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Revenues From New Drugs – And Thoughts on Chance

Here’s an interesting analysis of the industry from IDEA Pharma, via Endpoints. They’re looking at the revenues from the more recent drugs in the pipeline (approved in the last five years) and comparing that to each company’s total R&D spending. The list is all Big Pharma – the cutoff is companies that have at least five billion in revenues from such recent products. That makes sense, because otherwise the ratios would be dominated by small companies who have gotten their first products on the market, etc. But for the bigger outfits, the idea is to see how much revenue is being generated by the more established drugs versus the fresher ones.

Gilead is the big outlier – they have by far the largest revenue from recent approvals, both in sheer dollar terms and as a percentage of their R&D spending. Bristol-Myers Squibb is the only other company where the past five years’ approval revenues are actually higher than past five years’ R&D, and they’re almost even. Biogen is almost even, just on the other side, but they’re also an outlier in having the smallest R&D expenditures on the whole chart (both the total over the five years and the average annual spending). For everybody else, the revenues from recent drugs are a only a fraction of their recent R&D spending, typically around 20 to 40%. Roche (especially) and J&J are the outliers on that end, with comparatively small contributions from the last few years of approvals.

There are complications with these figures, as the article notes. Different companies can have different ways of assigning R&D expenditures, especially in the case of in-licensed compounds. And depending on their portfolios, some companies may be letting some older drugs just cruise along, while others are still pouring development money into them to expand their indications, combination therapies, and so on. That said, I found this part particularly interesting:

There is little similarity in these top performers. . .other than a dependency on one therapeutic area – in many cases one where the company was not dominant 10 years ago. That the drivers of revenue may have succeeded despite the company, not because of it, seems to hold for most. Leadership in a therapy area seems to lead to poorer decisions, rather than better ones (a factor that other industries have tried to solve for.)

No one in upper management likes to hear talk like that, but it’s a challenge to try to prove it wrong. It’s better for everyone’s career to have a narrative featuring bold, far-seeing leaders making the hard, gutsy decisions, followed by wise stewardship of their well-deserved revenue streams after their visions are realized. Does that sound just a bit like some press releases or annual reports you might have come across? All that stuff is just as worthwhile as watching sports interviews, where the winning pitcher/forward/quarterback informs the world that they just had to come together as a team, stick to their game plan, and give one hundred and ten percent.

Visiting space aliens would find it notable that victory always seems to go to the clubs that do these things, just as business success goes to those companies with strong corporate values and visionary leadership teams. Up in the saucer, one large-eyed greenish head turns to the other: “Xondegaark, I ask you, what are the odds that this can be coincidence?” I admit, it is possible that creatures who are able to fly a two-seater from Alpha Centauri might have come across the concept of confirmation bias. And if they spend as much time on the home planet BSing each other as we do down here, you wonder how they managed to discover faster-than-light travel in the first place.

Just to pick one example, if you’d appeared in Merck’s executive boardroom in 2008 or so and told them that they’d be an oncology powerhouse in ten years, they’d have looked at you like you were our buddy Xondegaark. Even if they’d believed you, they wouldn’t have believed how it happened, probably ascribing that future success to their visionary leadership, etc. But Keytruda was barely a footnote when Merck bought Schering-Plough in 2009, and the company was making plans to unload it on whoever might be interested. The company definitely gets credit for solid execution once Bristol-Myers Squibb showed them that a PD-1 compound could do something interesting, but Keytruda itself was part of nobody’s vision and no one’s plan. A lot of things aren’t. Management should be advertising how well they can deal with the curveballs that reality throws at them, rather than pretending that they can see them coming before the pitcher even goes into the windup.

35 comments on “Revenues From New Drugs – And Thoughts on Chance”

  1. MrXYZ says:

    I am still trying to parse the final two sentences of the IDEA Pharma analysis:

    “As this chart shows, there is only heterogeneity when we look at outcome, although a great deal of homogeneity in the R&D strategies. It remains true that serendipity and decision-making are having a bigger impact on success than the ‘follow the science’ strategy – science needs a direction, and that direction should come from the patient, or their surrogate: the market.”

