run the numbers - roland berger · 8 tips for scenario modeling roland berger has contributed to...
TRANSCRIPT
A comprehensive guide to reinventing companies
Mastering the Transformation Journey
2015
March
2016
Using scenario modeling to support strategic decision-making in biotech
Run the numbers
THINK ACTBEYOND MAINSTREAM
T H E B I G
32 THINK ACT
Run the numbers
60%of the companies in the NASDAQ Biotechnology Index
have a clinical pipeline of 5 or fewer drugs. Page 4
75%of the 20 most promising drugs in the sector's pipeline
in 2015 did not originate at one of the traditional big pharma companies.
Page 3
1R&D project often determines the future
of a biotech company. Page 4
PLUS:5 TIPS FOR SCENARIO MODELING
P. 8
THINK ACTRun the numbers
3
A GAME OF RISKS AND REWARDSBiotech is a risky business. Companies invest enor-mous amounts of money, time and energy developing new drugs or diagnostics that have only a small chance of reaching the market. Getting a new drug from first idea to first sales typically takes more than ten years and hundreds of millions of euros. But the rewards can be equally large. Blockbuster drugs reach sales of bil-lions of euros per year. For such drugs, the investment is well worth it. If only we knew upfront which ones would be successful.
Biotech is a numbers game. For a long time, only multinational pharmaceutical companies were able to run research portfolios large enough to generate the few successes that could make up for the many fail-ures. But the industry has changed. More and more, it is new and upcoming biotech companies that devise the next generation of drugs and diagnostics. In 2015, they were responsible for 75% of the 20 most promis-ing drugs in the sector's pipeline. Large pharmaceuti-cal companies co-invest in these biotech companies’ development projects, and through licensing or acqui-sition often play an important part in bringing these products to patients.
As the industry evolves, so must the way we per-ceive and deal with risks and rewards, as well as antic-ipate resource needs. 60% of the companies in the NASDAQ Biotechnology Index have a clinical pipeline of 5 or fewer drugs. A
The biotech entrepreneur with only a few products in the pipeline essentially plays the same odds as large pharmaceutical companies – but with fewer drug at-tempts. Without being able to rely on large numbers of drug attempts to spread risks, it is all or nothing. The same goes for smaller investors in biotech companies. They cannot hedge their bets by investing in multiple companies or in one company large enough to diversi-fy risk itself. And for large pharmaceutical companies, the risk-reward question shifts from projects to part-nering: the closer to the market, the larger the invest-ment needed to partner with biotech companies.
FROM PLAYING THE NUMBERS TO RUNNINGTHE NUMBERS: SCENARIO MODELINGWhen the numbers are large, the resource needs and expected returns of R&D portfolios can be modeled and managed fairly accurately by calculating average (ex-pected) values of many projects. But a biotech compa-ny with a limited portfolio lacks the numbers. It needs a different approach to predicting resource require-ments and company/portfolio value – one that fits the peculiarities of the biotech portfolio:> The success or failure of each individual project has a large effect on the resource requirements and value of the company as a whole> Projects go through a well-defined process with dis-tinct steps that include three phases of clinical studies and regulatory approval
Scenario modeling is a powerful tool to support strategic decision- making in biotech.
THINK ACTRun the numbers
4
Companies in the NASDAQ
Biotechnology Index (Q4 2015)
with >10 drugs in the clinical pipeline or no
clinical pipeline
These companies face big investments in small and high-risk project portfolios
Source: Roland Berger
A
IT'S ALL OR NOTHINGThe majority of companies in the NASDAQ Biotechnology Index don't have large pipelines
with 1 drug in
the clinical pipeline
13%
15%
13%
13%
4%
6%
5%
6%
25%
with 2 drugs in the clinical
pipeline
with 3 drugs in the clinical
pipeline
with 4 drugs in the clinical
pipelinewith
5 drugs in the clinical
pipelinewith
6 drugs in the clinical
pipelinewith
7 drugs in the clinical
pipelinewith
8-10 drugs in the clinical
pipeline
143 COMPANIES
THINK ACTRun the numbers
5
tions drive the value of a company or its resource needs – providing a wealth of information that can be used to steer the company
Scenario modeling brings its power to two main appli-cations: to anticipate what resources the company would need to run the portfolio and to put a value on the portfolio and/or the company as a whole.
