Applying Porter’s Five Forces to Portfolio Management in Pharmaceutical R&D: A Strategic Roadmap

Mehtap Saydam Aydemir
PhD, eMBA
Turkish Medicines and Medical
Devices Agency

The costs required for R&D to bring new drug products to market have increased significantly over the last two decades. In the United States, R&D spending in 2019 reached $83 billion USD, approximately 10 times the spending in the 1980s.¹ However, 90 percent of drug developments fail.² A study conducted on 200 large pharmaceutical companies between 2012 and 2023 reveals that sustainable efficiency is difficult to maintain due to failures and cancellations in the R&D phase, making companies more hesitant to invest in R&D.³

Strategic portfolio management involves decision-making processes that determine an organization’s long-term goals, plan the resources required to achieve these goals, and prioritize projects in the portfolio according to market size, competitive status, and R&D costs. This process aims to gain a competitive advantage by analyzing both the organization's internal resources and external environment.

Among strategic management theories, Igor Ansoff⁴ and Michael Porter⁵ are important milestones. In 1957, Ansoff was known for his “Product/Market Matrix” explaining strategic growth orientations, and in the 1980s, Michael Porter brought a more analytical approach to strategy with his “Five Forces Model” (Figure 1)⁵ for market analysis and “Generic Competitive Strategies” (Figure 2)⁶ for strategic management.

Low-cost strategies can be implemented through supply chain optimization, efficiency-enhancing technologies, and large-scale production. The advantage is attracting price-sensitive customers by reducing prices. However, customer demand for high quality can pose risks. Differentiation strategies can be applied through high quality, innovation, or superior customer service, leading to branding and customer loyalty. However, differentiation is costly, and for products that are easy to copy, competitors may offer similar alternatives. A focus strategy can be implemented by developing expertise in a specific geography, customer group, or product category.

Michael Porter's five forces model.

This reduces competition in the niche segment and allows better customer satisfaction. However, small market segments and the risk of big players entering the niche market are challenges.

According to Porter, adopting more than one of these strategies simultaneously can lead to a “stuck in the middle” situation. Therefore, a business must choose a clear strategic focus to maximize its competitive advantage.⁶

PORTER’S FIVE FORCES FOR THE PHARMACEUTICAL INDUSTRY

In recent years, increasing drug safety and efficacy requirements, regulatory demands, and costs have made portfolio management in the pharmaceutical industry a more complex and challenging process. Since the early 2000s, major pharmaceutical companies have struggled with weak portfolio management. Long-term projects that could lead to new drug platforms or technologies are often abandoned in favor of short-term revenue growth. Although this flawed resource management approach provides short-term profit increases, it leads to financial problems in the medium and long term.⁷

To sustain future value, pharmaceutical companies face constant pressure to innovate.⁸ Effective strategic portfolio management allows holistic and efficient resource management, reducing financial losses from project cancellations and increasing overall R&D efficiency. This study examines strategic portfolio management in the pharmaceutical industry using Porter’s "Five Competitive Forces" framework.

Threat of New Entrants

New market entrants can reduce the market share and profitability of existing firms. Companies can create entry barriers through brand loyalty, economies of scale, and patents.⁹ In markets where drugs have established efficacy and safety, patient loyalty is high, making penetration difficult.¹⁰ Strict regulatory requirements create high entry barriers and capital intensity, reducing the threat of new entrants. Additionally, large firms' strong supplier relationships and control over distribution channels further limit new competitors. Innovation and patent protection remain the biggest obstacles for new entrants, classifying the threat of new entrants as “low” in the pharmaceutical industry.

Michael Porter's generic competitive strategies

Threat of Substitute Products or Services

Substitutes can decrease the attractiveness of existing products, affecting pricing power and profitability. Alternative treatments, natural medicines, generic drugs, biosimilars, and gene therapies pose a “high” threat.⁹ In the generic drug industry, multiple competitors and price-sensitive customers intensify this risk. Companies can mitigate this threat by developing innovative products and fostering customer loyalty.

