All opinions are my own.

Thursday, February 9, 2017

Pharmaceutical Sales Forecasts: Fiction, Facts or Alternate Facts

Every year many analysts and magazines publish their forecasts for the new drugs that have been approved by the US FDA the previous year. Every thing looks glorious and sales are projected in billions. An extremely rosy picture is painted. However, I have not found a “fact check recap” of the projected numbers three or five years after the sales projections have been made. In today’s new political lingo no one has presented “alternate facts”. Real numbers come from how many patients are benefitting from the new drugs and that is a missing piece of the reality.

It seems that the sales projections are always Up Up and Away (1), a wishful thinking. Even the yearly total global pharma sales are projected to grow about 5-7% per year ending around $1.3 -$1.5 trillion dollars by 2020-2022 (2,3). I have serious doubts about these numbers and wonder have these projections been questioned in a public forum. Most likely no one cares, at least that is my conjecture. Since businesses design their plants based on projected sales, I am comfortable in saying that we will consistently have “mega over capacity” at plants. In simple terms overspent capital, under-utilized assets and inefficient plants. This sentiment was recently echoed (4). I am afraid poor patients pay for this largesse through higher drug prices.

Trying to understand these forecasts, a recent article (4) was brought to my attention. Excerpts from the article enlightened me and reconfirmed my apprehensions. It seems to be telling us things many of the forecast pundits most likely do not want to know. 

“First, most consensus forecasts were wrong, often substantially.”
 “Furthermore, a significant number of consensus forecasts were overly optimistic by more than 160% of the actual peak revenues of the product.”
Although the conclusion that most forecasts are poor is not surprising in our view, the magnitude and extent of the error in forecasting is striking and troubling as it suggests a large-scale and systemic misallocation of capital and destruction of value in the industry. It also suggests that there is a substantial opportunity for companies and investors who develop a competitive advantage in forecasting.”
 “The ‘consensus’ consists of well-compensated, focused professionals who have many years of experience, and we have shown that the consensus is often wrong.”

A recent analysis of the projected global pharmaceutical sales (5) shows their irrationality, at least to me. 

If the world knows that these forecasts are “often wrong”, the question is what is the rationality and value of publishing such numbers year after year. Who benefits? Why are these supposedly “ostrichian” numbers published? Are these numbers just exuberance based or are telling us that the companies are doing great things when the reality is otherwise or is this a way to impress investors or much ado about nothing? Shouldn’t we be associating new therapies with people rather than dollars when we know these therapies have a very limited patient base?

The most important fact or a reality, which matters the most is never published or for that matter known to anyone and that is how many patients (+/-10%) are benefiting from the drugs or using it. Forecast numbers per drug can be checked, published and compared against forecast using various company Annual Reports.

I believe that number of patients would be an excellent indicator of each drug’s efficacy and ability to treat patients. Increasing numbers will tell us that drug’s mode of action is of value and could be modified to create better treatments for larger population. Future treatments could be based on this learning. If any new drug is just marginally better than an existing drug, lack of its sales will also be a deterrent for R&D investment in such therapies.

As I have not seen reality checks against forecasts and it begs the question “are we afraid to ask or know the reality?” My conjecture is that reality checks will allow the companies to have better R&D, manufacturing processes and offer us an opportunity for efficient asset utilization, a small step for making drugs affordable. In addition, these numbers will also be of value to the investors to discern and direct value of their investments.  

Girish Malhotra, PE
EPCOT International

  1. The 5th Fifth Dimension, Up Up and Away, Accessed February 8, 2017
  2. World Preview 2016, Outlook to 2022; Accessed February 8, 2017
  3. Global Medicines Use in 2020: Outlook and Implications, Accessed February 8, 2017
  4. Cha, Myoung, Rifai, Bassel and Sarraf, Pasha, McKinsey & Co.: Pharmaceutical forecasting: throwing darts? Nature Reviews, Drug Discovery: Volume 12, October 2013,  737-738, Accessed February 7, 2017
  5. Malhotra, Girish: Manufacturing technologies and their part, Chemica Oggi Chemistry-Today, September/October 2015 Vol. 33(5) pg. 28-31

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