MODELING FUTURE RESOURCE REQUIREMENTSConsider a biotech company with a portfolio of ten projects, three of which are in clinical studies. The dis-covery department has been very productive in recent years and five candidate drugs are moving into pre-clin-ical development. Should all of these projects progress to clinical phase I, then two years from now the compa-ny would need to conduct as many as eight new clinical studies (five in phase I and three in later stages). That would certainly mean a huge success for the company, but also a major commitment of human and financial resources. Such commitment is beyond the means of a typical biotech company, resulting in unwanted project delays and/or premature partnering decisions.
The situation described above is not very realistic. The probability that all projects make it into the next phase is very small (and, incidentally, could be quanti-fied with a scenario model). But the difference be-tween continuing six or four out of ten projects may also be huge – as much as 50% in human resources in certain departments, for example. Should the compa-ny decide to pursue all six, it would need to recruit more people and mobilize the financial resources to pay for them – and time it well. Too late, and risk de-lays; too early, and risk inflating capacity and costs be-yond what is actually needed. Alternatively, the compa-ny could decide to postpone some projects or pursue a few with a partner.
To prepare for any eventuality and make informed decisions, an entrepreneur needs to truly understand the potential scenarios, the resources each would need, and the likelihood of each occurring – in other words: he or she should have a good scenario model. The same model may also help him or her decide on invest-ments in new projects to fill the pipeline, partnering with other companies (e.g. big pharma), the timing of projects, make/buy strategies, and the strategy for at-tracting financial resources.
> Each step is marked by a go/no-go decision for mov-ing into the next step> Each step marks a large investment in financial re-sources and human capital> Each step brings the product closer to the market
Scenario modeling is a powerful tool for the biotech firm. A scenario model plots the possible outcomes of each development step for each product in the pipeline – much like a tree that branches as it grows. It then quantifies the consequences and probability of each outcome and the time, money and manpower required for each step. This results in scenarios for the company that show, at every turn, the risk-weighted value or re-source needs of the portfolio. B
THE POWER OF SCENARIO MODELINGOf course, just because scenario modeling fits the sit-uation well is not the reason to use it. Scenario mod-eling is a powerful tool for strategic decision-making because it fits the purpose: it gives the entrepreneur, his/her investors, or multinational pharmaceutical companies considering its acquisition insight into the value or resource needs of the company (or its portfolio) at each stage of development – and how that value or resource needs would change over time, in light of events (e.g. clinical trial results) and given investment decisions.
The power of scenario modeling lies in:> Statistical probability distribution: The model can yield a distribution of resources required over time as the portfolio of the company evolves, or a distribution of the value of the company given various outcomes. Such distributions enable decision-making much bet-ter than on the basis of isolated expected values for re-source requirements or company value> Prediction/simulation: Situations develop (and change) over time. With a scenario model, one can assume certain events and simulate the situation that results – revealing windows of opportunities and/or potential issues that might arise> Strategic options: The scenario model can be en-riched with outcomes for e.g. partnering, licensing, investments, portfolio extensions, etc., making it a dy-namic tool to generate and assess strategic options > Understanding the drivers: Sensitivity analyses with scenario models show what parameters and assump-
THINK ACTRun the numbers
6
CLINICALPHASE II
B
DRUG DEVELOPMENT IS WELL SUITED FOR SCENARIO MODELINGSimplified drug development process
Toxicology and dosing
Laboratory and animal tests
Safety and closing
20-100 healthy volunteers
Efficacy and side effects
Over 100 diagnosed patients
CLINICALPHASE I
Stop development
Stop development
PRE- CLINICALDEVELOP-
MENT
Source: FDA, Roland Berger
70%
67%
30% 33%
Scenario modeling is a powerful tool for the biotech firm. A scenario model plots the possible outcomes of each development step for each product in the pipeline – much like a tree that branches as it grows.
