Wednesday, May 13, 2015

Investor Analysis - the Economics of the Blockbuster Drug





Just for fun, I took the latest DDD metrics shown in the graphic below (courtesy of S.M. Paul's analysis $1.78 billion and 13.5 years) and translated that into an Internal Rate of Return calculation which theoretically will remove emotion and focus our analysis on the rigorous framework  that most of industry uses to allocate capital. I also ran the same model against the metrics for a repurposed drug.

To perform the analysis I used the cost and time metrics shown above and made the following assumptions:

1. We did, in fact, end up with a blockbuster drug, producing $1 billion in revenue in years  15 to 24 (the period of exclusivity for the intellectual capital). Note: this is a very generous benefit of the doubt position to assume that a blockbuster drug emerges.
2. The repositioned drug was a reasonably successful product, producing annual revenues of $300 million for its period of exclusivity, beginning in year 7 and continuing on through year 24.
3. The metrics we used for the repositioned drug were 6 years and $320 million in cost based on the compounds already existing and already approved for toxicity and safety.
 
What I found really surprised me. The IRR for the de novo process was 14% and the IRR for the repurposed process was 37% or 2.64 times the return of  a de novo success. If I do a net present value analysis and I enter a 30% cost of capital (appropriate risk adjusted rate for a venture capital investment), the NPV is actually negative. I might have been surprised, but industry executives have realized this for some time now which may explain why they are doing everything possible to outsource the risk associated with this process from universities' technology transfer offices to NCATS.

Weekly a new deal is announced of a small bio tech being acquired with a pre-Stage 3 clinical trials drug at what seems like an incredible valuation. But if you look at where it gets the buyer in the process and compare that to the costs they would have incurred internally,  the investment does not look out of line. It is too bad that their comparative metric is such an easy target to beat.

In studying the portfolios of the major large pharmaceutical companies' venture arms, I found a robust amount of investing in what I call the word jumble of new drug opportunity. You remember that game where you randomly put together a noun, verb, subject, and adverb and come up with some amusing sentences.  Well I did that with the descriptions of the investments that are being supported:

new class of|||  exquisitely selectively target|||  siRNA (DsiRNA) molecules |||    ALRN-6924|||  orphan ophthalmologic conditions ||| Phase 1b/2 |||    today announced the completion of a $45 million Series A financing

novel technology|||    potent inhibitors|||  calcium release-activated calcium (CRAC) channel|||  OC459   |||  moderate-to-severe plaque psoriasis |||  Phase 2  |||  announced the successful completion of an oversubscribed $43 million Series B financing
     
 breakthrough|||  selectively regulating translation|||  Cadherin 11, a surface protein|||  CM2489 ||| lymphoma and other malignancies|||  pre-clinical|||   Completion of $17 million Series A Financing

I am having a little fun here, but this does not fill me with a lot of confidence that these are high probability bets on bringing new effective treatments to markets in the near future and at a reasonable cost.

With our clear advantage in time, cost, and risk, why hasn't big pharma embraced the repurposing approach as another tool in replenishing their drug pipelines? What am I missing?

Dave Kauppi
is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital

No comments:

Post a Comment