The value cycle approach has been applied in a number of pharmaceutical majors including GlaxoSmithKline, AstraZeneca and Akzo Nobell. One of the current hot topics in ‘Big Pharma’ boardrooms is the phenomenon of rapidly expiring patents pools and the echo of empty R&D pipelines. The hunt is on for new technology to plug the gaps.

Client issues

Against a background of these industry drivers, Valculus was engaged in 2005 by the pharmaceutical division ($2 billion pa) of a European conglomerate to support a root and branch strategic review of the value of the client’s long-term pharmaceutical portfolio.

The client is a diversified drugs company producing a wide range of pharmaceuticals and vaccines and operating in over 100 countries worldwide. Despite a strong sales growth forecast for the next five years, the long-term drugs pipeline is weak. Investors were insisting that the company develop a coherent medium to long-term product portfolio development strategy which was balanced in terms of growth, value and risk and delivered the maximum long-term sustainable value.

The value cycle approach - FolioValue

A simulation model of the client’s pharmaceutical product portfolio and value chain was tailored for the client using the value cycle and Valculus' knowledge base. The ‘FolioValue’ simulation models all stages of R&D and marketing, tracking the progress of R&D projects and products across their full life cycles, over a 25 year planning horizon. The simulation also models probability success rates and the expected time phasing of each development stage. At its simplest, the simulation model provided a 'test-bed' for developing and testing alternative product development and acquisition strategies, including internal drug discovery, development of generics, in-licensing/out-licensing of technology and also M&A.

Most importantly the simulation model was transparent in the eyes of senior managers. In order to recognise uncertainly and to test for strategic risk, the model was rigorously tested at the extreme limits of control variables and ‘sanity-checked’ to develop confidence. The result was that the whole process was fully ‘owned’ in terms of model structure, data and resultant outputs. Valculus’ approach was therefore able to facilitate the communication of strategies (both new and old) across the whole organisation.

The impact on corporate value was assessed through a fully integrated financial model which attached costs and revenues to each and every stage of the R&D project lifecycle from discovery/in-licensing through launch to eventual generic status. The modelling approach was simply configured for client-specific valuation methods such as WACC and terminal value. In this manner, the physical portfolio value was tracked over time in respect of revenues, full P&L, cash flow and a wide range of KPI’s including ROS, ROI, growth, R&D productivity and gain.

Finally although specific to this particular client’s needs, the FolioValue simulation model is fully generic (and indeed configurable) to the needs of any pharmaceutical industry client.

Company conclusions

The simulations revealed a significant gap between desired growth and achievable growth in the mid-term (between 5 and 15 years). Conventional wisdom had suggested that the company could bridge any value gap either through a greater throughput of internal R&D projects, increasing the mix of generics in the product portfolio or in-licencing new technology. Fundamental physical constraints across the value chain meant that none of the approaches was a realistic and sustainable strategy. Indeed, no R&D strategy added more value than the option of simply 'milking' the exisiting portfolio of products.

Parent company conclusions

The parent organisation was naturally concerned by these conclusions and by the Board’s new strategy proposals. It concluded that the company might have a better future in the hands of a larger pharmaceutical company where the strategic ‘fit’ could add more value to the portfolio. Within 12 months of the conclusion of the strategy study, the parent successfully divested the company to another European major pharmaceutical company at a significantly higher value than the internal value of the portfolio.