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project management

1. Case Analysis || Vertex Pharmaceuticals: R&D Portfolio Management

2. TABLE OF CONTENTS 01 Case Facts & Industry Analysis 02 Approach 03 Portfolio Analysis 04 Analysis Methods- Quantitative & Qualitative 04 Management Process & Conclusion

3. Case Facts and Industry Analysis Pharmaceutical Industry Vertex Pharmaceuticals Introduction of new standards concerning patent protection, clinical testing & government subsidies Revenue in 2002 for top 10 companies over $184 billion Steps to approve a new drug by FDA : Phase 1 : test drug’s safety in patients (80% passes). Phase 2 : efficacy as treatment ( 30% passes) Phase 3 : relative performance to existing treatment (80% passes) 1 of every 250 drugs in preclinical testing reaches FDA Vertex Pharmaceuticals is a fully integrated research and commercial medicine developer focused on developing therapies for “serious” diseases. The current strategy of the company is primarily focused on treatments for Cystic Fibrosis Vertex has strength in research and development due to their history as a research focused organization. Currently working on four projects: VX-148, VX-702, VX-765, VX-950. Vertex is trying to fund two portfolios due to management and financial constraints.

4. — Question “ What approach should be used to make a decision like this? How much should vertex management rely on quantitative methodologies (ROV) versus more qualitative approaches? ”

5. Approach We are equally treating qualitative and qualitative approaches Quantitative Approach ROV Financial Analysis Use for late-stage decisions and development Dynamic project valuation under uncertainty. This can allow management of rough estimate of the valuation of each applicant in the current capital. ROV is good for starting discussions, but it is relative and not absolute. The financial implications of the decision must be considered before proceeding with the product. NPV represents the positive and negative future cash flows throughout a project’s life cycle discounted today. IRR use to estimate the profitability of a probable business venture. Knowing ROI and payback period are also an essential to know for any company which would determine the ability of the company in terms of financial stability. Real Option Valuation Net Present Value(NPV) Internal Rate of Return(IRR) Return on Investment(ROI) Payback period

6. Approach We equally treat qualitative and qualitative approaches Quantitative Approach Qualitative Approach EMV Expected monetary value (EMV) is a risk management technique to help quantify and compare risks . EMV works well when there are more number of risk involve. It calculates the average outcome of all future events that may or may not happen and consider both positive and negative risks. We should add subjective side of the project for evaluating portfolio. Through qualitative research we are trying to find out the pro’s and con’s of each variant. Also the relationship with all stakeholders. Short term strategic Analysis Long term Strategic Analysis Expected Monetary Value ROV starting discussion ROV is not reliable we need to consider qualitative data for decision making

7. What criteria would you use to make the decision? We will be using EMV: Expected Monetary Value as our base criteria for evaluation. For calculating the outcomes of the phase-III, profit margin and expenses will be used. The probabilities from Exhibit 7 will be used as the event node probabilities. Out of the four alternatives, the two with the highest EMV will be considered for the projects to be funded. We will verify our decision based on the other qualitative and quantitative measures like NPV, payback period and ROI.

8. Margin is calculated based on SG&A expenses. If at the end of the phase III trial, the result is a failure, the outcome value is assumed to be zero. Assumptions used for calculating EMV

9. — Question “ Which of the project portfolio options currently facing vertex do you favor ? Specifically, which two projects would you advance in development? Would you license out the two others not chosen or keep them as backup? ”

10. Which Portfolios to Consider ? VX-148 VX-702 VX-765 VX-950 Target Molecule: IMPDH Target Molecule: p38 Target Molecule: ICE Target Molecule: HCV Protease Potential to treat Psoriasis, Multiple Sclerosis, Cancer Validated Target Molecule, large market Completed Phase I trials, Phase II continuing Marketing will be quickest Concerns: no novel mechanism, high competition Potential to treat acute coronary syndrome (ACS), rhematoid arthritis Novel approach of inhibition Completed Phase I trials, Phase II pilot study going on Concerns: Prone to toxicity issues, earlier development failed Potential to treat rhematoid arthritis and osteoarthritis Attacks the biological causes and not the symptoms Small molecule, taken orally Great market potential, no ICE inhibitors in market Phase I trials completed Concerns: Aventis partnership Potential to treat fibrosis, cirrhosis and liver cancer Novel small molecule inhibitor Leadership position in HCV protease Pre-clinical trials going on Concerns: Complex, costly and high time to market Candidate Indication Peak Sales Expenses Margin Profit Investment ROI Payback Pd VX-148 Psoriasis 600 40 90% 360.00 100 360% 0.28 VX-702 ACS 800 65 90% 585.00 300 195% 0.51 VX-765 RA & OA 1000 80 90% 720.00 600 120% 0.83 VX-950 HCV 750 65 82% 296.11 220 135% 0.74

