Can U.S. Drug Prices be Justified? A U.S. vs. E.U. Comparison

Regulators and payers have raised major concerns over recent spikes in drug prices. Unjustified high drug prices (see Valeant case) have triggered not only political comments from U.S. presidential candidates in the previous U.S. elections (see Hillary Clinton’s statement) but also a broader discussion on how drug prices can be regulated and whether the European drug pricing model (reference pricing) should be adopted.

In this article, I will discuss the differences between U.S. and E.U. drug prices based on the case of CNS drugs. Prices have been drawn from various sources including reported Wholesale Acquisition (WAC) prices as well as from a number of journal articles.

The following indications will be analysed: Multiple Sclerosis, Neuropathic Pain and Parkinson’s Disease. These disorders account for ~50% of the global CNS market (excl. psychiatric disorders such as depression, schizophrenia anxiety or eating disorders).


Multiple Sclerosis (MS)

Disease Description: MS is a neurodegenerative disorder in which the insulating covers of the nerve cells in the brain and spinal cord are damaged causing a range of symptoms (mental, muscle, ophthalmic).

MS market: is highly crowded by various drugs that are prescribed based on disease progression. First line therapies include beta interferons (Avonex, Rebif, Extavia and Betaseron) which are injectables, Copaxone which is also an injectable and finally Aubagio, Tecfidera and Gilenya (Gilenya has been approved as first-line therapy in the U.S. but as second-line therapy in the E.U.) which are oral therapies. First-line therapies account for approx. 80% of the USD 22 bn. MS market.


Neuropathic Pain

Disease Description: Neuropathic pain is a chronic pain disorder in which nerve fibers have been damaged sending the wrong signals to the somatosensory system. There are 3 types of neuropathic pain: painful diabetic neuropathy, postherpetic neuralgia and trigeminal neuralgia.

Neuropathic Pain Market: Painful diabetic neuropathy accounts for 90% of the overall neuropathic pain market which is estimated at USD 2.5 bn.


Parkinson’s Disease

Disease Description: PD is neurological disorder that affects the region of the brain responsible for movement. PD slowly progresses from Stage I  (mild symptoms) to Stage V (aggressive symptoms), which are generally broken down to two major patient categories: early stage patients and advanced stage patients.

Parkinson’s Disease Market: The global PD market is estimated at USD 3.5 bn. with the advanced stage segment holding a share of ~70%.


Across all 3 CNS indications, U.S. pharmaceutical prices are approximately x 4.4 greater than EU5 prices. This is one of the main reasons that most pharmaceutical and biotech companies target FDA approval first; A company can argue to European authorities that this is the drug price approved in the U.S. and thus it should be considered as a basis for receiving a high price in European countries as well.

Are such high prices in the U.S. justified? It depends on what the U.S. market economy is trying to achieve. High drug prices is one of the incentives for U.S. biotech companies to continue innovate and for VCs to continue invest in U.S. biotech companies. In fact, the amount of VC funding that U.S. biotech firms receive is triple compared to what European biotech companies receive.

Therefore, the question is shaped as follows: how can U.S. drug prices be regulated without causing a VC funding crisis but also without resulting in a disruption of the biotech stock market?

Sales Forecasting in the Pharmaceutical Industry

One of the main challenges Sales & Marketing teams face is how to forecast the revenue of new products. There exist two principal strategies to estimate the sales of new products hitting the market:

  1. Primary research: communicating to KOLs and physicians how a new medicine can add value to patients and its potential side effects. Hence, based on their views and on current competition an estimation can be established for the peak sales of the product.
  2. Developing a patient flow: a purely financial estimation based on potential market share to be captured and on drug pricing.

In this article I will discuss about the second method for developing drug sales forecasts. In particular, I will establish an estimation of the U.S. and EU5 sales of Nusinersen (expected launch in 2017), an orphan drug co-developed by Biogen and Ionis Pharmaceuticals for the treatment of Spinal Muscular Atrophy (SMA). SMA is an ultra-orphan neurodegenerative and autosomal recessive disorder with a prevalence of approximately 1/10,000 live births.

SMN1 and SMN2 genes are responsible for producing the SMN protein, the protein which is crucial for the survival of motor neurons (neurons that exist in the spinal cord). In SMA, a defect in the SMN1 and SMN2 genes causes disruption in SMN protein expression.

There exist four types of SMA categorized based on age of onset, disease progression and prevalence (1,2):

Table 1: Description of SMA types

Using prevalence estimates the % breakdown of SMA patients can be derived.

Table 2: Breakdown of SMA patients by type.

SMA Patients - Breakdown

At this point, some important assumptions need to be made in order to develop the sales model for Nusinersen. Nusinersen will be the only pharmacological solution for the treatment of SMA and therefore, it can be assumed that a company with global reach such as Biogen can easily capture 40% of type 1 and type 2 patients and 10% of type 3 and type 4 at peak (since symptoms and disease progression for these types are much less serious and paying a high-cost product might not be justified in these cases). In addition, patent expiry is assumed 10 years post-launch (2027). Diagnosis and compliance rates are assumed 95% for type I and type II and 85% for type III and IV (late age of onset, less visible symptoms).

