portfolio Management at XYZ Pharma

Exhibit 3 Pharmaceutical R&D by Country13

 
page11image2248

Sweden 2%

Other 8%

page11image3664

Belgium 3%

Switzerland 3%

Germany 7%

France 8%

United Kingdom 9%

United States 47%

Japan 13%

page11image9240

13 The Pharmaceutical Industry in Figures, Key Data - 2005 update, EFPIA (2005). 11

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Project Portfolio Management at XYZ Pharma

Exhibit 4 Drugs Introduced per Country14

 
page12image2248

France 3%

Sweden 4%

Belgium 5%

Japan 7%

Germany 7%

Switzerland 9%

Other 6%

page12image5872

United States 45%

United Kingdom 14%

page12image9464

14 Barral, PE. 20 Years of Pharmaceutical Research Results Throughout the World. Rhone-Poulenc Rorer Foundation, 1996 12

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Project Portfolio Management at XYZ Pharma

Exhibit 5 World Pharmaceutical Market15

 
 

China

2% Japan

11%

Latin America 3%

Rest of Europe 7%

European Union 26%

Asia, Africa and Australia 6%

page13image5664

North America 45%

page13image7672

15 The Pharmaceutical Market Outlook to 2015: Implementing innovative, long-term strategies for sustainable future growth, Business Insight, May 2005.

13

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Project Portfolio Management at XYZ Pharma

Exhibit 6

Discount Rate
G&A Rate
Distribution
1.00%

NPV Calculations of Projects

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10.00% 2.00%

General & Administrative expenses (as a percentage of gross sales) Distribution cost (as a percentage of gross sales)
The net contribution is taxed at 25%

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Tax Relief Work Capital Base Year

25.00%

15.00% 1-Jan-06

All cash flows are discounted to the base date

General Practitioner Product Niche Product
Specialised Product

GP/ Budget Status: Active Spec:

Pre Launch Expenses(Value)

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Product Type

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GP 20.00% Niche 15.00% Specialised 10.00%

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Compound XYZ001a

Launch Year 2012

% Value

2006 page14image36048 page14image36248 page14image3644891.2% page14image366800.00 2007 page14image3708028.4% page14image373120.00

2008 page14image37840 page14image38040 page14image3824018.3% page14image384720.00

2009 page14image39008 page14image39208 page14image3940812.7% page14image396400.00 2010 page14image400409.9% page14image402720.00

2011 page14image40800 page14image41000 page14image412008.7% page14image414320.00

2012 page14image41984 page14image42184 page14image423847.1% page14image42616144.56 page14image4284826.02 2013 page14image432647.0% page14image43496289.12 page14image4372852.04

2014 page14image44272 page14image44472 page14image446727.0% page14image44904491.50 page14image4513688.47

2015 page14image45688 page14image45888 page14image460887.0% page14image46320737.24 page14image46552132.70 2016 page14image469687.0% page14image472001069.73 page14image47432192.55

2017 page14image47976 page14image48176 page14image483767.0% page14image486081445.58 page14image48840260.20

2018 page14image49392 page14image49592 page14image497927.0% page14image500241445.58 page14image50256260.20 2019 page14image506727.0% page14image509041445.58 page14image51136260.20

2020 page14image51680 page14image51880 page14image520807.0% page14image523121329.93 page14image52544239.39

2021 page14image53096 page14image53296 page14image534967.0% page14image537281130.44 page14image53960203.48 2022 page14image543607.0% page14image545920.00

2023 page14image55120 page14image55320 page14image555207.0% page14image557520.00

2024 page14image56264 page14image56464 page14image566647.0%

Stage: Pre-Clinical

Post Launch Expenses (Value)

GP

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86.73 260.20 505.95 491.50 442.35 427.89 433.67 289.12 216.84 132.99 113.04

3.13

6.16 14.94 28.32

8.17 86.73 -86.73 1.92

287.67 -146.00 560.88 -277.55 584.88 -103.21 582.42 140.08 631.14 417.19 708.33 708.33 563.78 852.89 491.50 925.17 385.68 917.65 327.83 780.01

0.74

5.40 18.76 39.04

9.80 2.31

-3.87 -11.56 -33.70 -67.35 -17.97 -90.97

-2.90

-8.67 -25.28 -50.52 -13.48 -68.23

-109.50 -208.16 -77.41 105.06 312.90 531.25 639.67 693.88 688.24

751.54 1175.92 72.64

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-146.00 -277.55 -103.21

140.08 417.19 708.33 852.89 925.17 917.65 780.01

NPVg
NPV with TVh eNPV

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a The first line contains: compound name, current stage, budget
b Because the success of each stage is uncertain, cash flows occur with a probability. The probabilities are given per stage and are converted into yearly probabilities by taking a weighted average of the probabilities of the stages occurring within the year.
c Includes COGS, G&A expenses, royalties and distribution cost (1% of gross sales).
d Gross sales minus total product costs minus G&A cost (2% of gross sales).
e Contribution after G&A and revenue deduction minus the cost of R&D.
f Free cash flow with a tax burden (or relief) of 25%.
g Computed as if all cash flows after tax were certain and includes sales for the first 9 years.
h Assumes that the sales after the 9th year decay at a constant rate determined by the product type (TV = terminal value).

status (active = included in the budget) and product type.

14

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Year

Probability of cash flowb

Gross Sales

Cost of Goods Sold (COGS)

Marketing & Sales (M&S)

Royalties

Milestones

Total Product Costs including distributionc

Contribution after G&A and revenue deductiond

Internal R&D Cost

External R&D Cost

Phase 4 Estimates

Other Dev Costs

Free Cash Flowe

Free Cash Flow after taxf

Project Portfolio Management at XYZ Pharma

Exhibit 7 PMB Meeting Slides

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Slide 1. Projects per Therapy Area

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Slide 2. Expected NPV per Therapy Area 15

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Project Portfolio Management at XYZ Pharma

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Slide 3. Expected Launches until 2010

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Slide 4. Cumulative Probability Distribution per Therapy Area

16

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Project Portfolio Management at XYZ Pharma

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Slide 5. Composition of Expected Sales: NME versus LCM

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Slide 6. Composition of Expected Sales per Product Type

17

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Project Portfolio Management at XYZ Pharma

page18image1280

Slide 7. Financial information on the projects

18 

 

Subject Business
Due By (Pacific Time) 04/29/2014 12:00 am
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