[Note: Today's Rule Maker article was written by guest columnist David Langford, who helped write content for The Motley Fool's recent biotechnology seminar and is a frequent contributor to the discussion boards -- under the name Wotdabny.]
Knowing what Pfizer's (NYSE: PFE) revenues were last quarter or last year, what its margins are, or how much it spends on reasearch and development (R&D) can be instructive. However, these metrics alone don't do much to foretell the future.
To know a drug maker's future, you've got to know how good its pipeline is. We're going to evaluate Pfizer's using a technique we wrote about in the Motley Fool Research Guide to Biotech Investing.
How does it work? Assess each drug candidate for four things:
- Width: How wide a market might it serve?
- Depth: How serious is the indication?
- Competition: How much market share can we expect?
- Phase: What if it never gets to market?
Two of Pfizer's most interesting drugs
Inhaled insulin isn't so much a new drug as a new way of delivering it. One in 16 Americans has been diagnosed with diabetes, and the global rate is growing. Shots are inconvenient, not to mention painful. Pfizer's inhaled product, which is in Phase III trials at 120 sites worldwide, could replace injected insulin for millions of people.
ONYX-015 is Pfizer's potent new liver cancer cure. It's actually a genetically engineered adenovirus that identifies and attacks cancer cells, kind of like having your immune system find out that the cancer isn't good for you. It finds more than 90% of cancer cells, then sets up shop, reproducing within the cancer and destroying it. This is exceptionally good because the prognosis for liver cancer is poor. Today there is no cure and death can come in a matter of months. Surgery is the best course, yet it seldom works, and most cases are inoperable. At least it's relatively obscure in the United States, with some 15,000 new cases expected this year. ONYX-015 is in Phase III trials for this indication, and so far has been reasonably effective and well-tolerated by patients.
Here's how you can take this information and apply it to a point system. It gives you a quantitative way to analyze a company's drug pipeline, and it's flexible enough for you to make adjustments.
Width If the number of people who would benefit is: Less than 100,000 1 100,000-500,000 2 Greater than 500,000 3 Depth Less severe 1 Debilitating 2 Fatal 3 Competition Good drug exists 0 Less effective drug exists 1 Lousy drug exists 2 Even less competition 3
Note: where the treatment is only partially effective, or has multiple competitors, score the drug as though it has a stronger competitor. Also, you can score the drug lower if there's competition in a rival's pipeline.
Phase Sum points above and multiply:
Phase 1 0.05
Phase 2 0.15
Phase 3 0.60
Approved, but not yet marketed drugs 1.00
The above Phase numbers correspond to the percent chance each drug has of getting approved. For example, it's estimated that a drug in Phase I has a 20% chance of making it to market, a Phase II drug 28%, and Phase III 60%. I tell you this so you can see the standard.
However, in this case I have reduced the odds of survival for Phase I and II drugs since many drugs that make it to market are approved for fewer indications than originally expected. (You can see this reflected in the Phase table above.) Let's go back to Pfizer. How many people stand to benefit from its liver cancer and diabetes drugs? In the case of inhaled insulin, millions. In the case of liver cancer, thousands. On a scale of 1 to 3, I'd give the inhaled insulin 3 points, and the liver cancer cure 1.
I know that liver cancer is much more serious than diabetes since treatments for diabetes are very effective. Therefore I'd give liver cancer 3 points. Diabetes is serious enough to give it 2 points (I'd reserve a 1 point score for things like appetite suppression).
What about competition? Inhaled insulin's competition is injected insulin. On the one hand, inhaled insulin would be vastly preferred. On the other, there is a safe, effective, proven product already on the market. Because of that, I'd give inhaled insulin only 1 point. Liver cancer has no cure currently, as we reviewed, but it has tons of competition in clinical trials. Many people expect a genuine cure to some or most cancers to be forthcoming in the next five or 10 years. ONYX-015, which even in a best-case scenario isn't perfect, might be brushed aside. With that much competition, I'd give this drug a 1 as well.
Let's see, that's 3+2+1=6 for inhaled insulin, and 1+3+1=5 points for the liver cancer drug. They look pretty close so far, but let's take those scores and multiply them by a percentage that represents their risk of not making it to market.
Inhaled insulin is in the third and last Phase already. That gives it about a 60% chance of getting to market. Good enough for me. ONYX-015 is still in Phase II, greatly reducing its odds of getting to market. Being back in Phase 2 also puts it farther off in time (which costs the company money), gives us less reliable information about the drug, and puts the company at greater risk that the drug will be approved for a narrower use than expected (such as only certain kinds of liver cancer). Because of all of these things, I d cut its multiplier to only 15%. Here s how it adds up:
Inhaled insulin 6 times 60% = 3.60 Liver cancer cure 5 times 15% = 0.75
A person could work up all the drugs that Pfizer is developing in just this fashion and come up with a total score for the entire pipeline. Comparing that score to another pharmaceutical company would provide an idea of how strong their pipelines are relative to each other. To that end, I've done just that for Pfizer and Schering-Plough (NYSE: SGP). Here's what I got:
Drug Score Pfizer 38 Schering-Plough 48
Note to reader: I'll post the full data on the Rule Maker Strategy Board.
Again, one advantage of this method is that it's so flexible. You can add or subtract points as drugs move through the testing process, as competition waxes or wanes, and as you learn more about the drugs in question.
Have a great day.