Bergaining Power of Buyers

Powerful buyers can demand price reductions or higher-quality products. Large buyers, such as governments, hospitals, pharmacy chains, and insurance companies, hold significant bargaining power⁹. In the pharmaceutical industry, buyer bargaining power is classified as “high.” Developing patented drugs with unique medical advantages, particularly in areas where efficacy and safety are the primary concerns (e.g., cancer and orphan drugs), can reduce this power.¹⁰

Bergaining Power of Suppliers

Powerful suppliers can increase prices or reduce product quality. High switching costs enhance supplier power, as regulatory requirements make changing suppliers costly and time-consuming. Additionally, supplier-held patents strengthen their position.⁹ The bargaining power of suppliers in the pharmaceutical industry is considered “high."⁵ Reducing dependency through multiple suppliers or vertical integration can mitigate this power⁹.

Rivalry Among Existing Competitors

Intense competition arises from factors such as patent protection, the number of market players, alternative treatments, and regulatory hurdles. The pharmaceutical industry requires rapid innovation, making competition “high¹¹." Companies must continuously develop new drugs and protect them with patents⁹. Intellectual property rights provide significant competitive advantages¹². Mergers and acquisitions shape competitive dynamics¹⁰; for instance, Pfizer’s acquisition of Seagen in 2023 strengthened its oncology portfolio, while Merck enhanced its orphan drug portfolio through its merger with Acceleron Pharma⁹.

STRATEGIC PORTFOLIO MANAGEMENT IMPLEMENTATION STEPS

The goal of strategic portfolio management in the pharmaceutical industry is to maximize the return on a company's R&D budget. In this context, the process is both expensive and complex, and it can be applied at different stages of R&D. These steps can be summarized as follows [13]. While different methods are used across companies, the most widely accepted approach is to manage the process by focusing on a small number of therapeutic areas.

Strategic Market Analysis:

• Market Niche Analysis:The analyst examines diagnostic and therapeutic needs in the market and evaluates existing products to identify unmet medical needs. Market gaps or niches for new R&D projects are then determined by considering the company’s current product line and products in the R&D phase. A list of potential products is created using market segmentation and product differentiation concepts.
• Market Model:Flowcharts can be used to define information flows between different marketing models (e.g., market share model, sales model). These charts help determine project selection, investment decisions, production volume, and raw material needs at the very beginning of the R&D process.
• Multifactor Matrices:These are used to assess the overall market attractiveness of various indications and objectively evaluate the competitive position of proposed or existing products. The ability to compare multiple products simultaneously ensures the successful application of multifactor matrices.
• Research Surveys:Surveys help justify the initiation of research projects by providing validation from external sources.

Selection and Elimination Models:

• Checklists: A list of success criteria is created, usually in consultation with all participants (decision-makers and key influencers), ensuring that the decisions made are agreed upon by all stakeholders.
• Hurdle Rates: This involves a preliminary assessment of the project's costs and return on investment (ROI). ROI, typically expressed as the internal rate of return (IRR), is then compared to the hurdle rate, which is a predetermined minimum acceptable rate.
• Scoring Models: The process begins with a checklist of success factors carefully selected to reflect the company’s priorities. Each factor is assigned a weight based on its importance within the specific company environment. The total score is used to compare proposals, with a predetermined threshold value eliminating projects that do not meet the criteria.
• Profile Models: In a profile model, projects are rated both subjectively and quantitatively to facilitate comparison. Various subjective project criteria are assigned numerical values, usually represented on a scale with negative (undesirable) and positive (desirable) regions around a neutral midpoint. Each project is then rated and plotted visually, creating a "profile" that aids in comparing multiple projects.
• Index Models: These require slightly more effort than simple checklists and scoring models. A typical example is the benefit/cost ratio, which uses factors such as the present value of R&D ROI as the numerator and R&D costs as the denominator. Among index models, the profitability index is considered the most effective.
• Risk Analysis Models: These models evaluate risk-return curves, which are created using expected value concepts. By comparing different projects, selections can be made based on the direction and slope of the curves.