For the purpose of this analysis, the average annual cost of treatment of Duchenne Muscular Dystrophy (DMD) therapies has been assumed as the standard annual cost for SMA. That is because, both DMD and SMA are orphan, genetic disorders causing defects in the musculoskeletal system due to deletion mutations. Therefore, cost of treatment for DMD is the closest approximation to that of SMA. Since Nusinersen is an ultra-orphan product, it is normal to expect the annual cost of treatment to range between US$ 200,000 – 400,000 in the U.S. and a 60% discount on that price for EU5 (this discount accounts both for price reductions and for clawbacks / rebates that are present in some EU countries). EU prices are in most cases significantly lower than those in the U.S. Recent example in DMD: big price cuts for Translarna in Germany. (In indications where there are many treatments available, price estimations and discounts can be estimated with more accuracy by analysing prices of competitive products (number of dosages, mg/dosage, $/mg etc.) or by using reference pricing for EU).

Table 3: Estimated Annual Cost for Therapy for SMA (US).

Annual Cost of DMD Therapies

The assumptions made above can be summarized into an input sheet of the financial model:

Table 4: Inputs for Nusarnesen Sales Forecast


Using these assumptions the sales forecast is developed as follows:

Table 5: Nusanersen Sales Forecast


By 2023 the product is expected to hit the billion dollar mark driven by strong market penetration and high annual cost of treatment.

Table 5: Summary of Results


This is a bright example of a blockbuster orphan drug. Although the blockbuster model has become obsolete, there are still blockbuster opportunities for big pharma / biotech in indications where no pharmacological treatments are available, especially in the orphan space. In these markets, high prices can be charged, market shares can be maximized in little time and sales & marketing expenses are smaller leading to huge ROI. The challenge however is that regulators are stricter when it comes to high drug prices and therefore such prices must be justified by the value (in terms of efficacy and safety) added to patients.


(1) D’Amico, A. and Mercuri E. Spinal Muscular Atrophy (2011). Orphanet Journal of Rare Diseases 6, 71.


(3) Eurostat

(4) U.S. Census bureau (

Do Scientists accept Management Processes?

Scientists’ acceptance or rejection of management processes has been historically a controversial issue not only at a corporate level but also at a research level. The method used by a researcher reveals the underlying theory associated with this method and determines to a certain extent the results obtained and hence, their interpretation. In order to frame this issue sufficiently defining “scientist”, “technical processes”, “management processes” as well as explaining what it means to reject or accept such processes, is important.

From a research-based view, Science can be defined as the process in which a researcher (Scientist) collects and redefines data and uses a qualitative/quantitative or mixed methodologies to achieve certain results from which specific conclusions can be drawn. Performing scientific processes at a macro-level (e.g. societies and businesses) or at a micro-level (groups with similar characteristics, e.g. engineers, managers) stems from the need to understand the various dynamics of our environments. This tendency towards identifying the stimuli of such environments is well incorporated in human nature. Scientists performing research originating from interest, dedication or passion for inventing or discovering novel results for the benefit of the community will be referred as basic researchers.

In practice, scientific research is to an extent restricted. Scientists working in a corporate environment need to carry out specific research projects that are aligned with the strategy of the company. In other words, a “corporate scientist” (also referred as applied researchers) does not have the free will to choose his subject of research. In theory, corporate scientists may not accept management processes because such processes directly affect their day-to-day work and restrict their research spectrum. Conversely, technical processes are accepted since these are compatible with scientists’ academic and research background. However, this is not always the case.

Consider that many corporate scientists work for contract research organisations (CRO) or fully integrated pharmaceutical companies (FIPCO) that perform clinical trials on their own. Corporate scientists in such organisations are very commonly involved in completing protocols: a set of actions that must be completed, as required by the company or regulatory authorities, in order to achieve certain targets. A concrete example is the involvement of scientists in clinical development process (phase I, II and III). Scientists work together to collect and validate data on patients based on the protocols provided by the regulatory authorities (FDA, EMA etc.). Such protocols are not rejected by corporate scientists but they are not fully endorsed either; because in a way protocols restrict them in a typical process that does not require the use of skills and expertise that scientists have developed throughout their lives. Hence, scientists may not accept all technical processes just because their academic and research backgrounds are considered “compatible” with certain research subjects.

Based on the discussion above, a fundamental difference can be observed; in general terms, a corporate scientist is less autonomous than a basic researcher. To situate this distinction within a philosophical framework, basic researchers have more power of self-government in their work life and are more able to exercise this power than corporate scientists. Having the ability and the opportunity to make a decision are prerequisites of having the power of self-government. The two factors determining the degree of autonomy of a scientist are the existence of realistic alternatives and the provision of sufficient information. However, there are very few or no alternatives for corporate scientists, since they tasks they have to complete are pre-determined. Instead, basic researchers have sufficient information to decide on the topic to dedicate time and effort on.

The problem for corporate scientists lies in the fact that in most large corporations there is a top-down approach, which hampers the ability of scientists to understand management processes in the same way managers do. This constraint however, can be removed if the company is open to new ideas and allows its scientists to articulate their research ideas to the upper management which will then review them and decide if these are aligned with the overall strategy of the company. In such process, an entrepreneurial spirit is developed and it can have a huge positive effect on the company’s potential to innovate in the long-term. Establishing this culture, is very common in early and mid-stage biotech firms where the company is mostly focused on R&D.

In my view, one of the reasons big pharma suffers from lack of innovation is that big pharma corporations, due to their size, have adopted the top-down approach that does not leave much room for ideas to be generated from bottom-up. And that is way, pharma’s way out of this challenge is to acquire biotech firms with promising products in their pipeline.

