Developing sales forecasts has long been a crucial piece of the pharmaceutical development puzzle. Pharma companies use these forecasts to guide decisions at every stage of product development, from what drugs to develop and what technologies to license to how clinical trials should be designed and how sales resources are deployed. Yet last week, a study of more than 1,700 individual analyst forecasts on 260 launched drugs was published in Nature Reviews Drug Discovery, definitively finding that most consensus forecasts are wrong.
Though most people familiar with the pharma/biotech industry will not be surprised that sales forecasts are not always accurate, the study did uncover several startling revelations about just how far off pharmaceutical forecasting can be.
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The study, conducted by global management consulting firm McKinsey & Company, found that the majority of consensus analyst forecasts are off by more than 40% from drugs’ actual peak revenues. Put another way, pharmaceutical forecasts are either over- or under-estimated by at least 40% in at least 60% of cases. In addition, 53 of the 260 drugs examined had actual peak revenues that came in at least 160% below their forecasted performance.
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Common sense dictates that the greatest inaccuracies in forecasting would occur at the earliest stages of drug development, when there is the least amount of credible information on which to base sales projections. Interestingly, McKinsey’s researchers found that forecast error versus actual peak sales is still as high as 45% even six years after a drug is launched—a finding that may have particular implications for investors, who often base investment and stock purchase decisions on the strength of the drug forecasts.
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The study looked at drugs launched from 2002 to 2011. During this time, the most commonly overestimated forecasts were for cardiovascular and central nervous system (CNS) drugs. Oncology drugs were the most commonly underestimated, which the study’s authors theorize is due to new indications frequently being approved for these products after their launch, which might have expanded the market in an unforeseen manner.
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Smaller drug companies tended to overestimate peak sales by more than 30%, while large pharma companies had less bias due to underestimates before launch averaged with moderate overestimates after launch. McKinsey states, however, that as a result of the high variances seen for both large and small drug companies, “any one selected forecast is likely to be wrong.”
Given the extent and frequency to which pharmaceutical forecasting has been proven erroneous over the past decade, many industry professionals are now questioning whether forecasts can be a reliable source of information informing investment or acquisition decisions. To this end, leadership at Novartis and Merck have already begun adapting to new decision-making models, according to this article in Forbes.
Our firm as well recognizes the limitations of pharmaceutical forecasting, which is the foundation for our model of providing investors with only factual research on all key drivers of a company’s potential for success or failure, devoid of sales forecasts. Jeffrey Kraws, CEO of Crystal Research Associates, states “All too often, individuals without the proper training are put into situations not really understanding the finer points surrounding the creation of a sales estimate with regard to a particular product. One needs to understand the product: its advantages and disadvantages in the marketplace, the competition current and anticipated, as well as all of the elements that go into manufacturing, pricing, tax, regulation, and risk, and ultimately the final net impact on the company. These are many of the key elements to understanding the full story.”
The full article, Pharmaceutical forecasting: throwing darts?, published in Nature Reviews Drug Discovery can be found here, free with account registration.