New Approach to Project Portfolio Management …

1 Hitachi Review (April 2005) 57 New Approach to Project Portfolio Management for NewDrug DevelopmentOVERVIEW: Regulatory harmonization, driven by the ICH regulatorycommittee founded in 1991, established an infrastructure for pharmaceuticalfirms to make global use of their clinical test data for registering new drugsin Japan, the USA, and the European Union (EU). This deregulation forcespharmaceutical firms to face stiff competition in the world market. Therefore,it is important to be able to efficiently manage individual projects to maximizethe expected profits within a tolerable risk limit.

2 It is also essential to balancethe profits and risks of their Project Portfolio because of the many otherscheduled projects in it. Hitachi has applied a risk budgeting concept tomanage the assets of pension funds. This financial Management concept/technique is a scientific solution to Portfolio Management , because it enablesfund managers to control the financial risks at the Portfolio and individualasset levels to maximize profits. The concept of risk budgeting has an excellentpotential for application to managing the Project portfolios ofpharmaceutical firms.

3 Hitachi provides comprehensive solutions topharmaceutical clients with its new-drug- development Project -managementsolutions/new-drug-dev elopment Management -support system and projectportfolio Management techniques developed through advanced KuboJunko ItoYusuke KawaiYasuhiro KobayashiINTRODUCTIONREGULATORY harmonization, driven by ICH* since1991, established an infrastructure for pharmaceuticalfirms to make global use of their clinical test data toregister new drugs in Japan, the USA, and the EuropeanUnion (EU). Deregulation has forced pharmaceuticalfirms to face stiff competition in the world market.

4 Itis important for these firms to manage individualprojects efficiently to maximize their expected profitswithin a tolerable risk limit. It is essential for them tobalance the profit and risk of their Project Portfolio ,because of the large number of scheduled projects provides comprehensive solutions toportfolio Management clients in the pharmaceuticalindustry at the Portfolio and the individual projectlevels. Our solution will help assure them of profit,while controlling their Project Portfolio risks to enablethem to maximize their profit within tolerable risklevels for new drug DRUG DEVELOPMENTS AND RISKMANAGEMENTNew Drug DevelopmentsFig.

5 1 shows the process of new drug development ,in which a specific chemical in the research phase istested for use in a pharmaceutical product. Thedevelopment phase consists of five stages: Preclinicaltesting, Phase I, Phase II, Phase III and Approval. It usually takes more than ten years toFig. 1 New Drug development process for new drug development consists of five stagesthat follow the research for laboratory animalsChoice of prospective chemicals for new drugsResearchDevelopmentPhase IToxicity test for healthy peoplePhase IIClinical test for small groupPhase IIIC linical test for large groupApprovalReviewed by regulatory agencies* International Conference on Harmonization of Technical Requirementsfor the Registration of Pharmaceuticals for Human UseNew Approach to Project Portfolio Management for New Drug development

6 58risk of their Portfolio and the actual risks taken bytheir fund has already applied this concept to feasiblemathematical problems and implemented a fast solver/solution. Hitachi has also applied them to actualpension asset Management Budgeting in New Drug DevelopmentIt is possible for pharmaceutical firms to apply therisk budgeting concept to their Project portfoliomanagement. Allocating expected profits and tolerablerisks to each development Project helps them controlthe total risk of their Portfolio under tolerable addition, Project Portfolio Management leads tocontinuous Portfolio restructuring whenever a projectpasses or fails a stage (see Fig.)

7 4). The concept of riskbudgeting, therefore, has strong potential forapplications to Project Portfolio Management inpharmaceutical all stages. Therefore, the budgets andresources for the Project must be carefully plannedand managed. We expect that the investments in new drug projectswill be rewarded by their future potential returns afterthe product is put on the market (see Fig. 2). However,there are far fewer successful projects than there areunsuccessful ones in the pharmaceutical industrybecause of the many critical business risks.

8 Therefore,pharmaceutical firms keep several dozens of projectsin their Project Portfolio to stabilize their long-termbusiness earnings. They must also maintain a goodbalance in the profit and risk aspects of their in New Drug DevelopmentNew drug developments are exposed to two typesof risks as below:(1) Technical risks: serious side effects, less effectivethan existing products(2) Market risks: volatility of drug prices, gettingbeaten by a competitorTo reduce these risks, pharmaceutical firms can:(1) Suspend or postpone risky projects(2) Adapt effective/existing chemicals for otherdiseases or forms(3) Develop jointly with another firm(4) Buy external projects and sell internal projectsHowever, they also need more choices at theportfolio Management level to attain Management IN NEW DRUGDEVELOPMENTSRisk BudgetingIn pension asset Portfolio Management , fundmanagement facilities allocate their assets to fundmanagers, who are responsible for investing theseassets in bonds or securities.

9 The allocation decisionshould be made considering the expected profits andrisks in their Portfolio . However, the actual risk maybe different from the expected one, because it ispossible for fund managers to take greater or fewerrisks than expected in conventional budgeting is a revolutionary concept forpension asset Management . Based on this Approach ,each manager is assigned both assets and tolerable risks(see Fig. 3), and they can then invest the assets underthe tolerable risk limit. Therefore, this helps fundmanagement facilities track the gap between the totalFig.

10 2 Investments and Profits in New Drug in new drug projects are expected to produce futuregains after the product is put on the 3 Risk Budgeting in Pension Assets Management facility allocates assets and tolerable risks toeach fund manager, who then invests the assets in to18 yearsInvestmentsProfitsPreclinicaltestin gApprovalFor salePhaseIPhaseIIPhaseIIIM anager AManager BAssetsTolerable risksManager NFund Management facilityHitachi Review (April 2005) 59 Value and Risk Measurement of New DrugDevelopmentAs far as the technical risks are concerned, the valueand risk of a new drug Project could be measured fromhistorical success probabilities at all stages.