Risk and Return Assessment:

• Payback:Payback measures a project's success in terms of the time required to recover the investment. However, this method does not account for the total effort involved or provide detailed ROI information. Instead, it indicates the “investment payback period” or “cycle period.”
• Net Present Value (NPV): NPV is based on the time value of money, applying discounting or "negative interest rates." It is a useful method for comparing projects with irregular cash flows or those at different stages of their life cycles.
• Internal Rate of Return (IRR): IRR is the discount rate at which positive (profit) and negative (cost) cash flows balance out, resulting in a zero NPV. Unlike NPV, IRR does not provide insight into project size.
• Simulation Modeling:Simulations model uncertainties in project estimates, such as marketing inputs. Ready-made software packages can be used for this purpose, with the key advantage being the ability to generate optimal solutions.

Portfolio Analysis and Budget Allocation:

• Budget Limits: This technique, developed by financial analysts, focuses on maximizing returns from a portfolio of financial investment instruments, such as common stocks, industrial bonds, or tax-exempt securities.
• Pairwise Comparison by Forced Choice: This method incorporates accepted organizational goals. Goals are compared in pairs, with weights assigned accordingly. The same process is applied to each project-goal pair, and the results are multiplied and summed to determine overall project scores.

CONCLUSION

Strategic portfolio management is essential for sustainable growth and competitive advantage in the pharmaceutical industry. It enhances R&D efficiency, reduces financial losses, and ensures the timely launch of the right products in the right markets. Additionally, it enables companies to adapt to changing market conditions and achieve long-term goals. Strategic prioritization, effective risk management, and continuous feedback mechanisms form the foundation of a solid portfolio structure, maximizing both commercial success and contributions to public health.

SOURCES

1. FDA, Research and Development in the Pharmaceutical Industry (CBO, April, 2021).
2. Sun D, Gao W, Hu H, Zhou S. Why 90% of clinical drug development fails and how to improve it? Acta Pharm. Sin. B. 2022;12(7):3049–62.
3. Fernald KDS, Förster PC, Claassen E, van de Burgwal LHM. The pharmaceutical productivity gap – Incremental decline in R&D efficiency despite transient improvements. Drug Discovery Today. 2024; 29(11): 104160.
4. Ansoff I. Strategies for diversification. Harvard Business Review. 1957; 35 (5): 113–24.
5. Porter M. The Five Competitive Forces That Shape Strategy. Harvard Business Review. 2008; 86 (1): 78-93.
6. Thompson AA, Peteraf MA, Gamble JE, Strickland AJ. Part 1: Concepts and Techniques for Crafting and Executing Strategy. In: Crafting and Executing Strategy: The Quest for Competitive Advantage, Concept and Cases. New York: McGraw Hill LLC; 2022. pp. 1–18.
7. Smith D, Sonnenblick R. From Budget-Based to Strategy-Based Portfolio Management, A Six-Year Case Study. Research-Technology Management. 2013; 45-51.
8. Bieske L, Zinner M, Dahlhausen F, Trübel H. Trends, challenges, and success factors in pharmaceutical portfolio management: Cognitive biases in decision-making and their mitigating measures. Drug Discovery Today. 2023; 28 (10): 10373.
9. DCF, “Pfizer Inc. (PFE): Porter’s Five Forces”, https://dcf.fm/products/pfe-porters-five-forces-analysis#:~:text=(PFE)%20is%20crucial%20for%20investors,business%20strategies%20as%20of%. Accessed Feb. 1, 2025.
10. Adam K. Porter five forces analysis of US pharmaceutical industry. https://www.porteranalysis.com/porter-five-forces-analysis-of-us-pharmaceutical-industry/. Accessed Feb. 1, 2025.
11. Ross M. Strategic overview. In: 2017 Fleming Sustainable strategies for generics & biosimilarsconference. 2017; March 5–7, Basel.
12. Dessain S, Fishman SE. Porter’s Five Forces and the Market for Angel Capital. In: Preserving the Promise. Wynnewood: Elsevier Inc. Academic Press; 2017. pp. 49–62.
13. Graham DL. Portfolio management in pharmaceutical/biotechnology R&D. In: Project management institute 25th annual seminar/symposium. 1994; October 17 – 19, Vancouver.