MARKET
Market size is defined by total annual sales of products that address a market's particular need, but one must be specific about what the market's needs are. For example, a company developing a pain drug should assess whether the drug will be used for severe or mild pain; this in turn will determine whether you will be competing in the opioid or NSAID/Cox-2 Inhibitor market respectively.
Factors that influence which market a company will target include the nature and price of the product, the specialization of the sales force, and the nature of the competition. Biopharmaceutical markets are most often broken down by disease and stage of progression. The size and growth rate of a market will give some indication of the potential for profit. Product switching frequency also determines if/when patients on other treatments will try your drug. Patients tend to stick with what already works but may rotate through numerous therapies quickly if no single therapy works perfectly.
For example, 10% penetration into a $2B market results in annual sales of $200M. If there is no product switching, then all sales will have to come from newly diagnosed patients using your drug. In this case, if a $2B market is growing at 10% a year and your product can capture 50% of new patients, then first-year sales would be $100M, followed by $210M in the second year, ~$330M in the third, and so on.
In those cases where no comparable products exist with which to estimate a market's size, look at comparable markets and analogous products. For example, there are essentially no effective therapies approved for ALS (a.k.a. Lou Gehrig's Disease), but the disease is similar enough to Multiple Sclerosis (MS) that effective ALS drugs might command prices comparable to the interferons (Avonex, Rebif, etc), around $10,000/year. Assuming all 30,000 ALS patients in the US were to take such a drug, the market would have a maximum size of about $3B/year.
Overestimating market penetration is a common mistake. Projecting 5% penetration into a $2B market (i.e. $100M in sales) may be conservative in one scenario but wildly optimistic in another. For example, it is not easy to gain market share in a mature, slow growing market where people rarely switch from their favorite brand, and even 1% of such a market may turn out to be an ambitious goal. Looking at how other products penetrated into the same or a comparable market is an effective way to arrive at a reasonable market share estimate. If the first MS drug achieved 30% market share within 2 years (i.e. 30% of eligible patients went on the drug), then sales of the first approved ALS drug might follow a similar trajectory.
When projecting penetration, there are nuances to consider for every market. For example, physicians who are paid to administer an IV-infused drug to patients during office visits may not want to give up that revenue by switching patients to a self-injectible formulation of the drug. Since physicians are gatekeepers to pharmaceutical markets, it is important to keep the physicians' interests in mind when developing a drug.
Because small biotechnology companies primarily deal with larger companies rather than sell their products directly to healthcare consumers, it is important to define markets according to what the real "customers" (i.e. the potential partners) want. Large companies typically have very good reasons for not addressing particular markets. For example, millions of people around the world suffer from malaria but most are in developing nations where the healthcare system cannot afford to pay for branded drugs. Therefore, large companies probably won't pursue malaria programs and a biotech startup focusing on malaria may find it impossible to attract a partner.
That is not to say that all small markets are unattractive; in the case of drugs, the FDA may grant Orphan Drug status to a drug for a very small market and may assign Fast Track, Priority Review, and/or Accelerated Approval status to a drug that addresses an important unmet medical need. Orphan status offers an extended period of market exclusivity to a drug. The other three qualifications are effective at simplifying and accelerating the process for getting the drug approved in the first place. Depending on the severity of the disease symptoms, a treatment may command very high prices. For example, Genzyme's Cerezyme has generated in excess of $750M from a global market with only several thousand Gaucher disease patients who pay roughly $170,000/year for the drug (with the help of insurance).
If the business model calls for licensing a drug candidate to a larger partner company, the partnering "market" becomes another essential consideration. The search should focus on companies that have the sales expertise (e.g. cardiology) to market your particular kind of drug. A study of recent deals will give you a sense of how generous potential partners may be when licensing a product at any given stage of development.
Key Questions:
- What is the size of the market you are targeting and how fast is that market growing?
- Are customers/patients loyal to a brand or is there frequent switching between products?
- How will the product compare with competing products in terms of quality, price, marketing effort, and other factors?
- How quickly did other products gain market share in this or a comparable market and what sales trajectory is your product likely to follow?