11. EMV Analysis Portfolio EMV (in $M) PBP (In Yrs) VX-148 50.7 0.28 VX-702 42.75 0.51 VX-765 25.92 0.83 VX-950 10.65 0.74 As per the EMV Analysis, since VX-148 and VX-702 have the highest EMV and, also the lowest payback period , therefore: We would recommend VERTEX to go for VX-148 and VX-702 for financing For VX-765 : We recommend it to be kept as a backup as it has a high market potential . In case any of the drugs from VX-148 and VX-702 fails, VX-765 would be the other option for Vertex. In case both VX-148 & VX-765 gets successful, VX-765 could be licensed. For VX-950 : We recommend it to be licensed as it is a high value drug. Also, since it requires high development cost , partnership with a Big Pharma company and releasing VX-950 would be safe and ensure steady cash flow for the company.

12. What other information, if any, do you think Boger needs to make his decision? Qualitative Information Quantitative Information Competition in the market and existing competitors Substitutes available for each drug Product life cycle Cost of material Cost of labor Further cost of development Cost incurred if prospective drug fails in test Other financial calculators such as IRR, NPV can assist in decision making In order to maximize the value gained from chosen portfolio, Mr. Boger needs to decide explicitly and not just on the basis of ROV. Apart from the given information the other quantitative as well as qualitative information that he needs to look up for a successful launch is aforementioned.

13. Financial Analysis As it can be seen that that through IRR and NPV calculations VX-148 and VX-702 might not be best drugs. But pairing quantitative analysis with qualitative information makes decisions better and reduces chances of risk created by other factors.

14. — Question “ How should a company value investment in projects like these, which entail an extremely high degree of uncertainty? ”

15. Reliability on Quantitative Data Financial Analysis Preferred Drug Preferred Drug Drug Choice Phase 1 Success Phase 2 Success Phase 3 Success FDA Approval Success VX148 50.7 50.7 126.75 195 260 VX702 42.75 42.75 71.25 142.5 285 VX765 25.92 32.4 54 90 120 VX950 10.65 15.22 30.44 60.88 76.1 EMV Analysis (All data is in Us dollars) Drug IRR NPV 15% 20% VX148 239% ₹ 2, 413 ₹ 1, 904 VX702 127% ₹ 2,9 72 ₹ 2,316 VX765 89% ₹ 3,4 90 ₹ 2,670 VX950 153% ₹ 2,847 ₹ 2,23 3 IRR & NPV Analysis Drug Indication Peak Sales Expenses Margin Profit Investment ROI Payback Period VX148 Psoriasis 600 40 90.00% 360.00 100 360% 0.28 VX702 ACS 800 65 90.00% 585.00 300 195% 0.51 VX765 RA & OA 1000 80 90.00% 720.00 600 120% 0.83 VX950 HCV 750 65 82.00% 296.11 220 135% 0.74 High Degree - Uncertainty

16. Valuing Investments - Qualitative Preferred Drug - Development Preferred Drug - Licensing Backup Drug Pros Cons VX148 Multi Speciality - Potential to treat several diseases Target Risk - Low target risk || Mechanism Risk - Low mechanism risk Market Capitalisation Potential - Large market with unmet medical needs Payback Period – Least, quickest to market Innovation - Least scientific sizzle Barrier to Entry - Market already exists, substitutes present Molecule Risk - A verage molecule risk. Potential Threats - May cause land war VX702 Effectiveness - P roved well tolerated in patients Initial Investment - Cheap and easy to make Market Capitalisation Potential – Very High potential if oral drug Potential Threats - Prone to have toxicity issue Barrier to Entry - Most other companies failed to develop it Innovation – High requirement w ith more unknowns VX765 Market Capitalisation Potential - N ovel targets excellent market potential Return on Investment Potential - L argest possible financial return Barrier to Entry - No substitutes in market Potential Threats - Reduces influence on committees and lose rights to sales force and may cause land war Collaboration Threats - Impact on Aventis partnership. Barrier to Entry - H igh manufacturing costs at development stage Innovation – Potency and has proper dose problem with more unknown Market Entry Frequency - L ong to get to market VX950 Market Capitalisation Potential - N ovel targets, Large unmet medical needs Barrier to Sales growth - Leverage existing relationship for product sale Barrier to Entry - Complex and costly to make Collaboration Requirement - May need to find a partner Market Entry Frequency - L ong to get to market

17. Management Process & Conclusion As it can be seen that project uncertainty varies according to the project scope is known and stable chance of success is known and proven. VX 148 and VX 702 are in second phase of testing and have good chances of success Hence the project management process that ought to be used here is Agile Project Management where tasks are executed in iterative manner to complete projects instead of planning everything upfront

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