new approach to pharma r&d / ppm
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Title of Presentation
Navigating the risk-return landscapeA new fully integrated approach to improve Pharma R&D productivity & project portfolio managementKelvin Stott PhDPharma R&D Portfolio Strategy, Risk & Decision Consultant
October 2012
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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OverviewThis presentation explores some of the underlying issues responsible for declining pharma R&D productivity, and provides a new, fully integrated approach to reverse this trend by navigating R&D projects and portfolios through the risk-return landscape in real time
A case study demonstrates how this system can be used in practice to improve the risk-return profile of a Phase 2 development project according to risk appetite
This presentation focuses on R&D in the pharmaceutical industry, however the approach can be used to manage and optimize the risk-return profile of any business asset at any stage of its lifecycle, at any level, in any industry
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Source: Bernstein Research, 2010R&D productivity has fallen by 99% over the past 60 years: cost is now >$5 billion per new drug!New technologies have done nothing to slow the steady decline in R&D productivityNote thelog scale!
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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R&D productivity has fallen by 80% over the past 10 years, with 40% output at double the cost
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Biggest cost is failure as success rates have fallen dramatically, especially in late development
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Yet Big Pharma has more resources and options than ever beforeMore money, capital people, FTEs skills, know-how data, information tools, technologies disease targets projects, partnersSo why is Pharma R&D productivity declining so rapidly?
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Increasing pressures in the pharma industry are squeezing R&D value creation from all sidesDiminishing profit window (Value/ROI)
Tighter regulationsLow reimbursementPricing pressuresIncreasing R&D costsHigher attrition ratesPatent expiriesGenerics and biosimilarsIncreasing R&D timelines (time to market)Decreasing R&D productivityDecreasing market potential
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Decreasing quality of new drug leadsTechnicalIncreasing standardsof careCommercial& regulatoryPharma R&D output has been hit by technical, commercial, regulatory & operational factorsDecreasing productivityIncreasing costs/projectIncreasing timelinesDecreasing success ratesDecreasing organizational effectivenessOperational
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Like drilling for oil, new drugs were initially more accessible, with lower risk and bigger returnsTechnical accessibilityPotential market by indication
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Over time, competition has raised standards and increased cost and risk of developing new drugsTechnical accessibilityPotential market by indication
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Remaining opportunities are technically more costly and risky, or have limited potentialTechnical accessibilityPotential market by indication
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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The quality of new drug leads has declined as the low-hanging fruit has been pickedCurrent drugs have already exploited the most obvious leads with the lowest risk and greatest potentialSmall molecules based on known active natural products, ligands, substrates, dietary ingredients & traditional medicinesRecombinant blood-based proteins to treat deficiencies in simple metabolic & genetic diseases (e.g., insulin, GH, factor VIII)Vaccines and antibodies against major pathogens, toxic proteins
Remaining opportunities are technically more challenging or have limited commercial potentialHighly complex diseases with no clear mechanism, target or leadTissue-based diseases with significant barriers to drug deliveryRare diseases and sub-types with existing drugs or limited market
Consequently, cost and risk have increased, like drilling for oil from less abundant, less accessible, lower quality sources
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Standards of care have steadily improved, raising the bar for new drugsIncreasing competitionMore safe and effective drugs have become available, raising the standard to compete for market shareGeneric competition is adding further pressure on drug prices
Improving regulatory standardsRegulatory standards are continuously evolving to ensure patient welfare over current treatments with longer more costly trials, as regulators learn to avoid past issues (e.g., safety recalls)
Increasing strain on healthcare budgetsSoaring healthcare costs are now considered unsustainable while payers & providers are under increasing pressure to reduce costs
Consequently, there has been increasing pressure to develop more safe and effective drugs at lower cost
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Generics & biosimilars:exact copies of existing drugs competing on price onlyPharma companies now face a strategic dilemma to take on more technical or commercial riskIncremental improvementsof existingdrugs based on established target/MoARevolutionary first-in-class treatmentsbased on new& unproven target/MoACombination therapies and improved formulations of existing drugsIncreasing technical risk (innovation)Increasing commercial risk (competition)Regardless of strategy, overall risk is increasing with time
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Top 10 organizational issues in Pharma R&DToo many ambiguous, conflicting goalsMisaligned performance metricsObjective bias and illusion of controlFundamental misunderstanding of riskLeft brain vs right brain mindsetOver-reliance on tools and processesManaging information in silosIgnoring key sources of informationOver-modeling discrete scenariosRisk-averse culture and leadership
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Issue 1: Too many ambiguous, conflicting goalsGet new products to marketMeet customer needsMaximize sales/profit/value/ROI/Minimize/manage riskMaximize probability of successOptimize time, cost, qualityDo the right projects, do them rightSupport the strategyManage resources effectively
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Ambiguous goals create conflict, confusion and raise too many questionsWhat are the right projects/products?Which customers? How to balance their needs?What to maximize: sales, profit, value, ROI?At what risk? What is risk?How to define & measure success, quality, etc.?If our goal is to support the strategy, what is the goal of the strategy? Tail wagging the dog?How flexible is the current plan/budget?How to prioritize when goals are not aligned?