Stop development
THINK ACTRun the numbers
7
Other regions
Scenario A
Scenario B
Scenario C
…
SALES
Product on markets X and Y
Market size
Competitive position
Pricing
CLINICALPHASE III
Efficacy and monitoring of side
effect
300-3,000 diagnosed patients
Stop development
70%
33%
30%
EU
MARKETAPPLICATION
Approval process by medical
authorities
US
THINK ACTRun the numbers
8
TIPS FOR SCENARIO MODELINGRoland Berger has contributed to the development of models for strategic decision-making on many occa-sions and for many companies. Our experience has yielded five tips for developing a scenario model:
Keep it as simple as possible! The number of scenarios rapidly grows with the num-ber of projects and events modeled. Include only those with meaningful impact. It serves no purpose to model events that change company value by one percent or have a likelihood of one percent of occurrence – the model will also not be accurate on such a scale. A sim-ple model is easier to understand and serves as a more effective tool for decision-making – and explaining those decisions to stakeholders.
Think before you start.Don't just start building the model based on a set of sce-narios identified. Define upfront which decisions and kinds of decisions the model must support, and what strategic options it must be able to simulate – and inte-grate these from the start. This will not only save time, but will result in simpler, more intuitive models. D
Benchmark, benchmark, benchmark.The model will contain a range of assumptions and variables. Benchmark them! Many companies have preceded you in similar development pathways and a lot of information is publically available. Even the share price development of biotech companies gives a wealth of information on the impact of events on a company's value (perceived or otherwise), as such com-panies are often strongly impacted by the results of a few products/projects. Benchmarking the assumptions and variables as well as the outcomes (e.g. with inves-tor reports) strengthens the model and the reliability of its results, and even by itself provides a wealth of information (i.e. how others did and decided). Bench-marking also adds an outside-in approach to valuation models that reveals how potential investors/partners will look at the company.
MODELING COMPANY/PORTFOLIO VALUEConsider another biotech company. This one has posi-tive phase II results for its lead product, and is moving into phase III. It has two follow-up products in phase I that build on the same technology platform. A rival has recently published positive phase III results for a prod-uct that targets the same disease.
The company is evaluating its strategic options – and so are its private investors. Success will largely de-pend on its lead product. It must be developed and launched quickly to win share before competitors have cornered the market. That means investing time and money. Yet there may not be a market for this product, because FDA approval is anything but certain. One op-tion the entrepreneur considers is to enter into a strate-gic partnership with a large company that can accelerate approval and launch. But what value should be put on this small company? How much equity should be of-fered? What would be a good price, both upfront and future milestone payments and royalties? What timing would get the best deal or make the greatest impact, or both? What would be the risk of going it alone, and what upside could that bring?
A number of analyst reports have estimated the ex-pected value of the company, but to the entrepreneur such isolated valuations have very limited utility. Small biotech companies do not have the numbers to spread risks and rewards and thus cannot work only with ex-pected values. And similarly, investors want to under-stand the risk-reward profile of this company in this time and this context.
Again, a scenario model could be a powerful tool here. It can show the distribution of company values (i.e. scenarios) versus their likelihood, both with and without a partner. C
This will clarify the impact of a partner on the ex-pected value and value distribution – quantifying, for example, the risk sharing that the partnership brings. It may also help define windows of opportunity in which a partnership may be struck and guide discussions on the price the partner must pay (amount and form, e.g. up-front, milestone and royalties). The model could be ex-tended to include different regions (and partners) and quantify the impact of competitor success, speed to market, IP disputes with the competitor, and all sorts of correlations between events. The entrepreneur will be able to make better-informed decisions and to better ex-plain them to the stakeholders – as will the investors.