    It’s the final sentence that bothers me. If serendipity is playing such a big role, then ‘follow the science’ seems to be the best decision-making strategy. For example, the multitude of recent Alzheimer’s trial failures, that followed after the first wave of Alzheimer’s trial failures, seems to be cases of following the market (Alzheimer’s is a big market) rather than following the market (the amyloid hypothesis isn’t panning out as expected, so let’s revisit the basic science).

    While I agree that the original decision on what to work on should be driven by medical need. But other decisions (do we move ahead or stop?) need to be based in the science and the data.

    1. Mike Rea says:

      I can explain: in early phase, using science to explore is sensible – that is, before indications, patient population, endpoints, etc., are chosen (not to mention price, access, etc.). However, where the drugs will land is baked in too early to allow this exploration – mostly pIIs are set up to deliver a signal for an already-laid out pIII and submission. Science has given way to proving the hypothesis, not exploring it, in most late-stage programs…

  2. yadda yadda yadda says:

    I’d say the jury is still out regarding companies being an “oncology powerhouse” people are starting to get wise about being fooled into spending their life savings on a few more months of lousy quality of life in a hospital bed.

    1. Anon says:

      Thank you for this comment. Derek is conflating revenue with – you know – actually helping people.

      1. yadda yadda yadda says:

        The point I was trying to make is this newfound revenue source for pharma may wane after people become more educated about real outcomes.
        With regards to people chiming in about their positive experiences, I didn’t say ALL situations were like that, but unfortunately a lot of people ARE being conned into spending their life savings for basically nothing, denying their spouses etc. money they need to survive on after their loved one passes.
        I’ve personally heard of a few, they were misled to say the least, about the possibility of a “cure”, by marketing types and their doctors.

    2. Krishna says:

      “a few more months of lousy quality of life in a hospital bed” is absolutely not true for all patients. Here is the 5 year analysis for Keytruda specifically – https://www.fiercepharma.com/pharma/asco-merck-s-keytruda-shatters-historical-long-term-lung-cancer-survival-stats

      ” results showing that 23.2% of previously untreated non-small cell lung cancer (NSCLC) patients taking Keytruda were still alive at the five-year mark.”

      This is up from 5% without these therapies. Add to that, the new CAR-T therapies could potentially improve these numbers further.

      In order to make a case for reducing exorbitant drug prices, we don’t need to make patently wrong assertions. More direct moral arguments are more than capable to make a strong case.

      1. yadda yadda yadda says:

        You just made my point….blow your life savings, that your family needs after you pass, on a 23% chance….

        1. gimme ya money!! says:

          From a Merck 2018 financial report at the end of 2018

          “Full-Year 2018 Worldwide Sales Were $42.3 Billion”

        2. Escapee says:

          Surely that’s just an argument against the appalling approach to healthcare funding in the US, not an argument against a cancer therapy that has raised patient’s 5 year survival rates 400%.

          If you’re unwilling to accept a 25% chance when it is available, how are you ever going to achieve 50%? or 100%?

      2. FoodScientist says:

        “Still alive” is a very broad goal. Terri Shivo anyone? There really needs to be some quality of life adjusted(above some threshold) x years/months metric put into common usage.

        1. Escapee says:

          That’s exactly what QALYs are…

    3. loupgarous says:

      Lu-177 octreotate PRRT gave me extra years outside a hospital. I’m grateful to the research team with whom I worked as a clinical trials subject and my current oncology team for the chance to try it. There are times when costly cancer interventions deliver good quality of life over multi-year periods, and when, like PRRT, they can work for years, they’re cost-competitive or even cheaper than Keytruda and/or other biologics.

  3. John Harrold says:

    I read the quoted text below and my first thought was survivorship bias:

    There is little similarity in these top performers. . .other than a dependency on one therapeutic area – in many cases one where the company was not dominant 10 years ago. That the drivers of revenue may have succeeded despite the company, not because of it, seems to hold for most. Leadership in a therapy area seems to lead to poorer decisions, rather than better ones (a factor that other industries have tried to solve for.)

    1. Humulonimbus says:

      Yes, it is indeed survivorship bias more than confirmation bias (though the latter is also ever-present).

