Portfolio Optimizer 5 Sb

Portfolio Optimizer


Developing pharmaceutical products is incredibly expensive and risky. Companies regularly pour money and time into pharmaceutical products that may never launch. Development involves a number of steps, most of which include clinical trials, each of which involves costs, timing, and probabilities of success. Once a product launches, it will generate revenues. If the product is out-licensed at some point, exposure to expenses will be less, but the royalties and payments received will also be less than the total revenues if the company retained the product. On top of this, companies usually are pursuing many compounds for many indications.

Creating a well-constructed strategy when confronted with this complexity and risk is daunting. Companies would like some clear direction on which product and indications to develop, which to terminate, and which to license out and when. A balanced portfolio of “solid” products may be better than a portfolio with one or two “star” products. The results of this portfolio optimization process may determine the very survival of the company. At a minimum, what is at stake is tens or hundreds of millions of dollars, if not billions.


Most companies use some form of long-term forecasting process to look at the net present values (NPV) and probability of launch for each project. The company typically then chooses the highest NPV projects, tempered by considerations of launch probability, launch timing, strategic fit, and resources limitations.


Net present values assume that every product succeeds and is eventually launched. This is hardly a realistic assumption. Because of risk, some products show a large, positive NPV, yet the company developing them can expect to lose money if it continues.

The problem arises from the high probability of failure facing developmental drugs. Consider the following challenges facing pharmaceutical companies:

• Expenses are incurred today but revenues are years off
• Near-term expenses are certain to be incurred
• Expenses that are farther into the future are less and less certain to be incurred
• Revenues, which are even farther into the future, are still more uncertain
• Out-licensing reduces both future expenses and revenues (due to royalties)
• The risk and future expenses for a product decline as it nears launch

NPV formulas account for only the timing of cash flows, not uncertainty. It is this shortfall of NPV values that causes some companies to ignore better products and develop lesser ones.

A company may attempt to skirt some of these issues by adjusting the NPV by the launch probability of the product. This may overstate the value of the product, since the launch probability adjustment adjusts not only product revenues, which happen when a product launches, but expenses which are guaranteed to occur up to the point where the go/no go decision is made.


Objective Insights has developed the Portfolio Optimizer to address the needs of pharmaceutical companies. The Portfolio Optimizer calculates the value of developing a portfolio given the uncertainties, costs, and timing involved.

Portfolios should be evaluated by more sophisticated metrics than simple revenues or the overall probability of success of each product. Portfolio Optimizer looks at: total number of products launched, portfolio NPV, portfolio revenues, portfolio expenses, peak annual cash outflow, portfolio expected value, portfolio risk-averse expected value, maximum cash exposure, cumulative cash flow, year of positive cash flow, Pearson Index, and others.

Constraints are used so that portfolios will be considered only if they meet management’s requirements. For example: “We will develop at least one drug in class A. We will not develop more than two drugs from the B family. We will not develop Drug C in both an accelerated and delayed fashion. We will develop at most five products.”

Portfolio Optimizer then looks at all possible portfolio combinations (many, many thousands) to maximize the favorable metrics and minimize the adverse metrics. The twelve portfolios with the best deterministic and probabilistic overall “decathlon” metric scores are then shown to management, along with a one-page summary of each project. This process allows management to focus its attention to pick the best portfolio possible.

The Portfolio Optimizer is developed in Microsoft Excel, allowing you to start working immediately rather than having to learn yet another software program. Objective Insights customizes the Deal Advisor for your company’s specific application, and provides comprehensive training and indefinite support.

Contact Objective Insights for a static, non-functional demonstration version of Portfolio Optimizer.

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For more information, please download the Portfolio Optimizer Overview (pdf).



Global Inputs

• Product name
• Indication
• Project start date
• Discount rate
• Research and development costs, timing, and probabilities by phase (discover, preclinical/IND, Phase IA, Phase IB, Phase II, Phase III, NDA approval)
• Peak annual product revenues
• Manufacturing cost of goods
• Returns and allowances
• General and administrative (G&A) costs as percent of sales
• First indication for this product?
• Second product in research program?
• Royalty rates by phase of licensure
• Upfront payment by phase of licensure
• Milestones by phase of licensure
• Cost per full-time equivalent
• Marketing and sales expenses
• Other research and development expenses
• Other regulatory expenses
• Capital expenses

Optional Inputs

• Share of profits
• Ex-U.S. sales factor
• Ex-U.S. development factor
• Depreciation factor
• Tax rate
• Working capital factor
• Risk tolerance
• Number of leads per year in research program
• G&A FTE’s allocated to this project