Structuring and Developing an Effective Business Plan

Developing a Business Plan (BP) is a very frequent action when companies expect a shift in their strategic direction or desire to have a clearer path in the future. The hardest part in developing a BP is to form a realistic plan in terms of expectations. In addition, a BP shall be understandable and easy to explain to both internal and external stakeholders in order to be implemented effectively and not just stay on paper. In this article, some insights are provided with respect to structuring and developing a BP.

Business Plan Pre-Development

1) Why a BP: before getting into writing a BP think of why you need to develop a BP, how a BP will benefit your organisation and within what time-frame (short-term / long-term) you expect that it will bear fruit.

2) Stakeholders: A company needs to identify the stakeholders that need to be involved in developing the BP as well as the frequency of their involvement. For example, internal stakeholders could be the CEO on a semi-regular basis, the Business Development Manager on a regular basis and possibly financial analysts on a regular basis as well. It is wise to consult external stakeholders such as a strategic / financial advisory firm. However, your advisor shall be a well-respected firm with significant experience in assisting its clients to develop a BP in similar sectors with proven positive results.

3) Preparation: Based on 1) and 2) the company may start to discuss internally the depth of the BP in order for the senior management together with the day-to-day stakeholders involved in the BP to budget their time prior to the development of the BP. It is crucial for the company to minimize destruction of day-to-day business during the development of the BP.

Business Plan Development

1) Availability of Historical Data: The Company shall have historical financial and operational data prepared or at least at an easily editable level. Practically the company should have 2-3 years of historical data of the following:

  • Financials: financial data should be available as analytically as possible. This does not mean just using financial statements as a benchmark but preparing detailed analysis of individual balance sheet and income statement items.
  • Detailed Analysis of the Company’s Operations: Assume that a company is a produces a range of products and sells them to a certain number of buyers. You need a basic analysis of the production process, a description of the end-products, analysis of terms (if any) of licensing / commercial agreements between the producer and the buyers and finally, a breakdown of the Company’s sales revenues and operational / capital expenses. For instance, with respect to revenue data: imports / exports, % of revenue coming from top 5-10 customers, revenue share of the different product categories. For costs / expenses: cost of goods sold (COGS) by product category and breakdown of operational expenses (payroll, advertising, insurance, utility, repair & maintenance expenses and third party expenses). It is very crucial to understand the relationship between these cost / expenses and revenues and not just report it on paper. Do these costs / expenses scale with revenues? If so, how? Will this relationship remain the same in the near future? If not, are these costs / expenses linked in another way with Profit & Loss (P&L) or Balance Sheet (BS) items?
  • Reporting figures: The way you report revenues and expenses is the way you will manage your company, so effective reporting is crucial. Does the volume of products you sell in general and their average price matter? Or is it the number of customers that matter? Which of the two makes more sense? Are most of your expenses direct (cost of production, payroll of scientists & salesmen, etc.) or indirect (management, accounting department etc.)?

2) Projections: Projections need to be as analytic and presentable as historical data. However, it is of crucial importance to make solid hypotheses and justifiable assumptions in terms of:

  • P&L items: What are the revenue drivers of the Company? Do these scale a lot with the economy at large (e.g. construction industry)?  Can you analyse easily the profitability of each of your products separately? Is it worth to utilise fully your product portfolio? Or is it hurting your profitability?
  • Balance Sheet Items: Are you getting paid fast? Or your suppliers / debtors manage their cash by delaying their payments? Do you have too much inventory in risk of losing some of your cash? Do your creditors demand payments in a timely manner? Or do they have a flexibility on the payment schedule?

All these questions should be answered carefully when writing the business plan. A business plan makes sense when there are suggestions on how to overcome the problems identified and assess how realistic the solutions are on paper compared to real life. In other words, an effective and pragmatic business plan should always be tied with an “action plan” for the company, especially if the company is an early or mid-stage company and not a mature company that is highly inflexible in implementing organisational changes and changes in its strategic directions.

3) Monitoring: the final step is to monitor the progress of the financial projections and the performance of the company. Is the company performing as projected? If not why? Is it something recurring or is it a one-off effect?

These “qualitative” issues should be reflected within the financial model that complements the business plan. Not everything can be modelled but it can be close enough to reality.

How to challenge your Company’s forecasts

Forecasting is a major challenge when it comes to budgeting, business planning or even valuation. In order for a Company to make future projections it has to have a good grasp of the market, its competitors as well as its own strengths and weaknesses. I have identified the following factors that a company executive can challenge when it comes to forecasting:

  • Look at competition: what is their strategy? How can their strategy affect your future performance?
  • What is the situation of your commercial agreements (commercial contracts)? In other words, to what extent are your revenues secured? (especially important for retail companies)
  • Has your company performed well at forecasting Profit & Loss (P&L) and Balance Sheet items in the past? What were the major reasons for divergence from actual performance? Were the factors causing this divergence systematic or one-off (extraordinary in accounting terms)
  • Look at industry reports: Global and national (where your company operates) – What do they say about the sector and its future? Are there any extreme differences between projected performance of the sector and your company? And why?
  • Macroeconomic and regulatory factors: Is the economy booming or in a recession? How elastic is the demand of your products/services and will the demand of your products/services be satisfied under these conditions? Are there any laws/regulations that may greatly affect your company in the future?
  • Investment community: What is the stock market telling you about the sector you operate in (even if you are not publicly listed)? What is the level of consolidation (M&A activity) that may shape the future of the sector? Are there any rumours for future deals?
  • Keep internal record: What about your working capital days? Are they expected to be stable in the future? (this is particularly important when projecting balance sheet items). Are you expecting major changes in your operating expenses, cost of goods sold (COGS) and selling & administrative expenses (SG&A) in the future?
  • What is the ability of your company to pay interests on short-term and long-term loans (if any) that may affect your company’s profitability?

