Risk Aversion in New Drug Research and Development Market

ZHANG Xing, LIAN Gui-yu, CHEN Yu-wen

(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

Risk Aversion in New Drug Research and Development Market

ZHANG Xing, LIAN Gui-yu, CHEN Yu-wen

(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

Objective To put forward the corresponding measures for risk aversion so as to improve the success ratio of new drug research and development. Methods Literature review was conducted. Results and Conclusion Market risk of new drug research and development mainly include the following aspects: product risk, demand risk, cost risk, competition risk and policy risk. Institutions of new drug research and development need to evaluate the five risks and take measures to reduce market risk of new drug research and development.

new drug research and development; market risk; risk aversion

During the 12th Five-year Plan period, China further strengthened the support for new drug research and development of the enterprises. Driven by “Major New Drugs Innovation and Development” of the national special projects, the patents of new compounds are continually produced, and several independent brands of innovative medicines have also been approved by CFDA. The risk of new drug research and development are large, the investment for R&D is high, the R&D cycle is long, and the R&D investment is disproportional to market return, which have been common embarrassment for the new drug research and development enterprises. The data showed that from 2007 to 2011, the average profit rate of American original drugs five years after coming to market is more than 30%, but the number of new drugs in China whose 5-year sales can reach one hundred million is very limited, with some of them remaining in a state of loss[1]after 3 years in the market. Many enterprises confidently put into market the new drugs they had developed with huge investment only to suffer a lot from market risk. Therefore, before new dru g R&D, we should analyze the market risk and put forward the corresponding proposals of risk aversion to improve the success ratio of new drug research and development.

1 Definition of market risk of new drug research and development

Market risk of new drug research and development is the possibility that in the process of new drug research and development, R&D sector can’t predict market acceptance, the competitiveness of products or the changes of market demands etc. accurately, which brings about deviation between the actual results of new drug R&D and the expected results in the market. Whether the new drug R&D succeeds or not is decided by the test of the market, just as the famous management scholar Peter Deruk said, “innovation success does not depend on its novelty, scientific connotation or dexterity, but depends on its success in the market”[2].

2 Characters of market risk of new drug R&D

Besides the common characters of risk, market risk of new drug R&D has its own unique characters. Its particularities are as follow[3].

2.1 Diversity

Many factors contribute to the market risk of new drug R&D and each factor may be the origin of market risk, such as the drug itself, competitors, customers, suppliers and policy etc. And each factor can be subdivided into a number of minor factors, which leads to the diversity of market risk.

2.2 Latency

Drug toxicity and adverse reaction of new drug can only be found through a lot of investigations and analysis. Due to latency of market risk in the process of new drug evaluation, the time for market feedback is prolonged.

2.3 Economic loss

After long time of new drug R&D, R&D sectors have invested large sums of money, but they may not yield profit. They hope the market success of new drug brings benefits to offset the R&D cost. But post-market drugs don’t necessarily succeed and potential risks only appear after a long period of monitoring its adverse reactions, which will result in great economic loss for R&D sectors.

3 Types of market risk of new drug R&D

Causes of market risk of new drug R&D are too many, subjective or objective, so the types of market risk are various. This paper, based on market risk of new product development and taking into account the characteristics of new drug R&D, classifies the market risk of new drug R&D as follow:

3.1 Product risk

Product risk is from new drug itself. The factors include the life cycle of new drug, new drug effectiveness, drug toxicity and adverse reactions, whose changes will affect new drug R&D. For example, In 2011, new lupus drug Benlysta was approved by FDA in 56 years[4]. America Human Genome Sciences developed the“blockbuster” Benlysta, and co-marketed with GSK. Analysts estimated its annual sales would reach $ 1 billion. Benlysta did treat some patients with lupus disease, but did not prove clinically effective on every patient with lupus. Furthermore, it isn’t sure whether the drug reduces the possibility of recurrence in patients or relieves pain. The effectiveness of the drug was not obvious so that doctors and patients didn’t totally accept it and the market returns was also less than expected.

3.2 Demand risk

For drug research and development enterprises, market demand should be the key element under consideration to decide the R&D direction. The ultimate goal of new drug R&D is not to obtain drug production approval but to develop and occupy potential and real market, produce as much economic and social benefit as possible[5]. However, market demand is always difficult to predict accurately, and it changes together with the changes of potential patient number, treatment preferences of patients, their ages and gender, income groups of patients, the elasticity of demands and the disease spectrums, which leads to demand risk. Therefore, R&D enterprises should take all the factors into account. Once the predicted results are not accurate or the information obtained is incorrect, it may result in the rejection of the new drug in the market.

3.3 Cost risk

The product cost includes design cost, production cost, sales cost and service cost[6]. So, for new drugs, the cost should include R&D cost, production cost and marketing cost. During the period of new drug R&D, R&D sectors need to purchase a large number of instruments, equipment and raw materials etc from both domestic and foreign markets. As the market changes, especially the international market, which is easily affected by many factors such as politics, economy, short supply may occur, which will lead to high cost, affecting price directly, and the new drugs may not be accepted by customers. Finally, R&D sectors can’t receive the expected return from new drugs.

