The Use of Decision Tools in Biotechnology Project and Portfolio
Decision Making
Svetlana Sigalova
Vertex Pharmaceuticals Inc
1
©2010 Vertex Pharmaceuticals Incorporated
Table of Contents
 Background
 Introducing decision tools & analytics to Vertex’s corporate strategy process
 Deep dive: building the tool to support the portfolio planning process & LRP
 Expanding the tools: wins in one area cause a “viral” spread to other groups
2
©2010 Vertex Pharmaceuticals Incorporated
Vertex Pharmaceuticals Inc.
History
• Founded in 1989, public in 1991 (ticker: VRTX)
• Developed 2 HIV drugs to date, commercialized by GSK
Vertex Historical Performance
$45
Pipeline
• 2 drugs in Ph.3 trials: HCV & Cystic Fibrosis
• 4 drugs in Ph.2 trials
• 2009 R&D expense - $551M
3
©2010 Vertex Pharmaceuticals Incorporated
8.5
6.8
Price Per Share
Market Capitalization, Billions
Financials
• 1 profitable quarter
• Over $3B in cumulative losses to date
• Raised over $1B in the last 2 years (43% stock dilution)
• NASDAQ 100 index best performing stock in 2008
6.2
4.7
4.9
4.6
4.7
3.4
$0
1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09
Share Price
Market Cap
My Background
• Raised in Moscow, Russia
• Moved to US to go to college
• Changed 3 industries prior to joining the world of biotech
• No math / science / excel modeling background
• Internship with Vertex during second year of MBA
• Currently work in the strategic finance
4
©2010 Vertex Pharmaceuticals Incorporated
Introducing Decision Tools into Corporate Strategic Planning
2005
• Basic LRP Model
2006 - 2007
• Scenario based planning with expected values / probabilization
2008 - 2009
• Introduce decision tools concepts & outputs to existing scenario based planning
2010
5
• Utilize decision tool & process to better test key drivers & assumptions
• Use tools more broadly
©2010 Vertex Pharmaceuticals Incorporated
Applying Decision Tools within Corporate Strategy & Analytics
Used for
• Long-range planning
• Portfolio optimization process
How
• Revenue & growth projections
• Budgeting
• Resource Allocation
Why
• Prepare for the “what if” outcomes
• Provide key stakeholders with a range of outcomes
• Align corporate goals with portfolio strategy
Fun Facts
6
• Long-range planning takes place once a year
• Portfolio process takes place twice a year
• All functions of the company get involved
©2010 Vertex Pharmaceuticals Incorporated
Building a Portfolio Tool for Vertex
What
• Dynamic revenue and expense forecasting methodology
• Monte-Carlo simulation
Why
•
•
•
•
Fun Facts
7
Show boundaries
Vertex portfolio was expanding - binary scenarios becoming too numerous
Provide better “risk-adjustment” process
Take into consideration key stakeholders’ risk tolerance
• No excel modeling experience prior to this project
• Academic knowledge of finance (not applicable to this project)
• Lots of internal and external help whenever possible
©2010 Vertex Pharmaceuticals Incorporated
Building a Portfolio Tool for Vertex
How does
it work?
Outputs
Fun Facts
8
•
•
•
•
Key assumptions from the long-range plan
Simulate pass or fail by stage, for each program
Some simulation of commercial outcomes
Certain programs are correlated
• Program contribution (revenue, development costs, EBIT)
• Both strategic outputs & operational metrics
• 10th, 90th & 50th percentiles
•
•
•
•
3mo to build & 1.5yrs of continuous revision
Original model was 25MB & took 3+ hrs to run
Runs one scenario at a time (26 assets x 6 outcomes for each asset)
Need approx. 23,000 iterations
©2010 Vertex Pharmaceuticals Incorporated
Communicating Results to Non - Statisticians
How
Why was it
successful?
Fun Facts
9
• Know your audience
• Simple and easy to read outputs – no statistics background necessary
• Added simulation results to an already established process
•
•
•
•
Simplicity
Identified and focused on what’s important
Introduced new concepts at the right time
Implemented tools one process at a time
• Explained the difference between Monte-Carlo and Latin Hypercube
sampling to a senior executive
• Once the tool was complete, the whole group took Palisade training online
©2010 Vertex Pharmaceuticals Incorporated
Corporate Strategy: Sample Outputs
Revenue ($B)
10&90th Percentiles
Sc.1
Sc.2
How likely is particular scenario to
occur?