      Survivor bias blows a huge hole in a lot of popular business reasoning/Monday morning quarterbacking. “Good to Great” is an excellent example of this sort of naivete, though its cardinal sin is hindsight bias (and small sample size, and a litany of others). Many of these delusions are well-described in Phil Rosenzweig’s The Halo Effect.

      https://www.amazon.com/Halo-Effect-Business-Delusions-Managers/dp/1476784035

      1. Anonymous says:

        Halo Effect: Haven’t read the book, but took a look at some reviews and comments. “What is the halo effect? A tendency to make inferences about specific traits on the basis of a general impression.” To tie this in to grad school and beyond, there is something related but that goes beyond just the Halo Effect: “The Self Fulfilling Prophecy.” An academic or industrial PI gets a general impression, forms an opinion (halo), and then STRIVES to prove their prescience and skill at evaluating talent by promoting their work and career. E.g., first year grad student, favorable first impression (or good reference from another Prof), “this guy will be the next Woodward” halo, gets good projects to work on, is added to others’ papers, their own poor results written up as good results, talked “up” to colleagues and others, … great recommendations, lands great job. “See! I told you this guy was great and going places!” Crashes and burns. “Well, that was after he worked for me.”

        (I think some people might include Self-Fulfilling Prophecy in the Halo Effect. Some mention the experiments with teachers and school kids. When the teachers are told, falsely, that a student has a high IQ or some other good attribute, they get more attention and better evaluations from the teacher; when told that a student has some poor attribute (ADHD, even if they don’t have ADHD), the teacher gives that student less attention and poorer evaluations.)

      2. Anonymous says:

        Halo Effect 2: From wikipedia, “The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the original false conception come true. This specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning.” (Merton)

        I have read other biz books, including Built to Last, that struck me as being full of … claims and conclusions I did not share. Sure enough, others have slammed BTL, too, including the Halo Effecters. Link in my handle.

    2. WWCody says:

      We hear great things from the drowning sailors pushed to shore by dolphins but there is a strange silence from those the dolphins pushed further out to sea.

  4. Anon says:

    Merck lucked out big time with Keytruda and no one knew including “Greedy Freddy” when they took over SP. Once they realized that it could be a a goose that can lay golden egg, there was no looking back and made all the right moves. Wonder how they are faring in small molecule research?

  5. drsnowboard says:

    So, with the caveat that I haven’t read the article, isn’t this just pointing out that to be First isn’t necessarily the most ‘cost-effective’ strategy. Derek uses Merck vs BMS, but how about Gilead vs BMS (NS5a), Pfizer vs AZ (Erb-2) etc? It would certainly explain the fast-follower bandwagon that rolls through a lot of companies ( I’m looking at you GSK…. )

  6. Calvin says:

    Well this is an appropriately flawed cut of the data which IDEA seem to specialize at. Gilead’s revenue may look remarkable but the R&D spend of 3.75B annually (or 18B since 2014) would seem to ignore that they spent 11.2B on Pharmasset (in 2012 before the data cut starts) to get those impressive revenues. Sure, they drove the P2 onwards clinical development at significant cost but the acquisition cost dwarf those clinical costs.

    This seems like a fluff piece looking to create the impression of some kind of correlation between unrelated numbers so that “advice” can be sold. I wonder if they pay John Carroll to get their stuff on his website.

    1. drsnowboard says:

      yeah, but you could argue that GSK never recovered from earning all that cash from the Zantac years….(though there are some patient benefiting drugs since) in the same way Gilead are stretched to repeat the Harvoni success. Despite all the shareholder emolient, R&D in pharma is a far riskier practice than anyone will admit. In hindsight, who would invest in Vertex? And when.
      Obviously I’m talking shareholder returns here. If you are a patient on chemo, ondansetron is a godsend.

  7. Thomas Hager says:

    While today’s pharma giants naturally pat themselves on the back and ballyhoo their own business models, history shows that serendipity (read: “Chance favors the prepared mind”) is often a more important factor in major new advances. The key word is chance. How do you encourage serendipity in a modern pharma company? Not, I suspect, by whipping researchers toward tightly scripted end goals, regardless of how well-funded, and dis-incentivising the following of hunches from seemingly tangential observations.

