- discussion of a client’s portfolio management objectives
- analysis and optimization of portfolio risk structure
- determination of value / risk and value / investment ratios
- project prioritization and resource allocation
- cash flow and pipeline analysis
- review and improvement of in and out-licensing strategy
- development of a portfolio management strategy that maximizes value
Portfolio management serves multiple objectives, e.g., maximization of value, balancing of risks, optimization of resource and capacity allocation, ensuring a rich development pipeline, providing guidance for in and out-licensing activities. Companies may weigh these objectives differently depending on their individual business situation. Therefore, Bioscience Valuation first discusses the predominant portfolio management goals of an organization. Typically, the first step is analyzing and optimizing a portfolio’s risk structure. Companies may prefer innovative and risky projects, or less innovative and therefore usually less risky projects, or a well-balanced approach.
Bioscience Valuation investigates individual projects, seeks ways to reduce the risk of failure, and then analyzes the overall portfolio. The analysis may include a Monte Carlo simulation of the portfolio resulting in estimates of success and failure probabilities. Bioscience Valuation may then suggest a concrete approach to improve a portfolio’s value and risk structure by proposing a well-defined pipeline and licensing strategy.
Depending on the client’s needs, Bioscience Valuation assesses a portfolio’s value / risk and value / investment ratios. The value / risk ratio determines how much value is produced per unit of risk (measured as the standard deviation of portfolio value). The ratio is roughly equivalent to the Sharpe ratio often used in finance to express an optimal balance of risk versus return.
An exclusive focus on value or return may not always lead to the optimal portfolio strategy if risk increases disproportionately. Likewise, a strict project prioritization only considering high NPV figures may lead to a suboptimal portfolio if the sum of projects with lower NPVs - that can be funded with the same budget - would result in a higher value portfolio.
When the portfolio has been evaluated individual projects are ranked according to their NPVs and productivity. Project productivity measures how much value is generated per investment; the selection of projects that provides the maximum productivity usually also ensures the highest portfolio NPV. If funds are scarce and not all NPV-positive projects can be started or continued, it is necessary to prioritize projects based on an individual project evaluation and in the context of a portfolio optimization strategy.
As a logic consequence of prioritization, some projects are out-licensed or partnered, or even abandoned or put to halt, and the allocation of the limited financial and human resources needs to be revised accordingly. If there are insufficient capacities in R&D or other functions to select the – from a pure financial point of view – optimal portfolio, either capacities are acquired or a different portfolio is chosen that may have a smaller NPV yet allows for optimal resource allocation. For example, it may not be wise to invest in three top priority projects for a particular indication that all consume the same resources, while for another indication resources are idle. Moreover, cash flows have to be well balanced and potential cash flow gaps have to be determined early. A significant cash flow gap may necessitate a further financing round or the issuance of new debt. Furthermore, a pipeline analysis allows management to anticipate a possible decline in sales early on, thus enabling management to act accordingly (e.g., by enhancing in-licensing activities).
The Bioscience Valuation team has extensive experience in portfolio optimization and has helped a number of companies to select and align their projects to capture maximum value from their assets and innovations.
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