Sc.3
Time
EBIT ($B)
Corporate Goal
Conservative, Median
Aggressive, Median
Conservative approach is unlikely to
meet corporate goals, given current
portfolio assumptions
Conservative, 90th Percentile
Time
10
©2010 Vertex Pharmaceuticals Incorporated
Prob. Density
Portfolio Tool: Sample Outputs
Millions
Std Dev
Millions
Key takeaways
Without a crisp analysis summary any tool could become obsolete.
Know your objective & goal upfront. It will save you a lot of “downtime”.
11
©2010 Vertex Pharmaceuticals Incorporated
Adjusting for Risk using Monte-Carlo Simulation
Traditional eNPV Calculation Method
Traditional P&L
($M)
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Product Revenue
Gross Margin
2010
-
-
-
-
-
-
64
54
432
358
506
416
818
661
677
549
571
465
478
391
404
334
353
293
321
268
91
77
44
38
15
12
14
12
14
12
Total Costs
Operating Profit
23
(23)
19
(19)
42
(42)
40
(40)
95
(95)
81
(81)
49
5
40
318
32
384
26
636
26
523
26
439
26
366
26
308
26
267
26
242
3
75
1
36
Tax
Net Profit
(23)
(19)
15
(57)
15
(55)
34
(130)
29
(111)
19
(15)
114
203
138
246
229
407
188
335
158
281
132
234
111
197
96
171
87
155
27
48
13
23
NPV ($M)
443
Stage
Preclin
Phase1
Phase2a
Phase2b
Phase3
USFiling
Cumulative
2011
2012
2013
2014
2015
-
-
-
12
12
12
4
8
4
8
4
8
Portfolio Tool Risk-adjustment Method
Start
POS Cume
2007 100% 100%
2007.75 100% 100%
2010.25 56% 56%
2012.5 60% 34%
2014.25 75% 25%
2016 90% 23%
23%
Probability of starting Ph 3: probability of Ph 2a x probability of Ph 2b
or 56% x 60% = 34%
Probability of incurring costs in 3Q 2012: 34%
Probability of incurring revenues (launching the drug): 23%
Problem:
Traditional risk-adjustment method shows only a portion of costs/revenue associated with the drug. When failing a stage, company
incurs all of the development costs associated with that stage and not just “62%” of the cost.
When drug is approved, company incurs all of the revenue and not just “23%” of it.
Risk – adjusted P&L
2016
25%
2017
23%
2018
23%
2019
23%
2020
23%
2021
23%
2022
23%
2023
23%
2024
23%
2025
23%
2026
23%
2027
23%
2028
23%
2029
23%
Product Revenue
Gross Margin
-
-
-
-
-
-
16
14
99
82
116
96
188
152
156
126
131
107
110
90
93
77
81
67
74
62
21
18
10
9
3
3
3
3
Total Costs
Operating Profit
23
(23)
19
(19)
23
(23)
23
(23)
32
(32)
28
(28)
12
1
9
73
7
88
6
146
6
120
6
101
6
84
6
71
6
62
6
56
1
17
0
8
Tax
Net Profit
(23)
(19)
8
(32)
8
(31)
12
(44)
10
(38)
5
(4)
26
47
32
56
53
94
43
77
36
65
30
54
26
45
22
39
20
36
6
11
3
5
eNPV ($M)
61
Probability
2010 2011
100% 100%
2012
56%
2013
56%
2014
34%
2015
34%
-
3
3
1
2
1
2
2030
23%
3
3
Portfolio Tool Approach
Iteration Outcome
1 Fail in Ph 2a
3
2 Fail in Ph 2b
1
2
3 Fail in Ph 3
4 Fail in Regulatory
5 Launch the drug
2010
(6)
(23)
(15)
(15)
(23)
2011
(19)
(19)
(19)
(19)
2012
(16)
(57)
(57)
(57)
2013
(55)
(55)
(55)
2014
(42)
(130)
(130)
2015
(111)
(111)
2017
203
2018
246
2019
407
2020
335
8
Solution:
Simulate pass / fail by stage. Incur all of costs/revenue for that time period if the drug “passed” the stage.