These are the main questions yourself and discuss with your colleagues when it comes to forecasting the future performance of your company.

Vectura Plc: Evaluating the Effect of Product Success / Failure on Share Price

Torux Biotech together with Biostrategy Analytics have published an Analyst Report relating to Vectura Plc, a listed (LON:VEC) pharmaceutical company focused on Chronic Obstructive Pulmonary Disease (COPD) and Asthma indications. The report can be found in the link below:

Vectura Report

The aim of this report is to evaluate the effect of potential success / failure of clinical trial products on the share price of Vectura Plc using variations of risk Adjusted Net Present Value (rNPV) methodologies. In addition, a brief revenue & market analysis of the market segment in which Vectura is active, has been performed.

Strategic Target Screening in M&A: When and How?

Acquisitions has been one of the major strategies for growth in several industries including pharmaceuticals and biotechnology. It is well-known that 3/4 of all acquisitions end up as failures. This article focuses on how to identify the right acquisition targets based on the company’s needs and future prospects. Before deciding to pursue an acquisition the potential acquirer needs to identify its weaknesses, whether these are linked to the motives of the acquisition and if so, how. Instead, if the company is trying to anticipate market or competitors’ moves target screening and selection should also be modified. Some conceptual and practical steps are discussed below:

Identify your Company’s Weaknesses

Before deciding to make an acquisition and justify the motive behind it, it necessary to perform an analysis to identify the weak spots of your company and which of the weakness you expect to improve through the acquisition. In general a company’s weakness can fall into the following categories:

  • Operational: Research, Development and Manufacturing
  • Financial: Low appreciation of capital markets towards your company (Stock price, expectations)
  • Market Access: Brand awareness as a marketing barrier to entry

Identify Motives & Criteria

A particularly important factor to consider is the acquirer’s motives and how these relate to improving the company’s weaknesses over the long- short or medium-term (assuming that is the aim for the acquisition/merger). These are the principal factors shaping the criteria for target screening. This relationship is illustrated in the table below:

Motives & Criteria

Motives & Criteria

Time factor refers to whether the motive for acquiring a company can cope with the acquirer’s weakness in the short-term, medium-term or long-term. There are also additional criteria that can make target screening proactive. This means that, If the acquirer is considering to acquire an early-or mid-stage firm it is important to search activity of the target firm in scientific conferences, intensity of scientific publications and in the scientific community in general.

Target Screening

Using the relevant criteria and motives it is possible to start screening attractive targets. In order to do that it is vital to gain access to a database or platform that incorporates the company descriptions, number of employees as well as companies’ financials.

  • OneSource: A multi-industry database that allows the subscriber to screen by SIC Code (or other codes), country or revenues. The main advantage of OneSource is that it includes millions of private companies across the world with accurate descriptions (
  • Evaluatepharma: A pharmaceutical industry database. It incorporates historical data as well as forecasts, information about investors in the industry and data for sub-sectors (
  • Mergestat: A databases dedicated for providing with historical M&A data. With Mergestat one can search control premiums, past deal values and acquirers’/targets’ financials at the time of acquisition or merger. Useful for performing a comparable transactions valuation for potential targets (

Next Steps

Once the target sample has been developed, the acquirer needs to conduct further research on the targets. That may include one or more of the following:

  • Indicative valuation of the targets’ intellectual property (e.g. patents) based on past transactions or historical growth of comparable companies, especially when it comes to early-stage firms
  • Contacting the targets’ executives
  • Contacting third parties (investment bankers, financial advisers)
  • Discuss about potential due diligence
  • Deciding on which targets would be easier to integrate, based on size, culture and expertise and how (absorption or preservation?) 


 Target screening is crucial as it determines on which target(s) the due diligence will be performed. This article integrates the motives and criteria for target screening, examples of appropriate online platforms as well as additional steps. Failing at developing a good target sample could lead to increased risk of an unsuccessful acquisition.

Pharmaceutical Industry Profile Report

You can download the Pharmaceutical Industry Profile report free of charge from the link below:

Pharmaceutical Industry Report

The report contains the following four chapters:

Chapter 1: Global Pharmaceutical Market

Chapter 2: Solutions to Challenges

Chapter 3: Global Players

Chapter 4: Overview of Industry Trends

For any questions or recommendations do not hesitate to contact me.