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Issue 2: Misaligned performance metrics
PortfolioValue RISKProject Value RISKProject Value RISKProject Value RISKBalanced scorecardMeasured performanceShareholder interestsNo. approvals/milestones, time, cost, quality, etc.
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Basic performance metrics are incomplete, not aligned with shareholder interest in value & riskPerformance metrics are over-simplified and do not incorporate all key value/risk driversOften based on quantity and defined by simple short-term operational milestones, e.g.,No. of approvals/successful phase transitionsNo. of milestones achieved on time/budgetQuality is judged subjectively, or measured only in part, e.g., strategic fit, probability of successOverall performance is calculated as weighted average, does not correlate with value and risk
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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In reality, value and risk are complex, based on an intricate system of many value/risk drivers
Value/ROI RISKOperationalTechnical & regulatoryCommercialBD&LSales, P&L, cash flow forecasts RISKFinancialPoS by phaseProb. approvalR&D costs R&D timelinesLaunch dateCapexCOGSS&M costsG&A costsTarget patientsMarket shareAdoption rateDose & compl.Net priceNew entrantsGeneric entryOther factorsLicensing feesDev. mstonesSales mstonesRoyalty ratesDiscount rateDSI, DSO, DPOExchange ratesInflation ratesTax rates
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Issue 3: Objective bias and illusion of controlRealityPerceptionPositive bias(get drug to market)Negative bias(kill projects early)Drug has intrinsic potential to succeed (safe & effective)Drug is inherently unsafe, ineffective or uncompetitive?
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Objective bias at the project level (get a drug to market) destroys value by clouding judgementProbability of successDevelopment Time & Cost
Intrinsic potential
Perceived potentialBiased objectiveto succeedUnbiased researchCostly late-stage failureExcess costs saved for other projects
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Negative objective bias (kill projects early) also clouds judgement and destroys valueProbability of successDevelopment Time & Cost
Intrinsic potentialPerceived potentialUnbiased researchBiased objectiveto kill project earlyOpportunity cost
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Goal is to discover the true intrinsic potential of a drug candidate, not to make it succeed (or fail)Naturally, project teams want their projects to succeed, and set their goals to develop a superior drug that is both safe and effective.However, many seem to forget that the potential of a drug to be safe and effective is an intrinsic property of the molecule which is already built into the drug when it comes out of the research labs.Consequently, teams can over-estimate their own ability to develop a drug, and may defer or even avoid critical tests to determine its true potential in case they give a negative result. This results in costly late-stage failures when the drugs true potential ultimately reveals itself, as it always does (sometimes even after approval).Alternatively, teams may be encouraged to kill their projects early to avoid such costly late-stage failures, however this can have significant opportunity costs if good drugs are terminated before sufficient data is available to confirm their (lack of) intrinsic potential.Therefore, development teams must learn that their ultimate goal is to discover the intrinsic potential of a drug candidate, not to make it succeed or fail. This requires a brave, pioneering mindset to ask the right questions and test critical hypotheses in an unbiased, objective manner, in the true spirit of scientific discovery.
