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. Kelvin Stott PhD Pharma R&D Portfolio Strategy, Risk & Decision Consultant BPE Pharma Summit London, 27 February 2013 ©KelvinStott2013
- 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. Source: PhRMA ©KelvinStott2013
- 4. Decreasing Technical quality of new Decreasing drug leads success rates Increasing Commercial Increasing Decreasing standards & regulatory costs/project productivity of care Increasing Decreasing timelines Operational organizational effectiveness Poor decisions due to misunderstanding of risk ©KelvinStott2013
- 5. How to define risk? How to measure it? How to manage it? ©KelvinStott2013
- 6. “Effect of uncertainty on objectives” ©KelvinStott2013
- 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. Business & Shareholders Maximize Actual Net Value Added (NPV or ROI) Customers (Patients, Physicians, Regulators, Payers & Providers) Maximize Actual Net Health Benefit vs Cost 1. Business objective absolutely depends on customer objective as key value driver (win-win) 2. Actual outcome ≠ Expected outcome 3. Potential difference is based on risk ©KelvinStott2013
- 9. Expected Value/ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory Product claims R&D costs Target patients Licensing fees Discount rate PoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPO Prob. 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. Value/ROI ± RISK Sales, P&L, cash flow forecasts ± RISK Technical & Operational Commercial BD&L Financial regulatory Product claims R&D costs Target patients Licensing fees Discount rate PoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPO Prob. 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. 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 ± RISK Project 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. Available options Risk Risk appetite Expected Value/ROI ©KelvinStott2013
- 13. Available options Risk Risk appetite Expected Net Health Benefit vs Cost ©KelvinStott2013
- 14. Risk Expected Outcome ©KelvinStott2013
- 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 what Key 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. 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 laws Unknown knowns Certain facts that others know but we don’t Based on information asymmetry or poor communication Unknown 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. Discrete Complex Continuous ©KelvinStott2013
- 18. Scenario Upside Value volatility risk Expected Downside value (eNPV) volatility risk Probability ©KelvinStott2013
- 19. Scenario Value Expected value (eNPV) Probability Downside tail risk ©KelvinStott2013
- 20. Scenario Upside Value volatility risk Expected Downside value (eNPV) volatility risk Probability Maximum Downside Probability loss tail risk of failure ©KelvinStott2013
- 21. Expected Value Value = 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. 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 combined2 1. LinkedIn survey of over 800 professional risk managers, financial analysts and investors 2. 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. Phase 3 projects Current products Risk BD&L options Phase 2 projects Phase 1 projects Expected Value/ROI ©KelvinStott2013
- 24. Available options Risk Risk appetite Expected Value/ROI ©KelvinStott2013
- 25. DEVELOP & EVALUATE EVALUATE PROGRESS OPTIONS RISK-RETURN OPTIMIZATION MAKE EXECUTE DECISIONS DECISIONS ©KelvinStott2013
- 26. Value & ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory value drivers value drivers value drivers value drivers Product claims R&D costs Target patients Licensing fees Discount rate PoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPO Prob. 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. Top-down External analysis advisors Bottom-up Internal analysis experts Mean Spread Skew Shape ©KelvinStott2013
- 28. Left and right brain must work together ©KelvinStott2013
- 29. Value & ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory value drivers value drivers value drivers value drivers Product claims R&D costs Target patients Licensing fees Discount rate PoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPO Prob. 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. Scenario Upside Value volatility risk Expected Downside value (eNPV) volatility risk Probability ©KelvinStott2013
- 31. Risk Risk appetite Expected Value/ROI ©KelvinStott2013
- 32. Value driver Uncertainty Project value/ROI ± risk Phase 3 PoS R&D timelines Phase 2 PoS Market share R&D costs Generic impact COGS ©KelvinStott2013
- 33. Value & ROI Sales, P&L, cash flow forecasts Technical & Operational Commercial BD&L Financial regulatory value drivers value drivers value drivers value drivers Product claims R&D costs Target patients Licensing fees Discount rate PoS by phase R&D timelines Market share Dev. m’stones DSI, DSO, DPO Prob. 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. Risk Risk appetite Expected Value/ROI ©KelvinStott2013
- 35. Risk Risk appetite Expected Value/ROI ©KelvinStott2013
- 36. Negative Positive data data Risk Expected Value/ROI ©KelvinStott2013
- 37. EVALUATE EVALUATE OPTIONS PROGRESS Research Preclinical Clinical Approval Lifecycle & discovery developmt. developmt. & Launch managemt. MAKE EXECUTE DECISIONS DECISIONS ©KelvinStott2013
- 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. ©KelvinStott2013
- 40. ©KelvinStott2013
- 41. Source: Bernstein Research, 2010 ©KelvinStott2013
- 42. Bobcat climbs cactus to escape hungry lion ©KelvinStott2013
- 43. Risk-averse Risk-averse decisions leadership RISK-AVERSE CULTURE, RESISTANT TO CHANGE Risk-averse Risk-averse hiring & behaviour promotion ©KelvinStott2013
- 44. Increasing technical risk (innovation) Revolutionary Incremental Generics and Combination first-in-class improvements biosimilars: therapies and treatments of existing exact copies of improved based on new drugs based on existing drugs formulations of and 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. Pharma companies will need to take more risk in the short term – but manage it better, smarter – in order to innovate, adapt and survive in the long term ©KelvinStott2013
- 46. Risk is expected deviation from expected value, based on uncertainty in all value drivers Goal is to optimize risk-return profile of assets according to stakeholder risk appetite Continuous process of developing & evaluating options to navigate risk-return landscape Applies to all assets, at every level, every stage Risk is critical for change & innovation, requires great courage by individuals (i.e., you) R&D is risk management: Manage the risks, the objectives will take care of themselves ©KelvinStott2013
- 47. kelvin.stott@gmail.com www.linkedin.com/in/kelvinstott ©KelvinStott2013