3.4 Competition risk

In the environment of market economy, competition is inevitable. Due to the attractive expected profit of new drug R&D, competition is very fierce. There will be two situations in the market. First, similar drugs have already occupied a large market share in the market, which sets barrier for the entry of new drugs. Second, competitors, who develop generic drugs on the basis of new drugs, win the recognition of the majority of consumers, and quickly occupy the market, resulting in that new drug R&D enterprises get few “skimming profits”. Therefore, the main competition risk factors include the number of similar drugs in the market, their effectiveness, toxicity and adverse reactions, their market share, market position, major competitors’ ability, and the difficulty of imitation and so on.

3.5 Policy risk

Policy risk affects new drug market directly. Relevant factors include national macro-economic policies, pharmaceutical industry policies, tax policies, thepossibility of being included in essential drug list, medical insurance directory or OTC directory, which has great influence on expanding market. For instance, including new drugs into national health care list, workplace injury insurance, maternity insurance is an effective way to expand the market capacity for new drugs. After entering the list, the popularity and market acceptance of new drugs can be improved, and patients who use the drugs are reimbursed. Furthermore, R&D sectors can ensure their sales. Conversely, if a new drug can not timely have access to the directory, the market share will be affected to a certain extent.

4 Corresponding proposals of market risk aversion

Reducing or avoiding market risk of new drug R&D will contribute to the success of new drug R&D. Therefore, in the process of new drug R&D, we must take corresponding measures for different types of risk to avoid market risk effectively.

4.1 Introduce new technology and shorten R&D cycle

With the introduction of new technology, especially the discovery of various drug targets and application of gene data technology, we can detect and confirm targets faster, find lead compounds, apply metabolic pathways and genetic differences, and exclude the undesirable candidate compounds to make new drug R&D direction more accurate and more effective to shorten R&D cycle[7]. If R&D sectors can develop more effective and cheap medicines, they can get more national support and customers’ preference to expand market share rapidly. However, for new drugs with too many side effects and adverse reactions, the market prospect is not optimistic and we should terminate R&D timely to reduce a series of follow-up expenses.

4.2 Strengthen market research of new drugs, and forecast market demand for new drugs accurately

Before new drug R&D, we should take future market capacity, market share and the market growth rate into account. If they don’t take into account the actual market demand, new drugs won’t survive in the fierce competition. The results of demand forecasting determine whether to develop new drugs, which type R&D sectors will develop, and the expected number of products. We need to choose the scientific market research methods and establish a more standardized systematic drug market research system to know the real situation of new drug market as true as possible based on the collected data. On this basis, R&D sectors predict future market demand for new drugs and grasp the trends in order to guide the direction of drug R&D.

4.3 Control cost strictly and set a reasonable price

Take full consideration of various costs of new drugs, make a detailed budget, and make a relevant cost accounting for the post-market price of new drugs. In the premise of enough new drug R&D funds, use them rationally and all kinds of costs should be carefully and abstemiously planned. This is not only a guarantee of success of new drug R&D, but also a guarantee of future returns. In addition, efforts will be made to improve the innovativeness of new drug technology and guarantee the sufficient supply of raw materials continuously in order to obtain cost advantages. Therefore, sectors will find the balance between input and output of new drugs.

4.4 Select the direction of new drug R&D carefully, and give full play to the competitive advantage of new drugs

For new drugs, we must take into account the characters of the market itself and give full play to the competitive advantage of new drugs. New drug R&D sectors face many competitors, including the existing and potential ones in the market. So, before R&D, SWOT analysis can be used to judge the advantages and disadvantages of new drugs to enter the market. We can study the effectiveness, toxicity, adverse reactions of similar drugs, and the difficulty of imitation to put forward the corresponding proposals. Meanwhile, new drug R&D enterprises should guard against rivals to adopt improper means of competition, such as theft of core technology, price dumping etc. They must prepare a competitive reaction model in advance against competition.

4.5 Grasp the dynamic policies and regulations, and adapt to market trends

In the process of new drug R&D, focus should be on the relevant dynamic policies and industry trends, and analysis should be done on their market opportunities and threats for new drug R&D to ensure the full use of theadvantages of the policies and meet the market demands. Furthermore, while encouraging new drug innovation, the government should give substantial support for the new drugs that may produce economic and social results in market. They should open a green channel for new drugs to come into market and ensure the corresponding protection from policies during the process of entering the medical insurance directory, government pricing, bidding and purchasing and so on.

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[4] HUANG Jing-zhi. Withdrawal is also Victory [N]. Medicine Economic News, 2013-04-19.

[5] SUN Li-hua, ZHAO Wei-wei, WANG Yue, et al. Analysis of Research & Development Trend of New Drugs of Chinese Pharmaceutical Enterprises [J]. China Pharmacy, 2005, 16(16): 1208.

[6] YANG Shuai, TIAN Kan. The Cost Effectiveness Analysis in the Application of Pharmacy Administration [J]. Chinese Pharmaceutical Affairs, 2009, (8): 748-752.

[7] YI Xi. Essence of High Quality and High Price [N]. Medicine Economic News, 2013-12-20.

Author’s information: LIAN Gui-yu, Master’s supervisor. Major research area: Pharmaceutical affairs management. Tel: 13002465888, E-mail: lianguiyu@163.com