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| Pharmaceutical & Biotechnology |
Situation Company ABC, a leader in diseases belonging to Therapeutic Areas 1 & 2 (TA1 & TA2) and a major competitor in TA3, has a plethora of innovative, late research and early clinical development assets that belong to TAs which are outside of its core competencies (TA4, TA5, TA6). The company is unsure as to how to allocate its annual budgetary resources across these 6 TAs over the next 10 years.
Decision Frame Given its strategic intent (to remain a leader in TA1 & TA2) and its annual financial growth goals, how can Company ABC sustain its leading presence in TA1 & TA2 while maximizing the utility of its constrained budgetary resources across the 4 remaining TAs on a risk-adjusted financial basis?
Decision Options
- ‘Business As Usual’ with a dedicated focus on TA1, TA2, & TA3 and any remaining budgetary resources allocated to the highest eNPV projects within TA4, TA5, & TA6.
- ‘Look To The Future’ by stepping down investments in TA1, TA2, & TA3 while ‘Aggressively Ramping Up’ investments in TA4, TA5, & TA6.
- ‘Maintain Strategic Intent’ in TA1 & TA2, ‘Provide Adequate Support’ in TA3, and ‘Encourage Healthy Competition’ in TA4, TA5, & TA6.
Methodological Approach Utilizing PPVC’s CREOPMTM framework, all TA1 & TA2 project investments that fulfilled pre-specified criteria belonging to the non-discretionary (MUST DO) category, were earmarked for budgetary resources. Discretionary (MAY DO) TA1 & TA2 project investments were allowed to compete with all other project investments belonging to TAs 3,4,5, & 6. After a thorough phase-dependent risk analysis was conducted, a Decision Tree was created for each project, and an eNPV calculated for each development, regulatory, and commercialization alternative. From this, the highest eNPV was selected for the dominant alternative for each project.
During a series of policy discussions, it was decided that a minimum level of annual budgetary resources would be allocated to TA3 with the understanding that this would not necessarily represent the level required by the company to remain a major player in this TA. A linear program was constructed and, with eNPV as the objective, the optimal portfolio of discretionary project investments was found. PPVC challenged the annual budgetary allocation and demonstrated that, on a risk-adjusted basis, some years required less than the target constraint while other years required more than the target constraint. It was subsequently decided that the annual budget would become somewhat flexible but remain within a narrow variance around each annual target.
Recommended Solution: ‘Maintain Strategic Intent’ in TA1 & TA2, ‘Provide Adequate Support’ in TA3, and ‘Encourage Healthy Competition’ in TA4, TA5, & TA6. This strategy enabled Company ABC to sustain its leadership position in TA1 & TA2, maintain a high presence in TA3, and optimize its budgetary resource utilization in 3 new TAs where it needed to develop core competencies before maximizing investments in these new areas.
Postscript During its data gathering, PPVC uncovered that the most critical constraint to the company over the next 10 years was not the annual budget. Rather, 2 critical functions were severely understaffed leading to unnecessary project delays and quality issues. As a consequence, a dedicated effort began to better staff these 2 functions.
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