The Cross-Border Biotech Blog

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

Potential Rewards from Successful Drug Development: Part 13 of Valuation and Other Biotech Mysteries

[Ed. This is the thirteenth 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.]

Finally we have reached the point of looking at the potential rewards from successful drug development. The potential reward can be estimated using the following step-wise analysis.

  • What is the potential market size?
  • What is a realistic market share for this new drug?
  • How much of the annual sales will become revenue, either from direct sales or as royalty and milestone payments?
  • What net income will be derived from these annual sales?

The simplest way to calculate the potential market size is simply to multiply the number of patients by the annual treatment cost. An unrealistic starting assumption is that every person in the world with that medical condition will be treated with the new drug. There is decent epidemiological information on disease incidence for most major medical conditions to give us that starting number. The analysis can be made more realistic by asking the following questions.

  • How many new cases are diagnosed annually – since undiagnosed cases cannot be treated?
  • Is this an acute condition, such as an infection, where each diagnosed patient is given only one course of therapy?
  • Is this a chronic condition, such as high blood pressure or diabetes, where the patient will likely take medication for the rest of their life?
  • Is this a condition which is treated until the disease goes into remission or progresses, such as various cancers?
  • In any given country, what percent of the diagnosed cases are likely to be treated?
  • Most medical conditions can be stratified by some measure of disease severity and treatment may differ based on disease severity. For example, most solid tumours can be classified as Stage 1 through 4, with smaller and localized Stage 1 and 2 tumours usually treated with surgery and radiation therapy. Chemotherapy is commonly used in the treatment of Stage 3 and 4 cancers, where there are often different chemotherapy regimens for first-line, second-line and salvage treatment.

The other part of the equation is the cost of the drug. For most new drugs, companies are announcing the annual cost or the cost of a standard course of therapy when the drug is approved.

Where can you find this information? The information sources can be split into two groups, those you pay for and those which are free.

  •  Free sources
    • Disease association web sites such as for the American Cancer Society, which contains the very useful resource Cancer Facts & Figures 2011
    • Medical textbooks which can usually be found at public or university libraries
    • Company web sites where they have products or are developing products for the treatment of certain medical conditions
    • Stock analyst reports may be the most comprehensive free resource because they will probably have looked at many of the other sources listed here
    • Some drug formularies are available on line such as the Ontario Drug Benefit Formulary (

A second way to calculate potential market size is to look at the sales of currently-approved drugs for a specific medical condition. The first step is to list all of the drugs used to treat a specific medical condition, which you will also need for market share analysis. This information can be obtained by looking at disease association web sites, medical textbooks and therapeutic classes in drug formularies. Company web sites are a good free source of sales data for major drugs but this information is often not available for drugs which have been genericized or for which sales are not material to a company. The situation can also be complicated if drugs are used for more than one medical condition.

Once you have a potential market size, the next question is assessing what share of this market a new drug could secure – which will be discussed in the next post.

One response to “Potential Rewards from Successful Drug Development: Part 13 of Valuation and Other Biotech Mysteries

  1. Pingback: Assessing Potential Market Share for a New Drug: Part 14 of Valuation and Other Biotech Mysteries « The Cross-Border Biotech Blog

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