We don’t suffer a lack of ideas for potential Pistoia Alliance projects. The trick is getting a critical mass (including people and funds) behind an idea to turn it into an active project driving toward a solution. With the latest round of portfolio projects, we worked with David Seemungal of Cubase Consulting to conduct an indicative valuation of the various proposed activities. I asked David to explain the methodology, which we plan to employ as a way of calibrating expectations around future proposed activities.
My first exposure to the Pistoia Alliance was at the Dragons’ Den meeting in London, where I served as one of the dragons listening to the pitches and determining whether to invest in any of the proposals. Frankly, I ended up holding onto my play money, because none of the proposals were clear about their long-term value and the return investors would see on their investment. That’s not to say the projects didn’t have value—they just weren’t making that value clear in the pitch. So it’s been rewarding to be working with the Alliance to help put some quantitative measures of value onto its activities.
Assessing value is a bit easier for my firm, Cubase Consulting, which is primarily concerned with drugs or diagnostics, where you can track things like future sales. Pistoia Alliance efforts are “virtual” projects aimed at “softer” things like time savings, where the value is seen in freeing people’s time to work on other tasks. We defined value as having five components:
- Cost: Savings in annual operating costs
- Productivity: Organization is able to achieve more output at the same cost
- Time to decision: Organization is able to make a go/no go decision more quickly at the same cost
- Quality: Organization is able to deliver higher quality output at the same cost
- Risk reduction: Able to comply with regulatory environment and avoid penalties
The first step in performing the valuation is to determine how these components factor in each project. The result is a “valuation tapestry” that assesses whether each component is a large (red), medium (orange), or low (yellow) component of the project’s value, as shown in Figure 1. So looking at the controlled substance compliance effort (first row in the table), the largest component of the value of this project is in risk reduction, whereas a project like tranSMART (last row in the table) spans most of the other four components.
Assigning numbers to the values required us to make some assumptions. First, we had to come up with some measures of how many scientists at what levels would be impacted within organizations. We made some rough estimates about how head counts in global R&D are typically apportioned between discovery, development, and operations and admin, as well as how external costa and alliances compare to internal payrolls and administrative costs. Second, we then looked specifically at discovery scientists and technicians and broke out their typical daily duties as percentages. These numbers were in turn related back to the head count estimates determined in the first step.
Our valuation methodology then implemented a rather simple algorithm.
- A = [Current prevalence of issue] x [Current resolution method] x [Current resolution resources]
- B = [Current prevalence of issue] x [Proposed resolution method] x [Proposed resolution resources]
- A – B = resources saved through adoption of Pistoia Alliance solution
For simplicity, we assumed each project had an implementation cost of $0.5 million incurred in 2013, with benefits from projects commencing in 2014. We also assumed a rather high private equity discount rate of 25% and a valuation period of five years. We based all valuations on the net present value (NPV), which is essentially the sum of all future cash flows over that five year period.
This kind of quantitation of ROI adds an important dimension to assessing the value of pursuing projects that can be taken together with other, softer reasons to determine which projects to carry forward. Of course, value, like beauty, is often in the eye of the beholder. What do you think of our methodology? And does your organization attach quantitative measures of ROI to determine which projects you should undertake?