An Example in Portfolio Management Continued

Under circumstances this risky, in which costs of failure are huge, and success is never certain, it is mandatory that pharmaceutical firms use highly sophisticated project portfolio management to ensure a steady supply of new drugs in the pipeline, for the simple reason that because failure rates are high and wash-outs are constant, the need for a continuous set of new drug opportunities is critical.

An illustrative example of this development process, which resembles a funnel, is shown in Figure 8.2.5.  Drug companies anticipate the lengthy lead times necessary to get final approval on a new drug by simultaneously funding and managing literally scores of development efforts.  The expectation is that some small proportion of the R&D portfolio will show sufficient promise and move ahead to clinical trials.  Many of the projects are further weeded out during clinical phases, resulting in ever smaller and smaller numbers of projects moving to final commercial rollout.

Pfizer uses portfolio management in order to actively manage the flow of development projects through their operations, much as Nokia or Erickson use a similar approach for keeping track of their product lines.  These portfolios of projects are necessary because some percentage of projects will be cancelled prior to full funding, others will be eliminated during development, and another set will likely suffer poor commercial results, leaving some few projects responsible for the firm’s return on investment.  Put another way, the company that puts all its eggs in one basket in the form of a single project, runs huge risks should the project fail or prove a disappointing performer in the marketplace.  Rather than take the risk, creating and constantly addressing and updating a portfolio of projects offers companies fallback options, greater financial stability, and the chance to respond to multiple opportunities.