Estimate “true average” eNPV of a project
© 2010 Vertex Pharmaceuticals Incorporated
By asset, eNPV & 50th percentile line should converge.
Then overlay scenarios to relate back to senior management.
© 2010 Vertex Pharmaceuticals Incorporated
12
2016
(15)
©2010 Vertex Pharmaceuticals Incorporated
18
Table of Contents
 Background
 Introducing decision tools & analytics to Vertex’s corporate strategy process
 Deep dive: building portfolio tool to support the portfolio planning process & LRP
 Expanding the tools: wins in one area cause a “viral” spread to other groups
13
©2010 Vertex Pharmaceuticals Incorporated
Using Palisade Suite Outside of Corporate Finance
14
Who
• Business development team
• Commercial group
• Scientists & program leaders
What
• Bidding & term sheet process
• Sales forecasting (share, price, competition)
• Sensitivity analysis
How
• @ Risk
• Top Rank
• Precision Tree
Why
•
•
•
•
Ability to show multiple outcomes with assigned probabilities
Generate average of outcomes
Identify key drivers and pressure-test assumptions
Educate non-finance audience about the effect of assumptions
©2010 Vertex Pharmaceuticals Incorporated
Appendix
Corporate Finance
March 2010
15
©2010 Vertex Pharmaceuticals Incorporated
Corporate Budgeting: Sample Output
Budget Proxy
90th Percentile (All Succeed)
Accounting for risk, the portfolio investment plan for . . .
Mean (Risk-Adj)
Millions
• Year 1: Falls right within the budget
• Year 2: Leaves small budget cushion
• Year 3: Opportunity to invest aggressively
Year
1
Year
2
Year
3
Decision tools help to improve the corporate budgeting processes
16
©2010 Vertex Pharmaceuticals Incorporated
Informing Business Development Process using @Risk
Define Variables for simulation
Monte Carlo Analysis Output
eNPV (after-tax)
Base
Range
Discount Rate
X%
7% - 10%
POS (Cumulative)
22.5%
15% - 30%
Price
$XK
-5K / +10K
Market Share
X%
Prob. of Early Launch * X%
25% - 45%
0% - 2x%
1
X% VRTX Win
$XXXM
0.8
Probability of VRTX Win
Base Assumptions
0.6
0.4
0.2
Bid (Millions)
Simulation can help to inform the bid strategy
17
©2010 Vertex Pharmaceuticals Incorporated
X% VRTX Lose
Sensitivity Analysis using Top Rank
eNPV Sensitivity Analysis
Impact by Input
Efficacy (Penetration)
Pricing (X, XX, 2.5X)
Launch Timing (+/- 1y r)
Ph2 PoS (+/- 10%)
Percent Change from Base
Help the team focus on key drivers of the program value.
18
©2010 Vertex Pharmaceuticals Incorporated
300%
250%
200%
150%
100%
50%
0%
-50%
-100%
-150%
Total Dev l Costs (+/- 50%)
Creating “weighted” Commercial Forecast with @Risk
Base Case
• Price = branded products
• Novel oral peak @RISK
share <Trial
XX Version
• VRTX shareFor
of novel
oral <Purposes
XX
Evaluation
Only
Lower Bound Sensitivity Range
Upper Bound Sensitivity Range
• Price < 30% vs. branded products
• Price = branded products
• Novel oral peak share < X
• Novel oral peak share ~3X
• VRTX share of novel oral < X
• VRTX share of novel oral > X
Product Peak Sales (Millions)
Sensitivity ranges reflect risk and opportunities in the commercial profile of the program
19
©2010 Vertex Pharmaceuticals Incorporated
Program Valuation using @Risk
Program Value
90.0%
5.0%
Indication “A”
5.0%
Program Value
Regression - Mapped Values
Net Price
Product share
Indication
“A”
has
5x greater impact on the
@RISK
Trial
Version
For
Evaluation
Purposes
Onlyother indication
program value than any
Other indications
@RISK
Mean pre-tax
eNPV Trial
$XVersion
For Evaluation Purposes Only
90% Confidence Range $.8X – $1.6X
