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Working with Risk in Pharma R&D

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Love it or hate it, risk is a critical part of innovation, and developing new products requires taking significant risks and making big decisions with great uncertainty. But how many people really understand risk - how to define it, how to measure it, and how to manage it? You cant manage what you cant measure, and you cant measure what you cant define. This presentation will help you understand the fundamentals of this elusive concept, at both project and portfolio level, so that you can learn to measure, manage and embrace risk in an R&D environment.

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Working with Risk in Pharma R&D

  1. 1. Kelvin Stott PhDPharma R&D Portfolio Strategy, Risk & Decision ConsultantBPE Pharma SummitLondon, 27 February 2013 ©KelvinStott2013
  2. 2. New technologies have done nothing to slow the steady decline in R&D productivity Note the log scale!Source: BCG / Bernstein Research, 2010 ©KelvinStott2013
  3. 3. Source: PhRMA ©KelvinStott2013
  4. 4. DecreasingTechnical quality of new Decreasing drug leads success rates IncreasingCommercial Increasing Decreasing standards& regulatory costs/project productivity of care Increasing Decreasing timelinesOperational organizational effectiveness Poor decisions due to misunderstanding of risk ©KelvinStott2013
  5. 5. How to define risk?How to measure it?How to manage it? ©KelvinStott2013
  6. 6. “Effect of uncertainty on objectives” ©KelvinStott2013
  7. 7. Get new products to market?Meet customer needs?Maximize sales/profit/value/ROI/… ?Minimize/manage risk?Maximize probability of success?Optimize time, cost, quality?Do the right projects, do them right?Support the strategy?Manage resources effectively? ©KelvinStott2013
  8. 8. Business & Shareholders Maximize Actual Net Value Added (NPV or ROI) Customers (Patients, Physicians, Regulators, Payers & Providers) Maximize Actual Net Health Benefit vs Cost1. Business objective absolutely depends on customer objective as key value driver (win-win)2. Actual outcome ≠ Expected outcome3. Potential difference is based on risk ©KelvinStott2013
  9. 9. Expected Value/ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatoryProduct claims R&D costs Target patients Licensing fees Discount ratePoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPOProb. approval Launch date Adoption rate Sales m’stones Exchange rates Capex Dose & compl. Royalty rates Inflation rates COGS Net price Tax rates S&M costs New entrants G&A costs Generic entry Other factors ©KelvinStott2013
  10. 10. Value/ROI ± RISK Sales, P&L, cash flow forecasts ± RISK Technical & Operational Commercial BD&L Financial regulatoryProduct claims R&D costs Target patients Licensing fees Discount ratePoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPOProb. approval Launch date Adoption rate Sales m’stones Exchange rates Capex Dose & compl. Royalty rates Inflation rates COGS Net price Tax rates S&M costs New entrants G&A costs Generic entry Other factors ©KelvinStott2013
  11. 11. Corporate Value ± RISK R&D portfolio Comm. portfolio Value ± RISK Value ± RISK TA portfolio TA portfolio TA portfolio TA portfolio Value ± RISK Value ± RISK Value ± RISK Value ± RISKProject Project Project Project Product Product Product Product Value Value Value Value Value Value Value Value± RISK ± RISK ± RISK ± RISK ± RISK ± RISK ± RISK ± RISK ©KelvinStott2013
  12. 12. Available optionsRisk Risk appetite Expected Value/ROI ©KelvinStott2013
  13. 13. Available optionsRisk Risk appetite Expected Net Health Benefit vs Cost ©KelvinStott2013
  14. 14. Risk Expected Outcome ©KelvinStott2013
  15. 15. Both risk and uncertainty are: Based on the current lack of certainty in a potential fact, event, outcome, or scenario, etc. Defined by probabilities or probability distributions Include upside and downside potential Subjective: depend on who knows whatKey differences Risk involves exposure to impact: consequences that matter to a subject Hence, risk is even more subjective, depends on how much the consequences matter, to whom ©KelvinStott2013
  16. 16. Known unknowns Potential facts, outcomes, scenarios that we are aware of, but don’t yet know with any certainty Based on stochastic processes and known probability lawsUnknown knowns Certain facts that others know but we don’t Based on information asymmetry or poor communicationUnknown unknowns Potential facts, outcomes or scenarios that we are not yet aware of, have not considered or encountered before Rare and extreme events or outliers (“black swans”) in the tails of a probability distribution Often over-looked due to lack of experience/imagination ©KelvinStott2013
  17. 17. Discrete ComplexContinuous ©KelvinStott2013
  18. 18. Scenario Upside Value volatility risk Expected Downside value (eNPV) volatility risk Probability ©KelvinStott2013
  19. 19. Scenario Value Expected value (eNPV) Probability Downside tail risk ©KelvinStott2013
  20. 20. Scenario Upside Value volatility risk Expected Downside value (eNPV) volatility risk ProbabilityMaximum Downside Probability loss tail risk of failure ©KelvinStott2013
  21. 21. Expected ValueValue = PoS x Upside Value + (1-PoS) x Downside Value Volatility Risk = 2 x PoS x (1-PoS) x (Upside Value - PoS Downside Value) ©KelvinStott2013