    1. Curious Wavefunction says:

      Along those lines, from the wise Peter Medawar’s “Advice to a Young Scientist”:

      “I construe my function as director of research as mainly to create the kind of environment which is conducive to the advancement of learning. That sounds pompous, but this is all a director can do. You cannot direct people to have ideas, and no one can have a big enough grasp of the whole of biological science to be able to say which lines of research are certainly going to be fruitful and which are are certainly going to be a waste of time. So what one has to do is simply create an environment and an atmosphere in which science flourishes.”

  8. Eric says:

    I found the whole analysis confusing. Why would current R&D spending be expected to correlate to past research success (marketed, profitable drugs)? This is the generic warning on every investment – past performance does not predict future returns.

    1. Anonymous says:

      “past performance does not predict future returns” – I was at a very early stage biotech looking for a VP or P of Chemistry. Management was entirely Wall Street Finance types with zero background in any science, pharma, or R&D. They started interviewing the usual candidates from Merck, Pfizer, etc., not understanding anything about the candidates’ Big Pharma interview seminars. In the followup meetings to discuss each candidate, the #1 question they asked was, “Has he made a drug?” #2: “Has he made a drug?” #3: … They did interview a very famous guy who had made important drugs and had retired from Big Pharma to academia. (He was in his 60s at the time, now RIP.) His first big drug was a back burner project that his management kept trying to kill but he and 2 biologists kept it going. When the “management approved” projects died one by one, they finally let them keep going and it became a blockbuster.

      Management didn’t care that he had made a drug. They weren’t interested in making him an offer because he was too old and didn’t project the image that they wanted. Apparently, that meant an image of “success.” The biotech went under in around 2 years.

  9. Daenerys Targaryen says:

    We need to hear more from Xondegaark and its buddy.

    1. Derek Lowe says:

      Yeah, I think he’ll probably be back. . .

    2. Anonymous says:

      I give up. I googled and got two hits: your post In The Pipeline and something about JW Designs. Who or what is Xondegaark?

      1. Derek Lowe says:

        Good grief, you got some other hit? I just made up that name on the spot for one of my alien observers in the post. . .

        1. sgcox says:

          That Google hit is a simple automatic loop back
          “2 days ago – Up in the saucer, one large-eyed greenish head turns to the other: “Xondegaark, I ask you, what are the odds that this can be coincidence?”

      2. WWCody says:

        This appears to be an american pronunciation of the Søndergaard family name of many famous artists and others of Danish descent: Povl , Morten , Trine, Gale, Søren (both the boxer and the politician) Lars, Jens…the list is very long and clearly includes the now famous intergalactic explorers descended from immigrants to the Alpha Centari federation.

  10. Dave says:

    I agree that the analysis is completely flawed. It takes so many years to get through the clinical trials and regulatory process that the current R&D spending has nothing to do with the current revenue. I keep seeing pharmaceutical companies trying to figure out how to get more out of their R&D. They should look at their best selling drugs and then go back and see how R&D was managed when the drugs were being discovered and developed. That is what works. In this industry you can’t tell if the changes you made to R&D worked for about 10 years after you made the changes.

    1. Mike Rea says:

      So, we have presented some facts – revenue from new(ish) drugs and R&D spend. It’s not really an analysis, and clearly I am not drawing a link between *this* R&D and *this* revenue. At a base level, as Derek says too, revenues from new drugs have to pay for this R&D, or you rely on your old portfolio. That is as daft as it sounds. It is important to address the dissonance in decision making that I and Derek acknowledge

  11. Me says:

    Reminds of a recent Bloomberg article on AstraZeneca. It claimed that Pascale Soriot had ‘turned around’ AZ by believing in oncology assets that the pre-Soriot company was not progressing. In the next scene, one of the SVPs is saying that they are successful now because they cut more projects than they did previously.

  12. hn says:

    Advice to management: 1) Support people. 2) Don’t fuck things up. 3) Step out of the way.

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