Spending billions on development before you even bring your product to market could be enough to detract investors, yet for the drug companies this sort of gamble can be worth every penny.
In its annual review, industry analysts EvaluatePharma forecast that by 2022, worldwide drug sales would hit $1.06 trillion.
The largest share of revenues comes from branded drugs that are still under patent, but generic drugs are still holding their own with sales expected to increase from $73bn in 2015 to $115bn in 2022, amounting to 10.2% of prescription sales.
Pfizer's Lipitor is the most successful drug of all time, netting $148,744bn in total sales since it hit the market. Currently, the most expensive drug in the world is Glybera, a gene therapy drug by Dutch company Uniqure. The drug costs upwards of $1 million per year.
Pharmaceutical industry trends
Overpricing, environmental issues, more demanding regulatory requirements and drug patent expirations are predicted to be the key trends affecting the pharmaceutical industry in 2017.
The cost of research and development (R&D) is still a big issue. The Evaluate World Preview 2017 stated that the cost of bringing a novel therapy to market has increased over the past ten years and stands at an average of $4bn.
This is something that puts a question mark over the long-term sustainability of some pharmaceutical companies.
What is the drug pipeline?
The drugs pipeline is the name given for the number of drugs that a company has at different stages of trial testing. Investment in the drug industry can be a waiting game as drugs can spend 10 to 15 years in development before they are brought to market.
To be approved, all drugs need to have undergone rigorous testing that fall under four phases: discovery, pre-clinical, clinical trials and marketing (or post-approval). After this lengthy process, only approximately 20% of drugs make it to the marketing stage.
The pharmaceutical industry seems to have been focusing its R&D on orphan drugs in recent years. According to the EvaluatePharma report, the orphan drug market is expected to almost double during the 2016-22 period, peaking at $209bn in 2022.
As treatments for these ultra-rare diseases can cost $200,000 or more per patient per year, it is a lucrative market with revenues even rivalling the traditional blockbusters. The cystic fibrosis drug, Kalydeco, for example, is priced at £14,000 per patient per month.
Add in the 1983 Orphan Drug Act, bringing with it seven years of market exclusivity to the usual five as well as tax incentives and research design support, then you can see why investors are taking note.
The lack of other treatments in the area also helps to speed up regulation. This provides a platform for further drug development in a specialised market and the higher market value of orphan drug companies reflects this.
In addition, initiatives like the UK’s 100,000 Genomes Project will help see the growth of personalised medicine. These genetically tailored drugs may be costly to develop, but have the potential to bring in huge amounts of revenue.
What affects the sector’s share prices?
The mid-2015 record of the sentinel Nasdaq biotechnology index was not repeated in 2016. Policymakers and analysts claim closer questioning of drug pricing and tax avoidance could have dampened investor enthusiasm.
According to EvaluatePharma, pricing is the one factor that could keep denting investor sentiment, and cause further cooling of the sector.
Antonio lervolino, head of forecasting at Evaluate, said: “The continued political and public scrutiny over pricing of both the industry’s new and old drugs is not going to go away and we are starting to feel the impact now.”