Why Pharma Undervalues Novel R&D

[This post originally appeared on Forbes.com on December 7, 2016.]

Why do pharma firms sometimes prioritize “me-too” R&D projects over high-risk, high-reward “pioneer” programs?

One reason–not the only one, but a contributor–is that many pharma financial models assume first-in-class drugs will gain commercial traction more slowly than “followers.” The problem is that when a drug’s projected revenues are delayed in a financial forecast, this lowers its net present value–which can torpedo the already tenuous investment case for a risky, innovative R&D program.

According to a new paper by me and Seth Robey, however, it may be time to revisit the decades-old assumption that sales of pioneer drugs ramp more slowly–which could change how pharma companies assess the financial value of innovative R&D.

(Disclosure and shameless self-promotion: We did this study as part of the work on our new book, The Pharmagellan Guide to Biotech Forecasting and Valuation–get details and sign up for excerpts and special offers here.)

First, some history. The idea that pioneer drugs gain market traction more slowly than followers comes from work by Bauer and Fischer, who looked at international prescription data from the 1980s for four classes of cardiovascular medicines. They found that first-in-class drugs took about eight years to reach peak sales, compared with four years for subsequent entrants.

Despite this work’s old and limited sample set, Bauer and Fischer’s finding has persisted as the standard assumption in many early-stage biotech models–in part because it reflects an appealing logic. Doctors may hesitate to widely prescribe drugs with brand-new mechanisms until they use them in a few patients and see for themselves their efficacy and risks, compared with new drugs in classes with which they’re already experienced.

But today, many drug launches are highly anticipated and widely publicized (some might even say overhyped), especially in cancer and rare diseases–so doctors may not wait as long before broadly prescribing new agents as they did when beta-blockers and calcium channel inhibitors were launched several decades ago. Meanwhile, it’s gotten harder for companies to drive adoption of undifferentiated me-too drugs as pharma sales forces have become less effective and payers have raised the bar for what they'll cover.

To update Bauer and Fischer’s findings, we looked at the market uptake of all drugs that garnered FDA approval from 2000 to 2002–more recent than the earlier study, but old enough to see the full uptake trajectory–and we couldn’t detect any systematic difference in ramp rates between pioneers and followers. Both took about six years to reach peak penetration, suggesting that first-in-class drugs are gaining traction faster, and me-too agents are being adopted more slowly, compared with cardiovascular drugs in the 1980s.

Shape of a median launch curve for drugs launched in the United States, 2000–2002. Figure from Robey & David, Nat Rev Drug Disc, 2016.

Shape of a median launch curve for drugs launched in the United States, 2000–2002. Figure from Robey & David, Nat Rev Drug Disc, 2016.

The main advantage of our approach is also the source of its biggest caveat: the diverse set of drugs we analyzed to better reflect the breadth of R&D programs and drug launches today. This heterogeneity likely contributed to the broad distribution of ramp rates we observed for both pioneers and followers, and thus, our conclusion that commercial uptake is similar in both groups may not hold across absolutely every therapeutic area or market.

It’s also worth noting that although our sample is more updated than Bauer and Fischer’s, it’s still not recent enough to answer some questions–like whether adoption of the Affordable Care Act has affected commercial uptake–because we wanted to give ourselves a long enough runway to correctly define the sales peak. So although we think our work is an improvement over prior efforts, it’s certainly not the last word on launch trajectories.

But from a practical standpoint, our data challenge a longstanding assumption that affects how some pharma companies assess innovative R&D programs. We've seen several firms abandon first-in-class internal programs and in-licensing deals because they balked at low financial valuations that were, in part, due to their slow projected ramp rates. Our finding that pioneer drugs are adopted no more slowly than me-too ones could help level the economic playing field and make riskier, but often higher-impact, R&D programs more attractive to executives and investors.

Note: Thanks to Laura Chico of Raymond James & Associates for helpful input. Please send requests for reprints of the published paper to info <at> pharmagellan.com.