Pfizer-Wyeth to Optimize R&D Portfolio Post Merger

Case Type: organizational behavior; operations strategy, optimization.
Consulting Firm: Boston Consulting Group (BCG) first round full time job interview.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences.

Case Interview Question #01059: We just finished a post merger integration (PMI) project between two large pharmaceutical companies Pfizer and Wyeth. Each of them has broad product portfolios consisting of only branded or patented prescription drugs; neither company sells over-the-counter (OTC) drugs. The combined company’s sales are the largest in the world, comprising 10% of the pharmaceutical drug market. All organizational aspects of the merger are complete (new positions have been assigned and assumed).

The new Head of Development comes to us and asks if we can analyze the combined Development Portfolio. He is certain that some of the projects in development pipeline can be eliminated; others he feels are blockbusters and should be fast tracked; others are middle of the road type products that may be successful and can continue through the normal development process. He wants our consulting team to help identify the appropriate product portfolio.

FYI, here is what the drug development process looks like:

Research & Development (R&D) –> Pre-clinical studies –> Clinical trials –> FDA Approval –> Launch

Each step in this process can take months or years to complete. Additionally, the number of products in each stage also decreases. For example, there may be 200 products in R&D, 75 in Pre-Clinical, 50 in Clinical, 20 in FDA approval and 5 in Launch. How would you help the client identify the appropriate product portfolio?

Possible Answers:

1. Suggested Framework

a. Consumer demand
b. Competition
c. Expected profits and risk of each product in development

2. Analysis

a. Consumer Demand

* Identify what ailment each product is for
* Determine the total number of people facing this illness
* Determine the current market size for the illness
* Project it out to the appropriate number of year(s) the product requires before it can be launched.

b. Competition
* Look at what the competition is doing
* First mover advantage
* Concentrate on what the client’s competitors have in their development pipeline and their timeline of release relative to ours.
* Understand the potential reactions of competitors to our client’s portfolio decisions.

c. Profit Potential and Risk
* Determine the market share our client could expect for each product
* Make pricing assumptions based upon the costs incurred and competitors’ prices to
forecast revenue streams for each product
* Costs:
– Research, development and testing costs incurred prior to launch
– Manufacturing Costs
– Sales & Marketing Expenses
– Distribution $ Customer service
* Costs for each product can then be subtracted from the revenue to determine profits for each year.
* Take the present value of the profit streams to determine the total profit potential, using an appropriate rate that considers the risk of the product.

d. Evaluation
* Consider level of risk — speak with the research scientists working on each product to determine the probability of the product actually being launched.
* Calculate the expected profit: (Probability of success) * (Profit Potential) + (Probability of Failure) * (Potential Loss)
* The potential loss is the total of the costs incurred prior to launching the product.
* Then select the top expected profit products, considering competitive positioning and timelines.

The candidate actually drew a decision tree here showing the two branches of failure or success.

3. Sample Interview Transcript

Interviewer: How would you help the client identify the appropriate product portfolio?

Candidate: To identify the ideal portfolio, I would analyze consumer demand, competition, and the expected profits and risk of each product in development.

First, I would identify what ailment each product is for and try to determine the total number of people facing this illness. I would determine the current market size for the illness and project it out to the appropriate number of year(s) the product requires before it can be launched. This will give us an understanding of the total market size for each product.

Next, I also want to look at what the competition is doing. In the pharmaceutical industry, being the “first” to offer a particular drug can give a company a competitive edge; once physicians begin to use a drug, I would assume it is more difficult to make them switch to a new drug unless it offered other benefits as well. Therefore, it is important to concentrate on what the client’s competitors have in their development pipeline and their timeline of release relative to ours. I would also want to try to understand the potential reactions of competitors to our client’s portfolio decisions.

Interviewer: Ok, let’s say we’ve looked at the market size and the competitors, what’s next?

Candidate: Well, we want to identify the profit potential of each of the products as well as their riskiness. Based upon the availability, reputation and pricing of competitive products, I would determine the market share our client could expect for each product. I would then make pricing assumptions based upon the costs incurred and competitors’ prices to forecast revenue streams for each product.

Interviewer: What are the different costs involved?

Candidate: Well, there are all research, development and testing costs incurred prior to launch. Once a product is approved by the FDA for launch,…well, let’s go through the value chain:

FDA Approval –> Manufacturing Costs –> Sales & Marketing Expenses (training/education of physicians) –> Distribution –> Customer service

The costs for each product can then be subtracted from the revenue to determine profits for each year. Then, we must take the net present value (NPV) of the profit streams to determine the total profit potential, using an appropriate rate that considers the riskiness of the product.

Interviewer: Ok, let’s say we’ve done all the research and have an enormous Excel spreadsheet that has total costs and revenues by product. What would you do? How do you make your decisions?

Candidate: Well, we can calculate profits as total revenues less costs. One missing factor to consider, as I mentioned earlier, is the riskiness of the product. I would speak with the research scientists working on each product to determine the probability of the product actually being launched. Then, I would calculate the expected profit; that is, (Probability of success) * (Profit Potential) + (Probability of Failure) * (Potential Loss). The potential loss is the total of the costs incurred prior to launching the product.

(I actually drew a decision tree here showing the two branches of failure or success. BCG loves graphs, charts, etc.!)

I would then select the top expected profit products, considering competitive positioning and timelines as we discussed earlier.

Interviewer: Very good.