Projecting out drugs that are in FDA approval process

Does anyone have experience with this / a template model? I'm having difficulty understanding how to make reasonable projections about drugs that are in Phase II or III and have some probability of entering the market in the next 2 years.

 

Good question. If you're interested in predicting whether the drug will be approved or not, I learned the following through my graduate research (which included work with pharmaceutical companies) and thought I'd post the topic sentences of the larger work I wrote this morning; I wrote it since I received internship offers recently in finance and am trying to gain experience related to what you're doing. Feel free to pm me and I'll evaluate the company you're looking into through the methods I'm talking about.

The first thing to do is review available literature (e.g. published academic papers in scholarly journals) on the drug's mechanism of action (pre-clinical, e.g. in animal models), safety (phase I), and efficacy (phase II & III) as I've parenthesized in terms of when they're evaluated; clinical trial data isn't always published...

Then, I'd search the internet for anything regulatory-related and covered in the media. A lot of the time, you'll find media reports and investigator interviews that provide insight into the drug's progress (if you know what to look for)...

I'd next search for prior NDAs for drugs in similar classes and/or treating the same condition, and pay attention to key data/results that investigators are emphasizing, then correlate that to the FDA's respective filings, meeting briefs, and responses to sponsor's filed NDAs...

You should also consider whom is sponsoring their clinical trials (e.g. is it a company that received significant investments and/or investment attention, what is their reputation, how many employees do they have, was it a university spinout and if so is the company headed by someone notable), what is their business model (e.g. do they use in-licensing)?...

Try to figure out what prior research has been done to validate the technologies that investigators will utilize to evaluate efficacy. This may include, for instance, a biomarker (a measurable/obtainable biological indicator of drug effectiveness), medical outcomes, and/or subjective patient reports...

I wrote quite a few other paragraphs this morning but decided not to submit them; the above should give you a good start, though, and like I said, feel free to let me know if you want me to look into the company's drug candidate.

 
Best Response

Dude - make up some peak sales number, say it takes 7 or 8 years to ramp up to peak sales and just project your revenue as a % of peak sales. You can build in sensitivities around peak sales value and and time to peak sales. Then just grow at inflation until patent expiry (assume like 15 years if you don't have info from the company). Then decline 80%, 20% and 20% in the three years to capture the patent cliff.

Depending on the stage of approval, assume 50% chance it goes from Phase II to Phase III, 75% chance it goes from Phase III to NDA and 90% chance it goes from NDA to actual approval and launch. Then take a straight haircut to the future cash flows. So a Phase II drug has a 34% chance of getting to market above, and you haircut the cash flows accordingly.

Expenses are a little bit trickier. For a biologic, go with 80% gross margin, otherwise assume 90%. Sales and other stuff is not as straight forward, so sensitize this. Assume you get to a run-rate EBITDA margin of like 30-40%.

If you're going to assume any nol values from losses, just net against income for tax purposes until they run out. You can debate this for a zillion years, but at the end of the day it doesn't make much difference.

Oh, and look at company information about their cash burn pre-launch. They usually have it in their investor presentations what the expect to spend to actually get a drug to market. Obviously there are some pretty hefty negative years before you actually get somewhere with the drug.

 

Success Rate really depends on what you're valuing. For a startup, this probably makes a lot of sense. For someone like Pfizer who might be launching a next gen lipitor, which could cost them $500M+ it BETTER hit, so I'd increase the likelihood. The big players generally won't put their cash into something unless it's fairly certain to ultimately gain FDA approval. In my time at one of the big pharma I saw plenty of ideas die due to uncertain cash flow.

Startups are looking to hit their homerun, whereas executives in big pharma already have their home run, they just want to add low-risk singles and doubles. It also makes a huge difference whether the product is white space or more of an extension of something existing.

twitter: @CorpFin_Guy
 

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