  22. 22. 4 simple options have the same expected value of $100: Which is the “MOST RISKY” option? 1. Gain $100 (100% probability) 2. Gain $300 (75%) or lose $500 (25%) 3. Gain $500 (50%) or lose $300 (50%) 4. Gain $700 (25%) or lose $100 (75%) 13% of experts1 chose Option 1 as “most risky” 26% chose Option 2 based on potential loss only 26% chose Option 4 based on probability only Only 35% chose correct Option 3 based on potential loss and probability combined21. LinkedIn survey of over 800 professional risk managers, financial analysts and investors2. Greatest risk according to all key risk metrics: expected loss ($150); downside risk vs EV ($200); standard deviation ($400); mean absolute deviation vs EV ($400) ©KelvinStott2013
  23. 23. Phase 3 projects Current productsRisk BD&L options Phase 2 projects Phase 1 projects Expected Value/ROI ©KelvinStott2013
  24. 24. Available optionsRisk Risk appetite Expected Value/ROI ©KelvinStott2013
  25. 25. DEVELOP &EVALUATE EVALUATEPROGRESS OPTIONS RISK-RETURN OPTIMIZATION MAKE EXECUTE DECISIONS DECISIONS ©KelvinStott2013
  26. 26. Value & ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory value drivers value drivers value drivers value driversProduct claims R&D costs Target patients Licensing fees Discount ratePoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPOProb. approval Launch delay Adoption rate Sales m’stones Exchange rates Capex Dose & compl. Royalty rates Inflation rates COGS Net price Tax rates S&M costs New entrants G&A costs Generic impact Other factors ©KelvinStott2013
  27. 27. Top-down External analysis advisorsBottom-up Internal analysis experts Mean Spread Skew Shape ©KelvinStott2013
  28. 28. Left andright brainmust work together ©KelvinStott2013
  29. 29. Value & ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory value drivers value drivers value drivers value driversProduct claims R&D costs Target patients Licensing fees Discount ratePoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPOProb. approval Launch delay Adoption rate Sales m’stones Exchange rates Capex Dose & compl. Royalty rates Inflation rates COGS Net price Tax rates S&M costs New entrants G&A costs Generic impact Other factors ©KelvinStott2013
  30. 30. Scenario Upside Value volatility risk Expected Downside value (eNPV) volatility risk Probability ©KelvinStott2013
  31. 31. Risk Risk appetite Expected Value/ROI ©KelvinStott2013
  32. 32. Value driver Uncertainty Project value/ROI ± riskPhase 3 PoSR&D timelinesPhase 2 PoSMarket shareR&D costsGeneric impactCOGS ©KelvinStott2013
  33. 33. Value & ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory value drivers value drivers value drivers value driversProduct claims R&D costs Target patients Licensing fees Discount ratePoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPOProb. approval Launch delay Adoption rate Sales m’stones Exchange rates Capex Dose & compl. Royalty rates Inflation rates COGS Net price Tax rates S&M costs New entrants G&A costs Generic impact Other factors ©KelvinStott2013
  34. 34. Risk Risk appetite Expected Value/ROI ©KelvinStott2013
  35. 35. Risk Risk appetite Expected Value/ROI ©KelvinStott2013
  36. 36. Negative Positive data dataRisk Expected Value/ROI ©KelvinStott2013
  37. 37. EVALUATE EVALUATE OPTIONS PROGRESS Research Preclinical Clinical Approval Lifecycle& discovery developmt. developmt. & Launch managemt. MAKE EXECUTE DECISIONS DECISIONS ©KelvinStott2013
  38. 38. Individual R&D projects (early or late-stage)Marketed products (branded or generic)BD&L opportunities (in & out-licensing deals)Entire portfolios (R&D or commercial) ©KelvinStott2013
  39. 39. ©KelvinStott2013
  40. 40. ©KelvinStott2013
  41. 41. Source: Bernstein Research, 2010 ©KelvinStott2013
  42. 42. Bobcat climbs cactus to escape hungry lion ©KelvinStott2013
  43. 43. Risk-averseRisk-averse decisionsleadership RISK-AVERSE CULTURE, RESISTANT TO CHANGE Risk-averse Risk-averse hiring & behaviour promotion ©KelvinStott2013
  44. 44. Increasing technical risk (innovation)Revolutionary Incremental Generics and Combination first-in-class improvements biosimilars: therapies and treatments of existing exact copies of improvedbased on new drugs based on existing drugs formulations ofand unproven established competing on existing drugs target/MoA target/MoA price only Increasing commercial risk (competition)Regardless of strategy, overall risk is increasing with time ©KelvinStott2013
  45. 45. Pharma companies will need totake more risk in the short term– but manage it better, smarter –in order to innovate, adapt and survive in the long term ©KelvinStott2013
  46. 46. Risk is expected deviation from expected value,based on uncertainty in all value driversGoal is to optimize risk-return profile of assetsaccording to stakeholder risk appetiteContinuous process of developing & evaluatingoptions to navigate risk-return landscapeApplies to all assets, at every level, every stageRisk is critical for change & innovation, requiresgreat courage by individuals (i.e., you)R&D is risk management: Manage the risks, theobjectives will take care of themselves ©KelvinStott2013
  47. 47. kelvin.stott@gmail.comwww.linkedin.com/in/kelvinstott ©KelvinStott2013

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