1
2
3
THINK ACTRun the numbers
9
C
TO PARTNER OR NOT TO PARTNER – THAT'S THE QUESTIONFrom scenario modeling to strategic decision-making
Company value
[EUR m]
Likelihood of realization of value
> 1,000 m
800-1,000 m
600-800 m
400-600 m
200-400 m
0-200 m
0
5% 3% 0%
8% 5% 5%
25% 20% 10%
10% 17% 15%
10% 15% 70%
7% 40% 0%
35% 0% 0%
GO IT ALONE
PARTNER (small upfront payment, large royalties)
PARTNER (large upfront payment, small royalties)
EXPECTED VALUE:
EUR 400 m for all three strategic
options
Source: Roland Berger
THINK ACTRun the numbers
10
Do not mistake the model for reality. A scenario model should be used as a tool for deci-sion-making alongside other tools and common sense. The outcome of the model is neither the right decision nor a reality. It is better insight into the impact and like-lihood of different scenarios. In that, do not underesti-mate the importance of understanding the model’s sen-sitivities: which assumptions are difficult to estimate and what is their effect. Such sensitivities are important to better understand the risks of strategic options.
Value is created through the model itself. Much of the information that goes into the model comes from the company itself. Gathering such infor-mation and combining it in a single model creates both clarity and dialogue within the organization, and with decision-makers. For example, a resource projec-tion may require an overview of the entire portfolio, project priorities, current resources of different depart-ments and expectations. Building the model may lead to new insights and strategic considerations, which in turn can be incorporated into the scenario model.
A scenario model can be a powerful tool to support strategic decision-making in biotech. Roland Berger knows how to build and use scenario models and can draw on its experience in helping many companies do so in various circumstances and for various purposes. Our experts will be happy to talk to you, share our in-sights and help in any way we can.
4
5
DSCENARIO MODELING IN BIOTECHStep-by-step
Clinical success, regulatory approval, com- petitor success, intellectual property position, commercial success, geographical position
Define scenarios
Partnering, license sales, company sales, IPO, upfront/milestone/royalty payment schemes
Identify strategic options
Modular build-up of scenarios, connections between modules, quality control
Design the model
Development risk, cost and time, IP verdicts, pricing, ramp-up time, market penetration, competitive intensity
Benchmark input parameters
Level of uncertainties in various input parameters and impact on the outcome of the model
Map sensitivities
RUN THE NUMBERS
ABOUT US
11THINK ACTRun the numbers
FURTHER READING Links & Likes
ORDER AND DOWNLOADwww.rolandberger.com
STAY TUNEDwww.twitter.com/RolandBerger
LINKS AND LIKESwww.facebook.com/RolandBergerStrategyConsultants
Detailed insight into current thinking at Roland Berger is available via our new microsite at new.rolandberger.com
SCENARIO PLANNINGTrend shifts and radical changes have become the norm
We have to accept that we can no longer trust numbers in general and forecasts in particular. What we need, therefore, are new tools and methods to support the task of strategic corporate management. One example is a new approach to using scenarios.
SCENARIO-BASED STRATEGIC PLANNINGDeveloping strategies in an uncertain world
In a world characterized by increasing complexity and volatility, managers must be able to flexibly adapt their strategies to changing environments. Traditional methods of strategic management often fail in this context.
Roland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 36 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners.
Publisher
WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS
ROLAND BERGER GMBHSederanger 180538 MunichGermany+49 89 9230-0www.rolandberger.com
This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication.
© 2016 ROLAND BERGER GMBH. ALL RIGHTS RESERVED. TA_1
6_0
04
KOEN BESTEMANPrincipal+31 6 519 281 [email protected]
EditorDR. KATHERINE NÖ[email protected]
ROLAND BERGER B.V.World Trade CenterStrawinskylaan 5811077 XX AmsterdamThe Netherlands
BENNO VAN DONGENPartner+31 6 206 169 [email protected]
PATRICK BIECHELERPartner+34 9 [email protected]
MORRIS HOSSEINIPartner+49 30 [email protected]
HANS NYCTELIUSPartner+46 8 [email protected]