What Constitutes an Optimal Portfolio of Pharmaceutical Compounds?

The business perspectives of a pharmaceutical firm (PF) are crucially affected by its portfolio of compounds under development. For this reason, companies strive to optimize the contents of their drug development pipelines. Can an “optimal portfolio” be uniquely defined? In this article, I discuss how the contents of an optimal, self-funding, pipeline can change according to the economic goal adopted by a firm. I lay out my arguments within a stylized framework, by considering three common goals for the pharmaceutical industry: increasing the market share, maximizing the expected profit, and maximizing the expected productivity. I also discuss how the optimal portfolios typically exhibit different degrees of sensitivity with respect to the relevant parameters of the models. The analysis suggests that the goal of maximizing expected productivity leads to an optimal portfolio with fewer drugs, and therefore a smaller investment in R&D as compared with the other two goal