2. Objectives
To improve pharmaceutical portfolio investment decision analysis by addressing the
largest source of risk: “portfolio attrition”
Provide answers to challenging management questions regarding size of portfolio,
expected future value (i.e. ROI), and quantifying the risks:
What is the optimum size of portfolio? How to prioritize investment?
How does partnering, M&A and financing decisions impact value creation and risk profile?
What are the key variables and their financial impact on future value?
How wrong can we be about the model assumptions and still make the same investment decisions?
This novel stochastic valuation model provides valuable insights lacking from
traditional discounted cash flow and net present value methods
Traditional methods focus on expected NPV of base case, worse case and best case with limited quantitation of the
probability of success of each case
Median and range of the net expected portfolio value creation in 3, 5 and 10 years based on industry standard attrition rates
(or developed internally), as well as quantitative analysis of probabilities with high level of certainty
Portfolio payoff ratio, breakeven analysis, ROI, volatility, etc.
Ahmad-Reza Saadat
3. Philosophy
Decision analysis is an integration of science (algorithms, statistics, models)
and art (experience, strategy, style), thus requiring a flexible approach
Strategic decision making is more robust when it is systemized and integrated
into a process while constantly updated and improved
The model must be customized to address the unique objectives and
challenges of each company (i.e. cash preservation challenge, vs. earnings
growth challenge)
Forecasting models are always wrong; focus should be on basing decisions
on corporate strategies while relying less on historical data with uncertain
predictive value
It is the mark of an instructed mind to rest satisfied with the degree of precision to which the nature of the
subject admits and not to seek exactness when only an approximation of the truth is possible. - Aristotle
Ahmad-Reza Saadat
4. Challenging Questions
What is the expected future value created and what decisions can be made to
improve the risk profile?
10
5
3
1
$50
$90
$250
$800
$0
$200
$400
$600
$800
$1,000
0
2
4
6
8
10
12
Year 1 Year 4 Year 6 Year 8
TotalCosts
NumberofPrograms
Illustrative Total Portfolio Costs and Attrition*
Portfolio Size Total Costs
?
What are possible
outcome values?
Ahmad-Reza Saadat
5. New Approach To Quantify Uncertainty
Drug development success is a tail-
risk phenomenon
Shape of the distribution is critical in
determining expected ROI
Standard methods (Net Present
Value) are potentially indifferent to
future outcomes
In other words, the same NPV can
describe different outcomes
Simulation identifies the probability
distribution and the value of
outcomes, and key activities that
modify the shape of its distribution,
thus impacting ROI
Successful LaunchFail in Development
Illustrative probability distribution of a drug launch
Ahmad-Reza Saadat
6. Input data
The process leverages existing data from discounted cash flow and net
present value analysis augmented by new simulation methodologies
Model
Commercial
Forecast scenarios
R&D costs by
stage
Probabilities of
phase transition
Overhead/Capital
Structure
Ahmad-Reza Saadat
Clinical
Manufac.
Research
population
Competition
Price
7. Key Outputs
-1000
-500
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Value($Million)
Year
Future Portfolio Value
Best Case
95% Perc.
Mean
5% Perc.
Worse
Phase I Phase II Phase III Registration
% of Drugs
candidates
succeeding to
next phase*
61% 44% 68% 84%
Cumulative POS 61% 27% 18% 15%
Attrition Rates*
Simulated
Distribution of
Future Outcomes
(new portfolio
metric: pay-off
ratio)
Significant Events
and Their Impact
*Source: Tufts - DiMasi et al. 2007Ahmad-Reza Saadat
9. Balance Portfolio Risk and Growth
Optimization of portfolio for best payoff ratio
Considers capital constraints
Internal vs. external mix of investments
Optimized distribution of assets across development phase
“what-if” scenarios to consider options
Quantify impact of key events and partnering options on
Growth objectives
Risk profile
Ahmad-Reza Saadat
10. The Process
Define the problem
- What decisions are we trying to make
Gather Information
- Model inputs from internal and external sources
Analysis and Communication of Results
- Excel model development and presentation
Integrate/Repeat
- Establish a process
Ahmad-Reza Saadat
11. Case Studies
A 150 person biotech company was facing financial difficulties
and looking for a buyer. Using this methodology, they were
able to demonstrate high expected average return on
investment in a 5-10 year period and justify a higher sale
price in 2007 to a major biopharmaceutical company.
A 175 person biotech company with multiple technologies,
assets and potential business applications was asked by the
board of directors to demonstrate the value of each individual
asset and evaluate various combination scenarios while
recommending one strategy given the financing constraints.
Using this methodology, the company was able to find the
optimum strategy to achieve the desired risk/growth profile.
Ahmad-Reza Saadat
