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Biotechnology, Health and Business in Canada, the United States and Worldwide

Valuation and other biotech mysteries – Part 6: The cost of developing a new drug

[Ed. This is the sixth part in Wayne’s series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

The Tufts Center for the Study of Drug Development has been the source of the most comprehensive studies of new drug developments, including costs, success rates and strategies. Their estimates include the cost of the failures and the lost income from simply investing in government bonds. Neither of these factors is relevant to our current discussion although the former is critical to the success of the industry.

The clinical development pathways for both Theratechnologies Inc. (TSX:TH) (NASDAQ: THER) and Oncolytics Biotech (TSX:ONC)(NASDAQ:ONCY) have been outlined in previous parts of this blog series  and it is appropriate to look at the expenses for these companies. The expenses of Cardiome Pharma Corp. (NASDAQ: CRME) (TSX: COM) in their development of both intravenous and oral forms of vernakalant are also shown below. The information for all three companies was found from their annual financial statements at www.sedar.com in about 30 minutes.

Oncolytics expenses are the simplest to assess and the company also provides cumulative information.

Year

R&D Expense

G&A Expense

Cash Used In

Operations

 

 

 

 

Cumulative

$98.3

$32.8

$122.3

2010

$12.2

$4.2

$18.0

2009

$11.6

$3.8

$16.1

2008

$13.4

$4.3

$15.3

2007

$12.4

$3.8

$14.4

2006

$11.4

$3.6

$13.0

2005

$9.3

$3.1

$11.1

2004

$7.1

$2.8

$9.2

2003

$2.8

$2.4

$5.5

2002

$4.3

$2.1

$7.3

2001

$5.1

$1.6

$4.3

2000

$3.7

$1.1

$3.2

Theratechnologies expenses are a little more complex to assess. The sales & marketing development expense could be combined with the G&A expense for financial modeling but showing the expenses separately is good corporate disclosure. In 2009 and 2010, they had income from a partnership and therefore had cash flow from operations instead of the normal cash burn. Historically, the company also had equity interests in 3 related companies (Celmed, Andromed and Ecopia) and the divestment of some of these assets led to the low cash burn in 2005.

Year

R&D Expense

G&A Expense

Sales & Mktg.

Development

Cash Used In

Operations

 

 

 

 

 

2010

$14.1

$8.0

$2.7

-$2.9

2009

$20.8

$6.5

$6.9

-$5.7

2008

$33.2

$6.2

$3.8

$42.4

2007

$30.2

$7.3

$2.4

$32.5

2006

$21.1

$4.9

$0.9

$23.1

2005

$13.8

$5.5

$1.0

$4.3

2004

$17.0

$6.6

$1.0

$22.0

2003

$21.1

$7.6

$0.9

$27.4

2002

$23.6

$7.2

$1.0

$23.6

2001

$11.4

$5.0

$0.9

$13.4

2000

$4.5

$4.8

$0.8

$7.0

Cardiome Pharma has one extra complication in their analysis. They currently report in U.S. dollars but some of the earlier financials were reported in Canadian dollars. They also have had substantial license and research fee revenue so it is important to look at the actual expense items and not only net income or cash used in operations.

Year

License &

Research Fees

R&D Expense

G&A Expense

Cash Used In

Operations

 

 

 

 

 

2010

$66.1

$15.3

$12.9

-$2.7

2009

$30.2

$26.6

$15.1

-$38.1

2008

$1.6

$49.2

$17.2

$65.0

2007

$4.9

$56.8

$18.5

$66.9

2006

$20.7

$43.4

$13.9

$21.0

2005

$16.1

$42.5

$9.3

$23.8

2004

$26.4

$38.7

$7.3

$29.7

2003

$6.0

$16.9

$5.6

$5.8

2002

$1.8

$9.8

$3.8

$9.5

2001

$0.2

$5.2

$2.0

$6.7

2000

$0.1

$4.7

$1.6

$3.9

What do you need to know when filling in the expense side of a product valuation?

  • There will be non-clinical R&D expenses such as toxicology and pharmacokinetic studies.
  • There will be clinical R&D expenses, including manufacturing of clinical supplies, clinical personnel at the company and clinical costs at CROs and hospitals.
  • Both of these costs will vary widely depending upon the drug, the clinical indication and the structure of the clinical trial, especially the number of patients, length of treatment and length of monitoring.
  • Pharma companies can easily do this part of the valuation by asking the appropriate groups within their companies what the costs would be.
  • There are two potential sources of information available to the general public. The first source is the company – simply ask them what the cost per patient or per trial will be. The second source is the financial data for public companies doing a similar clinical trial. As mentioned in a previous post, www.clinicaltrials.gov and analyst reports probably provide the best lists of similar clinical trials.
  • There will be non-clinical management expenses, which are the G&A (general and administration) expenses for small companies and become direct and indirect overhead in larger companies. The costs will rise as the clinical program expands.

So we now have a clinical pathway and the potential to estimate the cost for that clinical pathway. Before we turn to the potential reward side of the valuation equation, the next posts will look at the ability to find funding for drug development.

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