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Issue 4: Fundamental misunderstanding of riskRisk Prob. of Failure Potential Loss Risk-Adjusted Value
Scenario ValueDownside riskUpside riskProbabilityProbability of failureRisk-adjusted value (eNPV)Potential loss
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Risk is a key concept, critical to shareholders, yet poorly understood by most peopleShareholders are interested in risk as it relates to uncertainty (volatility) in their expected returnRisk is a function of both probability and impactRisk is the expected (probability-weighted average) deviation (impact) from the expected value/return across all potential scenariosBased on uncertainty in all potential value driversProbability (PoS) is a key value driver, but a poor and misleading indicator of riskPoS does not capture impact of success or failure on volatility in overall expected value/ROIExpected value increases linearly with PoS, but risk & uncertainty are greatest at 50% PoS (coin flip)
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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PoS is a key value driver, but a poor & misleading indicator of risk (uncertainty in value)0% PoSmin value, no risk100% PoSmax value, no risk50% PoSmid value, max riskPoS
Value/RiskExpected Value= PoS x Upside Value + (1-PoS) x Downside ValueDownside Risk= PoS x (1-PoS)x (Upside Value -Downside Value)Prob.Value
Prob.ValueProb.Value
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Example: Project A at 50% PoS is more risky than Project B with the same EV at just 25% PoSValue in $millionsProject AProject BProbability of Success50%25%Upside Value (potential gain)500700Downside Value (potential loss)-300-100Expected Value (1 project)100100Expected Loss15075Downside Risk vs EV200150Standard Deviation400346Mean Abs. Deviation400300Expected Value (10 projects)1,0001,000Expected Loss15694Downside Risk vs EV492451Standard Deviation1,2651,095Mean Abs. Deviation984901
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
32
Even the experts misjudge risk in the most clear and simple cases4 simple options have the same expected value of $100: Which is the MOST RISKY option?Gain $100 (100% probability)Gain $300 (75%) or lose $500 (25%)Gain $500 (50%) or lose $300 (50%)Gain $700 (25%) or lose $100 (75%)
13% of experts1 chose Option 1 as most risky26% chose Option 2 based on potential loss only26% chose Option 4 based on probability onlyOnly 35% chose correct Option 3 based on potential loss and probability combined2LinkedIn survey of over 800 professional risk managers, financial analysts and investorsGreatest risk according to all key risk metrics: expected loss ($150); downside risk vs EV ($200); standard deviation ($400); mean absolute deviation vs EV ($400)
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
33
Risk is uncertainty in value, based on uncertainty in all key assumptions/value drivers
Value/ROI RISKOperationalTechnical & regulatoryCommercialBD&LSales, P&L, cash flow forecasts RISKFinancialPoS by phaseProb. approvalR&D costs R&D timelinesLaunch dateCapexCOGSS&M costsG&A costsTarget patientsMarket shareAdoption rateDose & compl.Net priceNew entrantsGeneric entryOther factorsLicensing feesDev. mstonesSales mstonesRoyalty ratesDiscount rateDSI, DSO, DPOExchange ratesInflation ratesTax rates
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
34
Corporate Value RISKComm. portfolioValue RISKTA portfolio Value RISKTA portfolio Value RISKTA portfolio Value RISKTA portfolio Value RISKProject Value RISKProject Value RISKProject Value RISKProject Value RISKProduct Value RISKProduct Value RISKProduct Value RISKProduct Value RISKR&D portfolioValue RISKPortfolio risk is based on uncertainty in the value of each project (and all individual value drivers)
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
35
Issue 5: Left brain vs right brain mindset
Left & right brain work together
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
36
Left brain mindset increases risk, limits foresight and creative strategic problem solvingDetail-oriented, short-term thinking and analysis loses sight of the big picture and limits creativity & innovation to incremental improvements on current practiceImplementation of quick fixes and short-term processes without solving fundamental issues increases risk and complexity, causes more problems in the long term and creates a vicious cycle of continuous firefightingReliance on analyzing data to predict the future without incorporating intuition and imagination increases risk by assuming the future will look like the pastMain risk is that people are too busy watching the dials to look out the window when the train is about to crashHumans have evolved to manage risk by applying both left and right brain thinking; neither has been sufficient alone to survive, so it is critical to use both together
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
37
Issue 6: Over-reliance on tools and processes
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
38
Tools & processes can become self-serving and limit/discourage free thinkingTools and processes are implemented to help an organization achieve its objectives, however the organization often ends up supporting its tools & processes at the expense of its objectivesTools and processes usually introduce constraints that help to ensure consistency, however people tend to switch off their brains because they regard the tool/process as a substitute for free thinkingFinally, tools & processes are often implemented without proper foresight and testing, so they end up causing more problems than they solve
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
39
Issue 7: Managing information in silos
Project/Portfolio ManagerAnnualised S&Mcost forecasts by country/scenarioAnnualised sales forecasts by country/scenario
Bus. Intelligence
Sales & Marketing
BD&L / Finance
R&D teams
Tech. OperationsProduction cost forecasts by country/scenarioAnnualised R&D cost forecasts & attrition ratesBD&L / financial parameters by country/scenarioDiscrete assumptionsDiscrete assumptionsDiscrete assumptionsDiscrete assumptionsDiscrete assumptionsSo what? What if ?