Therapy peak share
Program eNPV (Millions)
Longer right tale indicates the upside
potential outweighs the downside risks
20
©2010 Vertex Pharmaceuticals Incorporated
eNPV Sensitivity (Millions)
No commercial assumptions outside of indication
“A”, can move value by greater than 10M
Traditional eNPV Calculation Method
Traditional P&L
($M)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
15
12
14
12
14
12
Product Revenue
Gross Margin
-
-
-
-
-
-
64
54
432
358
506
416
818
661
677
549
571
465
478
391
404
334
353
293
321
268
91
77
44
38
Total Costs
Operating Profit
23
(23)
19
(19)
42
(42)
40
(40)
95
(95)
81
(81)
49
5
40
318
32
384
26
636
26
523
26
439
26
366
26
308
26
267
26
242
3
75
1
36
Tax
Net Profit
(23)
(19)
15
(57)
15
(55)
34
(130)
29
(111)
19
(15)
114
203
138
246
229
407
188
335
158
281
132
234
111
197
96
171
87
155
27
48
13
23
NPV ($M)
443
Stage
Preclin
Phase1
Phase2a
Phase2b
Phase3
USFiling
Cumulative
Start
POS Cume
2007 100% 100%
2007.75 100% 100%
2010.25 56% 56%
2012.5 60% 34%
2014.25 75% 25%
2016 90% 23%
23%
-
-
-
12
12
12
4
8
4
8
4
8
Probability of starting Ph 3: probability of Ph 2a x probability of Ph 2b
or 56% x 60% = 34%
Probability of incurring costs in 3Q 2012: 34%
Probability of incurring revenues (launching the drug): 23%
Risk – adjusted P&L
Probability
2010 2011
100% 100%
2012
56%
2013
56%
2014
34%
2015
34%
2016
25%
2017
23%
2018
23%
2019
23%
2020
23%
2021
23%
2022
23%
2023
23%
2024
23%
2025
23%
2026
23%
2027
23%
2028
23%
2029
23%
2030
23%
3
3
3
3
3
3
Product Revenue
Gross Margin
-
-
-
-
-
-
16
14
99
82
116
96
188
152
156
126
131
107
110
90
93
77
81
67
74
62
21
18
10
9
Total Costs
Operating Profit
23
(23)
19
(19)
23
(23)
23
(23)
32
(32)
28
(28)
12
1
9
73
7
88
6
146
6
120
6
101
6
84
6
71
6
62
6
56
1
17
0
8
Tax
Net Profit
(23)
(19)
8
(32)
8
(31)
12
(44)
10
(38)
5
(4)
26
47
32
56
53
94
43
77
36
65
30
54
26
45
22
39
20
36
6
11
3
5
eNPV ($M)
61
21
©2010 Vertex Pharmaceuticals Incorporated
-
-
-
3
3
3
1
2
1
2
1
2
Portfolio Tool Risk-adjustment Method
Problem:
Traditional risk-adjustment method shows only a portion of costs/revenue. When failing a stage, incur all of
the development costs associated with that stage and not just “62%” of it.
When drug is approved, company incurs all of the revenue and not just “23%” of it.
Portfolio Tool Approach
Iteration Outcome
1 Fail in Ph 2a
2 Fail in Ph 2b
3 Fail in Ph 3
4 Fail in Regulatory
5 Launch the drug
2010
(6)
(23)
(15)
(15)
(23)
2011
(19)
(19)
(19)
(19)
2012
(16)
(57)
(57)
(57)
2013
(55)
(55)
(55)
2014
(42)
(130)
(130)
2015
(111)
(111)
2016
(15)
2017
203
2018
246
2019
407
2020
335
Solution:
Simulate pass / fail by stage. Incur all of costs/revenue for that time period if the drug “passed” the stage.
Estimate “true average” eNPV of a project
22
©2010 Vertex Pharmaceuticals Incorporated
Introducing Decision Tools into Corporate Strategic Planning
23
2005
• Basic LRP Model: compounds “on” or “off”
• Specific development plans were not available
2006
•
•
•
•
Scenario based planning with expected values / probabilization
First use of activity sheets
First portfolio valuations
Enhanced scenarios: from 5 to 5,000 possibilities
2008
•
•
•
•
Introduce decision tools concepts & outputs to existing scenario based planning
Indication & lifecycle valuations
LRP simulations
Enhanced probabilities: dependent POS
2009
• Efficient frontier
• Forecast simulations
2010
• Utilize decision tools & process to better test key drivers & assumptions
• Use tools more broadly
©2010 Vertex Pharmaceuticals Incorporated