Healthy Skepticism Library item: 2298

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Publication type: Journal Article

Numerof RE, Nightingale J.
Guest Opinion: R&D Prioritization - Going beyond decision analysis
eyeforpharma Briefing 2005 Aug 17; (151):
http://www.eyeforpharma.com/index.asp?nli=o&g-p&nld=8/17/2005&news=47331

Full text:

One of the most critical processes for any R&D organization is project prioritization – deciding which projects will be funded over the next period and which will not.

Pharmaceutical companies, in particular, have to make big investment decisions about their drug pipelines. These decisions involve complex assessments of technical, clinical, regulatory, legal, and commercial risk, often projecting conditions 5, 10, or more years in the future. To contend with this challenge, major companies long ago adopted sophisticated techniques – including expected value analysis, and option value analysis – to assess the technical and commercial merits of individual compounds and then rank them based on their risks and potential returns.

Despite the time and resources that are poured into R&D prioritization, the process still tends to be sub-optimized. The fundamental reason for this gap is that the framework that companies generally use in their prioritization decisions is incomplete. In particular, there has been a tendency to compare the costs, risks, and potential value of individual products in a vacuum, without fully considering the broader implications.

The underlying premise of the traditional approach is that each project is independent, which assumes that there are no capacity constraints other than funding and products will stand on their own in the market. In reality, the potential for certain capacity constraints or market considerations is recognized, but they tend to be addressed in an ad hoc way. The approach has reinforced the preoccupation with blockbuster products and it has contributed to the underperformance of R&D.

A few companies are beginning to take a more integrated, “portfolio” approach to both the R&D process and the commercial side of the equation.

On the R&D side, the portfolio approach seeks to maximize the collective value of the candidate products in the pipeline. It recognizes that there are all kinds of capacity constraints in the R&D process, and it looks to remove critical bottlenecks and align capacity with the capabilities that can drive the greatest value creation. It also turns to external vehicles – such as co-development, out-licensing, and spin-outs – to keep all promising compounds moving forward when internal resources are insufficient.

The greatest challenge companies face in applying the portfolio model is in identifying the true resource constraints in R&D. The prevailing approach to budgeting is to base future budgets on simple extrapolations from current ones, without seeking to understand the activities or their costs in depth. Efforts to go deeper often end up as little more than politically-charged, data-starved debates.

Companies have resorted to this approach because many R&D activities are “black boxes” to management, who assume that throughput and productivity can’t be measured or predicted with any degree of accuracy. This situation is not unique to R&D; it is a feature of most functions outside of manufacturing. In R&D, the problem is compounded by the inherent unpredictability of experiments.

The reality is that most R&D activities are reasonably predictable even if their outcomes are not. Furthermore, cost-effective methodologies exist to gain clear, measurable insight into R&D activities and the fully-loaded time it takes to accomplish them. The key is to develop an accurate understanding of how the bench scientists, managers, and support personnel actually spend their time and compare it with the strategic priorities of the organization.

Such activity studies typically have a high ROI because as a by-product they identify ample low-hanging opportunities to increase productivity. Even more important, the information provides a robust foundation for critical business decisions, including project prioritization, resource allocation, capacity development, and deciding between outsourcing and internal development.

For example, a pre-clinical development group recently conducted an activity study to cope with a dramatic change in the quantity and mix of research studies they were expected to complete. The activity study not only enabled them to forecast their resource requirements with unheard-of accuracy; it also uncovered opportunities to increase their capacity by 30% with existing resources. The experience tends to be an epiphany to groups that undertake it, but with the right methodology the process is actually highly repeatable.

On the commercial side, the portfolio approach looks beyond traditional product forecasts to the broader value proposition for physicians, patients, and payors. Consideration is given to complementary products – including diagnostics and devices as well as other therapeutics – that will deliver the greatest therapeutic value and provide the strongest market position for the company. Reimbursement strategy receives appropriate attention early in the development life cycle, both in prioritization decisions and in developing target product profiles. The key is to identify unmet needs from an integrated disease management, patient management, and practice management perspective.

The ultimate objective of R&D prioritization is to make choices that increase the value of the R&D pipeline and lead to a successful portfolio of marketed products. By building a more comprehensive set of strategic considerations and the information to support them into the process, pharmaceutical companies can increase the likelihood that they are making the best decisions available to them at the time.