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
40
Speed and quality of decisions are reduced as information is segregated and managed in silosIn order to manage great complexity, companies segregate and manage information in separate parts of the organization, but this creates silos by reducing connectivity and transparencyCompanies then develop more processes and hire interface managers to manage the flow of information between silos, however this increases complexity further by adding yet more interfaces, thus creating a vicious cycle.Moreover, organizations are primarily designed to manage people, projects & resources, rather than information as their ultimate business asset
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
41
Issue 8: Ignoring key sources of informationBottom-up analysisTop-down analysisInternal expertsExternal advisors
SkewShape
MeanSpread
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
42
Assumptions are based on limited data, ignoring other key sources of informationAll predictive models are based on assumptions, but the assumptions are often based on limited data and ignore key sources of information, for example:Probabilities of success are often over-estimated by teams believing that their projects are more likely to succeed than industry benchmarks, without considering that every team thinks the same about its own projects, and without asking external experts for a more balanced objective opinionExpected costs and timelines are often based on ambitious project plans, without taking into account a known history of project delays and budget deviationsFurthermore, the distribution of data is ignored where discrete assumptions are calculated as average expected values that are precisely wrong, while any uncertainty and sensitivities in the assumptions become invisible so that overall risk cannot be evaluated and managed
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
43
Issue 9: Over-modeling discrete scenarios
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
44
Restricting models to discrete scenarios leads to over-modeling with diminishing benefitsRisk is complex, includes continuous as well as discrete probability distributions, but models are usually based only on discrete scenarios & simple probabilitiesSuch discrete probability models do not include the full spectrum of potential scenarios, especially the rare and extreme outliers (black swans) as well as intermediate scenarios, so the temptation is to model more discrete scenarios in order to improve accuracyHowever, this costs more time and effort, and just adds more noise and complexity without increasing accuracy because the underlying data are ultimately limitedModeling with continuous probability distributions can solve this problem, but is not common practice
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
45
Risk is complex, includes discrete and continuous scenarios and probability distributions
Discrete
Continuous
Complex
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
46
Time & effortTemptation is to model more discrete scenarios, despite diminishing benefitsNo. scenarios modelled
TransparencyAccuracy
Perceived accuracyNoise and complexity
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
47
Modeling with continuous distributions can help solve this problem, but is not common practiceIncludes the complete spectrum of all possible scenarios, including intermediate scenarios and rare/extreme outliers (black swan events)Simple and transparent, with no more than 4 parameters to define the complete shape of uncertainty in each value/risk driverCan be easily modeled on historic data as well as the forward-looking intuition of experts (or even an integrated combination of the two)Supports automatic Monte Carlo simulations
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
48
Issue 10: Risk-averse culture and leadership
Risk-averse leaders continue to act in a safe way in order to further advance their careers in the companyRisk-averseleadershipRisk-aversedecisionsRisk-averse leaders make safe decisions by following the pack, avoiding risk in the new and unknownEmployees act in a safe manner to advance their careers, as risk-taking innovators get pushed out or fed up & quitRisk-aversebehaviourRisk-aversehiring & promotionEmployees are hired and then promoted based on their safe and steady track record, decisions and behaviour
RISK-AVERSECULTURE, RESISTANT TO CHANGE
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
49
Innovation and leadership require taking risks to step out from the pack and try the unknown
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
50
However, risk-averse companies select leaders by their safe career path, decisions and behaviour
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
51
Without realizing that risk-averse herd thinking can be anything but safe
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
52
Source: Bernstein Research, 2010Especially when the industry is facing the biggest challenge in its entire history...
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
53
Bobcat climbs cactus to escape hungry lionSometimes taking more risk is the safest, or only option to adapt and survive (just ask Kodak!)