Business models in the pharmaceutical industry: The case of Novo Nordisk

A business model demonstrates how a company delivers and captures value for its customers. It is one of the most significant factors determining the success of a company’s strategy, especially in the pharmaceutical industry. There exist various business models, which a start-up firm can choose for its short and long-term future. The main categories of business models are described below:

  • FIPCO: Fully integrated pharmaceutical company. These are companies that are active at all points of the value chain i.e. research, development, manufacturing and marketing/sales. A bright example of such companies is big pharma.
  • Partial integration: this includes companies that exist only at certain points of the value chain. For instance, early or mid-stage biotech companies are research driven and either outsource development and manufacturing processes or out-license their product. Contract Research Organisations (CROs) and Contract Manufacturing Organisations (CMOs) are also examples of such business model.
  • VIPCO: virtually integrated pharmaceutical companies. Such companies outsource almost all of the steps within the value chain. One of the most common examples of a “virtual” company is Shire Pharmaceuticals.
  • Collaborative models: partnering with other companies for drug discovery. Such model is a common example of value and risk sharing. A similar principle applies in a co-development model.
  • Biosimilar/generic: in such model the firm takes advantage of the patent expiry of branded drugs. It has to be noted however, that biosimilars differ from generics in the way that, biosimilars are required to prove their efficacy and safety. This primarily because, drug development and manufacturing of biologis is highly complex and therefore, biosimilar cannot be simple copies of biologics.
  • Technology brokering: using a strong network of clients for bringing together two or more companies for reaching a deal. These companies can be referred as service companies.
  • Follow-on (me-too) drug: developing a molecule that is already on the market but with new indication (Sabatier et al, 2010).

Novo Nordisk’s business model will be discussed in order to demonstrate how one can identify and analyse the business model of a company (Figure 1 shows the main financials of Novo Nordisk). Novo Nordisk is one of the industry leaders within the field of insulin delivery devices market. More specifically, Medtronic has 20% share of that market while Novo Nordisk and Sanofi have 16% and 15% of the sector’s market share, respectively (Global Information Inc, 2012). Thus, in order for the three key players to at least maintain their market share, they should have a growth rate equal or greater than that of the market overall.  One of the key characteristics of Novo Nordisk is its specialised R&D portfolio; both in the medical devices industry and the drug market the focus is on diabetes and insulin-related diseases. This characteristic can be perceived both as an advantage and a disadvantage. On the one hand, such specialisation may build a competitive advantage for the company as well as a brand over diversified organisations with multi-segment products and services. On the other hand specialised R&D, could be highly risky as it can make the company increasingly dependent on a specific market segment. For instance, if another entity discovers a product that can disrupt the diabetes market as a whole, then Novo Nordisk (or other “specialised” companies in that case) will be negatively affected. One way to compensate for such threat is forming strategic alliances and partnerships in which there is risk and value sharing. This is the point where the importance of business model becomes extremely significant.

Novo Nordisk Financials

Figure 1: Novo Nordisk Financials

It can be seen from Figure 1 that there is a significant trend between the percentage of sales coming from in-licensing with EBITDA margin, especially from 2009 to 2012. For this purpose, I have identified the majority of partnership agreements (including in-licensing deals) formed by Novo Nordisk (Figure 2). The first column indicates the year at which the agreement took place; the second column describes the type of agreement; in the third column I have determined the reason the partnership/alliance was formed or the stage at which the drug was in or out-licensed (where applicable); the fourth column describes the type of technology or drug that the agreement is related to.
Novo Nordisk Strategic Partnerships / Alliances

Figure 2: Novo Nordisk Strategic Partnerships / Alliances

The general conclusion that can be drawn from the analysis above is that two different strategies were pursued in the period of 1990s and 2000s:
1990 – 2000
•   In-licensed technology or granted access to different technologies that assisted Novo Nordisk in drug discovery and development.
•   Build brand name by marketing and distributing in-licensed products.
•   Avoided collaboration at pre-clinical stages with other companies.
2000 – 2012
•   Establishing in emerging markets, mainly India and Brazil by building/acquiring insulin manufacturing plants or through product co-development under local brands.
•   At the research stage Novo Nordisk seems to in-license promisingtechnologies instead of products (regenerative med., DNA binding technology, NGS) or make collaborations with the academia instead of with other companies.
A different way to formulate these results is shown in Figure 3:
Business Model of Novo Nordisk

Figure 3: Business Model of Novo Nordisk

In conclusion, the analysis above suggests that Novo Nordisk does not use a single business model. Having this in mind, one can assume that the business model of Novo Nordisk is a combination of a collaborative and a partial integration model. However, it is not possible to assume a business model that would perfectly reflect the reality. As a result of the technological progress in the healthcare sector and challenges that Life Science companies are currently facing, many companies have decided to develop a flexible and adaptive business model that may change depending on various internal and external factors. It would be interesting to see whether and how would pharma (especially big pharma) change its business model to overcome its challenges.

R&D Productivity: Winners and Losers

Measuring R&D productivity and innovation has been a historical issue in the pharmaceutical industry. From the concept of creative destruction developed by Schumpeter to the idea of disruptive innovation by Clayton Christensen, no one has been able to adequately define R&D productivity, especially innovation let alone quantify it. The pharmaceutical industry has suffered from lack of R&D productivity, often defined as a function of R&D costs, the overall approval rate, time frames (total number of years needed to bring a drug in the market) and the number of projects at hand (work in progress). As all of these factors increase the effect on R&D productivity is inverse, i.e. R&D productivity is declining.

However, there is a significant distinction between R&D productivity and innovation. R&D productivity is “easier” to quantify based on various R&D parameters and performance measures. Instead, innovation is conceptualised differently even within the same organisation. A shareholder would consider innovative a drug that captures maximum financial value in the sense that the end-users prefer that product instead that of a competitor. A scientist, a doctor or even a patient would consider innovation something that really changes lives, a huge switch that alters completely the current treatment paradigms. Therefore, the question still remains:

How would an organisation measure its innovative performance as compared to its competitors? The following metrics have been used historically:

  • R&D spending: The amount of money invested for research and development. It is an absolute number and since it is not relative to the company’s size it is an abstract measure.
  • R&D spending to sales (or else R&D intensity): The amount of money invested for research and development relative to a company’s sales. It is considered as a more accurate metric than R&D spending since it is a relative metric; it takes into account a size characteristic (sales) of the company. For instance, a mid-stage pharmaceutical/biotechnology company spends most of its cash on R&D and usually outsources the marketing/sales and manufacturing as it does not have the infrastructure to do so on its own. Instead, a fully integrated pharmaceutical company (FIPCO) spends slightly more of its costs on R&D than in marketing.
  • Number of NMEs: Number of new molecular entities approved can be an indication of the productivity of a company. However, their quality is considered more important than their quantity. In addition, a drug approved now shows how innovative the company was at the time of research and development and not at the time of approval. This time lag may misrepresent the effectiveness of a company’s productivity. Finally, a single company receives very few approvals in a single year and therefore, a slight variation (e.g. a company receives 3 approvals in a specific year but in the next year receives 2 approvals) does not show a variation in innovation as there are multiple factors to be taken into account (e.g. a company might receive a non-NME NDA approval that can be proved more innovative than another company’s NME approval in the same therapeutic area)
  • Number of pipeline products: indicative of the amount of products that will enter the market (if approved) in the future. Relative to R&D spending it makes it an efficient measure of R&D productivity.
  • Number of patents: In order for a company to be granted a patent, it has to show that its invention is useful, non-obvious and novel. The problem with number of patents as a metric of innovation is the huge time lag between the patent grant and the actual product. Also it is a combination of patents that leads to actual products and not a single patent. This, combined with the time lag involved makes it highly difficult to observe which patents have resulted in innovative products.
  • Sales or return on investment (ROI) from new products launched: Sales can hardly be considered as an indicator of innovation if the product does not add medical value or adds value only incrementally. New products launched can also be misleading if these products are not innovative. It can be however a measure of productivity.

The table below shows the relationship between the mean R&D spending to mean pipeline with mean EBITDA margin.

Mean pipeline to mean R&D (USD bn.) vs. Mean EBITDA margin (%)

Mean pipeline to mean R&D (USD bn.) vs. Mean EBITDA margin (%)

The mean R&D spending was estimated by firstly, deflating the real R&D values from 2000 to 2010 and then finding the 2000 to 2010 mean value of R&D spending. Mean EBITDA margin was estimated by averaging the EBITDA margin of all years (2000 to 2010).

The analysis above shows whether companies translate their number of products/average R&D spending to financial value. The following classifications have been made:

One-to-One Relationship: High number of pipeline to R&D spending (or conversely, low R&D spending per product) that leads to low EBITDA margin (similarly low number of pipeline to R&D spending with high EBITDA margin).

Productive: a company that has low R&D spending per product and achieves a high EBITDA margin.

Unproductive: a company that has high R&D spending per product but low EBITDA margin.

The Loser

Eisai’s R&D spending is not that high compared to its pipeline, however its EBITDA margin is particularly low. Eisai faced a patent expiration of its Alzheimer blockbuster drug, Aricept in 2010 which accounted 40% of the net sales of the company at that year. This is the possible explanation of Eisai’s underperformance.

The Winner

In opposite, Gilead Sciences seems the most productive company across the sample. Its high EBITDA margin is driven by its antiviral drug business and mainly HIV/AIDS drugs, Atripla and Truvada (which make up 3/4 of Gilead’s total revenues) which expire in 2018 (Europe) and 2021 (U.S.). In order to sustain its growth at least  pipeline products (5 are in phase I, 7 are in phase II, 7 are in phase III and 2 in approval/marketing) . Statistically, 0-1 of its phase I products, 1-2 of its phase II products, 4-5 of its phase III and 2/2 of its marketing/approval products can be approved (although a recent announcement by the FDA suggested that there will be a delay of the 2 products currently at the approval stage). Overall, it is expected that at the time of patent expiration of Atripla and Truvada drugs (at which time Gilead’s all other drugs will also have expired – as they have an earlier patent expiry date), Gilead Sciences will have 7-10 products in the market, 5 of which will be antivirals (HIV/AIDS). If Gilead’s revenues increase with a similar growth rate until 2019, its total sales will reach ~USD 28 bn of which ~USD 20 bn. will come from its antiviral business assuming Gilead maintains its focus on that specific area. In that case, USD 20 bn. will have to come from its 5 antiviral drugs that is expected to have entered the market by that time. It is however, unlikely for that to happen as it means that all 5 drugs will become blockbusters with average sales of USD 4 bn. To avoid the high risk of depending on very few blockbuster products, Gilead is more likely to diversify into new therapeutic areas through new acquisitions or increase its focus on its current, minor therapeutic areas by capitalising on the infrastructure of the acquired companies (Myogen and CV therapeutics acquisitions in cardiovascular area, Corus Pharma in respiratory area, Navitas Assets treatment for PAH, CGI Pharmaceuticals in inflammatory diseases, Arresto Biosciences and YM Biosciences in oncology area and Pharmasset in hepatitis C area).