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
54
Top 10 organizational issues: RecapToo many ambiguous, conflicting goalsMisaligned performance metricsObjective bias and illusion of controlFundamental misunderstanding of riskLeft brain vs right brain mindsetOver-reliance on tools and processesManaging information in silosIgnoring key sources of informationOver-modeling discrete scenariosRisk-averse culture and leadership
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
55
Direct consequences of organizational issuesInformation overloadIncreasing complexityCommunication issuesData/detail vs insightReduced transparencyDecreased objectivitySlow & poor decisions
Decreasing R&D productivity as the right things are not done at the right time
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
56
AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
57
Key elements of a complete solution to improve pharma R&D productivityClear, fully aligned strategic objectives and metrics based on a solid understanding of value & riskShift culture/mindset to more big picture thinking by integrating and automating information & data management to provide real insight in real timeFully integrated system to evaluate and manage risk-return profile of projects & portfolios in real timeAutomatically manages and integrates all key sources of data, including internal/external expert intuitionFully consistent, transparent & objective; incorporates uncertainty in all key value driversStrong leadership with a risk appetite to step out from the pack, challenge current thinking, and try the new & unknown (especially in recruitment)
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
58
AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
59
In war the goal is to navigate assets through the terrain and take control of strategic territory
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
60
In business the goal is to navigate assets through the risk-return landscape in line with risk appetiteRiskExpected Value/ROI
Risk appetiteAvailable optionsTarget profile
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
61
Each point on the risk-return landscape represents uncertainty in the expected value/returnExpected Value/ROIRisk
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
62
Where are your projects & products now on the risk-return landscape? Where is your portfolio?Risk
Phase 1projectsPhase 2projectsPhase 3projectsCurrentproducts
BD&L options
Expected Value/ROI
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
63
Risk appetiteTarget profileWhere do you want them to be? What is your risk appetite? Where is your target profile?Risk
Expected Value/ROI
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
64
Risk appetiteTarget profileHow do you get them there? What are the best options? Where will they take you?Risk
Available options
Expected Value/ROI
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
65
Imagine a military control center with the power & insight of current GPS & spy satellite systems
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
66
Imagine a similar system, acting as one brain to develop & evaluate strategic options in real timeInstant FeedbackAnalysisDiscussion
Options & Scenarios
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
67
-500.00.0500.01,000.01,500.00%10%20%30%40%50%60%70%80%90%100%
Value
Vmean
Vexp
Vmed
Vmin
Vmax
Risk threshold
2,000.02,500.0
17.020.018.215.015.015.02.80.50.00.00.00.00.00.00.00.05.010.015.020.025.0201120122013201420152016201720182019202020212022202320242025
Preclinical
Phase 1
Phase 2
Phase 3
Registrn.
Phase 4Providing clear and immediate insight to navigate any asset through the risk-return landscape
0.0200.0400.0600.0800.01,000.01,200.01,400.01,600.0
103.61,360.11,360.1697.0487.9487.961.8R&D CostsNet SalesG. MarginEBITNet ProfitCash FlowNPV
-30.0-20.0-10.00.010.020.030.040.050.060.070.080.0201220142016201820202022202420262028203020322034203620382040204220442046
R&D Costs
Net Sales
Margin
EBIT
Net Profit
Cash Flow
NPV
7.47.47.47.47.47.47.98.11.08.38.8-5.99.010.0-23.610.28.9-19.810.07.4-13.47.43.27.47.47.47.44.17.47.4-3.07.411.83.88.68.17.97.47.47.47.47.47.47.47.47.47.47.47.47.47.47.47.47.06.711.16.76.017.16.14.854.75.05.925.25.27.417.87.411.67.47.47.47.49.67.47.417.87.45.210.26.26.67.17.47.47.47.47.47.47.47.47.47.4-30-20-100102030405060Corp. tax rateProb. deferralInventory (DSI)Acc. receivableAcc. payableDiscount ratePhase durationTotal costsProb. successPhase durationTotal costsProb. successPhase durationTotal costsProb. successPhase durationTotal costsProb. successPhase durationTotal costsProb. successDelay to LaunchTotal patient popn.Annual increaseTarget segmentPeak patient shareCurrent shareAdoption rateUnits/patient/yearCompliance rateNet price/Unit at LInflation rateEvent probabilityExpected dateVolm decreasePrice decreaseRate of impactEvent probabilityExpected dateVolm decreasePrice decreaseRate of impactEvent probabilityExpected dateVolm decreasePrice decreaseRate of impact