What you invest is what you get

It can be seen that a major part of Big Pharma (Roche, Novartis, Eli Lilly,AstraZeneca, Bristol-Myers Squibb and Pfizer) is in the border between “PRODUCTIVE” and “1-1 RELATIONSHIP”. This means that pharma’s average R&D inputs lead to the average financial performance (EBITDA margin). This shows the life cycle aspect of these companies and more specifically their maturity. Their global presence and their huge infrastructure create several issues (including communication, lack of focus on or inability to identify key pipeline products if pipeline is full of other products).


If you find this article interesting do not miss the next one which will focus on a more qualitative approach related to the source of innovation in the pharma and biotech sector.

Regenerative Medicine Market: The future in Life Sciences or just another promise?

Regenerative medicine (RM) is one of the most innovative technologies that might prove to have a significant added value in healthcare. I will start with some scientific definitions and then move into the business area. RM is an interdisciplinary field involving tissue engineering and (stem) cell therapy. Stem cells are undifferentiated cells (i.e. they have not transformed to a specific cell type yet) with the ability to differentiate or self-renew. Progenitor cells have the capacity to differentiate but not self-renew.

In cell therapy ex-vivo cultured stem cells or progenitor cells are used to treat certain types of diseases.

In tissue engineering, scientists use scaffolds and growth factors to create new tissues (or repair damaged tissues) in the patient’s body. There exist three main treatment methods within tissue engineering: stem cell based tissue engineering, non-stem cell based tissue engineering and gene therapy. Stem cell based tissue engineering involves autologous stem cell therapy (e.g. cryopreservation of stem cells for transplantation – many people do that nowadays, when the baby is born) and allogeneic stem cell therapy (e.g. bone marrow transplantation). Accordingly, in non-stem cell based tissue engineering there is autologous and allogeneic (primary/progenitor) cell therapies. Non-stem cell based tissue engineering also involves xenotransplantation. Finally, gene therapy aims at providing tissue cells a suitable environment for the appropriate proteins to be expressed (potential applications: skin, cartilage or bone; Goessler et. al, 2006).

The advantages of each of these specific therapies vary, but in general these are: wide use as science progresses and treatment of previously non-treatable disseases. Disadvantages include: tissue or organ rejection from the body, adverse side effects and high costs.

The challenges that scientists are currently facing is the maintenance of the appropriate environment for terminal cells to expand (pH, temperature, metabolites and nutrients) as well as isolating homogeneous populations of differentiated cells.

Having discussed the problems related to the science of RM I will now move into the business promises and challenges of RM.

• High uncertainty: there is a high uncertainty regarding the therapeutic areas in which RM can be applied at. Literature suggests that orthopaedics and cardiovascular areas are the most promising for RM. Instead, diabetes and CNS remain at the bottom of the list.

• Large scale-up: most of the current treatments in RM are patient-specific and it is very difficult for biotechnology companies to do process scale-ups for these treatments. Therefore, only few hospitals (in high technology areas) are able to offer such therapies.

• Ethics and regulation: regulatory framework for RM is unclear as there is an extensive debate about its uses and applications (Bioethics).

• Costs: as an example an artificial heart valve may cost up to $1,000,000 for the patient and cryopreservation of embryonic stem cells can reach $2,000/year.

• High R&D costs: although the specific costs of RM have not been accurately identified yet, according to the costs for patient and hospitals one can conclude that R&D costs might be equal or even more than developing a drug.

Considering these challenges why would one invest in RM? To answer this question the market drivers should accurately be identified. The following business motives are the most prevalent for RM:

• Pressure for lower health-care costs: As discussed above there are high costs both for companies as well as for patients. However, many believe that as science progresses and time passes the law of “economies of scale” will apply and RM applications will become less expensive than traditional treatment methods.

• High academic research activity: Academia is undoubtedly the protagonist in the progress of RM. There are numerous PhD fellowhips in the field of RM and universities are also offering master degrees in the field of RM. A few years ago this would seem very distant. This involvement of academia has attracted both public organisations (for example the technology strategy board in the UK) and healthcare companies by becoming active investors in the field. On one side, public organisations believe that RM can have a significant added value in medicine and for the treatment of serious diseases, while healthcare companies expect RM –in the long-term- to compensate on the challenges that these companies face (especially big pharma – rising R&D costs, low market growth and patent expirations)

• High demand for organs

• Involvement of big pharma: Big pharma is getting increasingly interested in the field of RM. This interest may be just exploratory (challenges faced by Pharma companies may prevent them from getting intensely involved in other uncertain areas in which they are not familiar) or real (RM offers pharma companies to use stem cells for drug screenings. Also, RM offers a promising diversification of existing business models.)

• Technological innovation in other high-tech areas: for example nano-medicine.

According to my short market analysis, there are currently 50 companies listed in the stock-market that are related to RM of which the top 3 companies have a market cap US$ 2 bn, US$ 1 bn and US$ 600 mn while the rest of the companies have a market cap below US$ 240 mn. Moreover, 34 out of the 50 companies listed, have so far been making losses. But it was the same situation for biotech companies few years ago and pharma realised (with a delay I would say) their huge potential through acquisitions, strategic alliances and partnerships. Could RM be the same? I say we will have to wait. It is important to note however, that the compound annual growth rate (in terms of revenue) of the 50 listed companies (in total) is approximately 16% (from 2007 to 2010).

In conclusion, the scientific progress of RM, the increasing involvement of academia as well as big pharma and the approval of the first stem cell drug Prochymal (for the treatment of graft-versus host disease – produced by Osiris inc,) by the FDA makes me to believe that RM is in the right way and will eventually deliver on its promises.