Automatic sales, P&L & cash flow forecastsCumulative forecasts over any periodRisk-adjusted R&D costs by phase/yearMonte Carlo analysis of NPV, any P&L itemSensitivity analysis of key value/risk driversExplicit assumptions & probability distributions
INPUTScenarios & AssumptionsInput ParameterUnitDefaultScen. 1Scen. 2Scen. 3Scen. 4Scen. 5Scen. 6SDCorp. tax rate%30.0%Prob. deferral%Inventory (DSI)daysAcc. receivabledaysAcc. payabledaysNPVDiscount rate%8.5%Phase durationmo18.00.03.0Total costsM5.00.01.0Prob. success%75.0%100.0%Phase durationmo24.00.04.0Total costsM15.00.03.0Prob. success%65.0%100.0%Phase durationmo30.05.0Total costsM50.010.0Prob. success%30.0%Phase durationmo42.07.0Total costsM175.025.0Prob. success%70.0%Phase durationmo18.06.0Total costsM5.01.0Prob. success%80.0%TimingDelay to LaunchmoTotal patient popn.K1,000.0100.0Annual increaseKTarget segment%100.0%Peak patient share%100.0%Current share%Adoption rate%40.0%10.0%Units/patient/yearN1.0Compliance rate%100.0%Net price/Unit at L400.00100.00Inflation rate%Event probability%80.0%Expected datemo21.2.203236.0Volm decrease%50.0%10.0%Price decrease%20.0%10.0%Rate of impact%50.0%10.0%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Event probability%Expected datemoVolm decrease%Price decrease%Rate of impact%Accounting parametersWCapGlobal R&DPhase 2Phase 3TaxPreclinicalPhase 1UnitsRegistrn.PatientsEvent 5Sales growth without special risks & eventsPriceSpecial risks & eventsEvent 6Event 8Event 7Generics & biosimilarsEvent 2Event 3Event 4
Target profile
Available options
Risk appetite
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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AgendaPharma R&D productivity crisisFundamental issues & insightsPharma industry challengesTop 10 organizational issuesKey elements of a complete solutionA new fully integrated approachConceptProcessCase study: Phase 2 projectConclusion & key messages
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Risk-return profiles are managed and optimized by a continuous iterative processEvaluate risk-return profile of current planEvaluate risk-return profile of options & scenariosSelect best option(s) based on risk-return profileExecute updated plan and monitor progress
EVALUATE PROGRESSEVALUATE OPTIONSMAKE DECISIONSEXECUTE DECISIONS
RISK-RETURNOPTIMIZATION
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Expected value & ROI are calculated based on all potential value drivers (assumptions)
Value& ROIOperational value driversTechnical & regulatoryCommercial value driversBD&Lvalue driversSales, P&L, cash flow forecastsFinancial value driversPoS by phaseProb. approvalR&D costs R&D timelinesLaunch delayCapexCOGSS&M costsG&A costsTarget patientsMarket shareAdoption rateDose & compl.Net priceNew entrantsGeneric impactOther factorsLicensing feesDev. mstonesSales mstonesRoyalty ratesDiscount rateDSI, DSO, DPOExchange ratesInflation ratesTax rates
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
71
Uncertainty in each value driver is modeled by a 4-parameter distribution fit to all available dataBottom-up analysisTop-down analysisInternal expertsExternal advisors
SkewShape
MeanSpread
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
72
The probability distribution of each value driver is fed into the valuation model
Value& ROIOperational value driversTechnical & regulatoryCommercial value driversBD&Lvalue driversSales, P&L, cash flow forecastsFinancial value driversPoS by phaseProb. approvalR&D costs R&D timelinesLaunch delayCapexCOGSS&M costsG&A costsTarget patientsMarket shareAdoption rateDose & compl.Net priceNew entrantsGeneric impactOther factorsLicensing feesDev. mstonesSales mstonesRoyalty ratesDiscount rateDSI, DSO, DPOExchange ratesInflation ratesTax rates
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
73
The expected value distribution is calculated by Monte Carlo simulation to evaluate riskValue (NPV)Probability
Expected value (eNPV)Downside riskUpside risk
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
74
Target profile
The risk-return profile is plotted on the risk-return landscape to represent uncertainty in value/ROIRiskExpected Value/ROI
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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Options are developed by creativity and intuition, based on sensitivity of key value/risk driversProject value/ROI riskValue driver
Phase 3 PoS
R&D timelines
Phase 2 PoS
Market share
R&D costs
Generic impact
COGSUncertainty
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
76
Options are quickly evaluated by modifying only the relevant value/risk drivers (assumptions)
Value& ROIOperational value driversTechnical & regulatoryCommercial value driversBD&Lvalue driversSales, P&L, cash flow forecastsFinancial value driversPoS by phaseProb. approvalR&D costs R&D timelinesLaunch delayCapexCOGSS&M costsG&A costsTarget patientsMarket shareAdoption rateDose & compl.Net priceNew entrantsGeneric impactOther factorsLicensing feesDev. mstonesSales mstonesRoyalty ratesDiscount rateDSI, DSO, DPOExchange ratesInflation ratesTax rates
Kelvin Stott 2012
10/25/2012 12:45 AM 2007 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market cond