Oncology Market: Drivers and Challenges

As pharma celebrates its 16-year high NME approvals, productivity of certain disease areas including oncology certainly fall behind. Oncology diseases are the most complex in terms of research and development. At the research stage, target identification has been a major challenge due to the high toxicity of potential drug candidates. At the development stage, pharma has failed to add significant value in terms of safety and efficacy. Complexity of cancer diseases is proven by the low approval rates as opposed to other therapeutic areas (Figure 1; Kola and Landis, 2004).

Figure 1: Success rates – Oncology vs. All therapeutic areas

Figure 1 shows that the overall success rate of Oncology drugs is half of that of all other areas (on average). Although oncology approval rates are low, according to IMS Health oncology market has the largest share compared to other disease areas ($US 42 bn, ~7% of global pharma market) with compound annual growth rate (CAGR) of 10,5% (Figure 2).

The global market for pharmaceuticals (all areas) is estimated to experience a CAGR of 6.3% (Figure 3). Prescription drugs that were active in the market between 2007 and 2011 were found to be ~5,700 in number. Similarly, the number of oncology drugs was ~500.

Figure 2: Global Oncology Market (2007 - 2011)

Figure 2: Global Oncology Market (2007 – 2011)

Figure 3: Global Pharma Market (2007 - 2011)

Figure 3: Global Pharma Market (2007 – 2011)

Aggregate sales (in period 2007 to 2011) for oncology and all therapeutic area drugs was US$ 262 bn and US$ 3801, respectively. This results in average sales per product for oncology drugs US$ 524 mn (aggregate sales / # of products active in the market) and for all drugs $US 668 mn. Assuming even sales each year, oncology drugs achieved, on average, sales of $US 105 mn (per product per year) while other drugs, sales of $134 mn (per product per year).
The analysis above shows that both R&D and market productivity for oncology drugs is lower than other therapeutic areas. In addition, a thorough analysis from EvaluatePharma shows the oncology market outlook in 2014. What is interesting, is the dominance of Roche (with Genentech) in the market as well as AstraZeneca’s and Sanofi’s market share shrinking (projected – see figure 4).
Why does pharma continue to get involved in oncology? There are several market drivers that attracts  are:
  • Cancer prevalence: The main reason that the market is growing faster than other areas. Increased cancer prevalence is associated both with population growth as well as with increased life expectancy.
  • Early diagnosis: Due to emergence of advanced imaging techniques and computer simulations it is diagnosis has been more efficient and diseases can be detected earlier.
  • Academic collaborations and partnerships: Pharma and biotech companies, in order to reduce both the high R&D costs and risks related to cancer drug discovey, they form strategic alliances and partnerships with private academic institutions or funds. A high amount of government funded institutions are also involved in such deals. This is a major driver in the field of oncology.
  • Biotech: externalisation of R&D is becoming a major trend in pharma. Oncology drugs are commonly co-developed than developed in-house (due to their high R&D costs). Almost half of the drugs that are developed in-house at the preclinical stage, they end up as (out)licensed or co-developed at a phase III. In addition
  • Blockbuster presence: Although oncology drugs’ sales per product are lower than overall drug sales, approximately one sixth of blockbuster drugs are focused on cancer diseases, implying that oncology market profile is skewed towards high sales drugs. This makes oncology market more attractive for pharma companies.
  • Duration of treatment: As in other disease areas, drugs have succeded in extending patients’ life and therefore prescription of medicine is increased.
  • Emergence of targeted therapeutics
Apart from the attractive characteristics of the oncology market, there are also some challenges, including:
  • Cost containmentState funding for all industries has been reduced (U.S. and Europe) the past few years due to the financial crisis that has affected all areas including healthcare. As an example, the National Insitutes of Health (NIH) reduced R&D budget (compared to last year) for the first time in its history. This shows the efforts made to stabilise the upward trend of R&D spending. Moreover, the US$ 85 bn cut implemented by the US government is expected to decrease NIH spending by approximate 5% in 2013.
  • Barriers to entry: Lower approval rates for oncology drugs, makes the market of oncology riskier and more costly, raising barriers for new entries
  • Patent Cliff: Patent expirations between 2010 and 2014 put at risk at least US$ 100 bn and major oncology drugs are at stake.

Licensing agreements have proved to be more efficient from both a strategic and financial point of view, especially when it comes to oncology. A licensing deal made at a late stage will have high upfront values and low (development) milestones (high probability of approval). Instead a licensing deal involving a product at an early-stage will have a lower upfront value and higher milestones (low probability of approval).  Therefore, there is a reduction of value loss compared to the event where a company executes a project on its own. From a strategic point of view, every-day decision making and managers’ time and effort dedication (of the licensee firm) to clinical trial projects is not destructed, since only financial compensation is granted to the licensor depending on the outcome.

In my view, there are two ways to cope with the challenges of the oncology market. The first one is licensing agreements (as discussed above) which may make pharma companies more efficient by capitalising on biotech’s leading technology research platforms and scientists’ expertise. This suggested solution can reduce the effect of cost-containment as well as the major patent cliff faced by the pharma industry. The second solution would be to better understand oncology diseases and their complexity. This could only be achieved through a deeper dedication to research (drug discovery) in order to arrive to more optimised leads, which in turn it may result in more promising drug candidates.