CHART OF THE DAY: Biotech Forecasters Are Usually Way Too Optimistic About Drug Sales
People who invest in biotech stocks are largely speculating on the future sales of drugs that have yet to be approved for the market.
Unfortunately, the experts who forecasts those sales have a track record of being way too optimistic.
In a new research note, Morgan Stanley's Matthew Harrison and Dr. David Friedman reference a recent study published in Nature magazine that found "estimations are in general >160% of peak sales."
The study - conducted by Myoung Cha, Bassel Rifai and Pasha Sarrah - reviewed the consensus sales forecasts for 260 drugs launched between 2002 and 2011. The data set included over 1,700 analyst forecasts.
"[M]ost consensus forecasts were wrong, often substantially," they found. "And although consensus forecasts improved over time as more information became available, accuracy remained an issue even several years post-launch."
Some findings:
- "More than 60% of the consensus forecasts in our data set were either over or under by more than 40% of the actual peak revenue."
- "Although the overall median of the data set was within 4%, the distribution is wide for both under- and overestimated forecasts."
- "A significant number (53) of consensus forecasts were overly optimistic by more than 160% of the actual peak revenues of the product."
- "The variance in peak sales estimates was still 45% versus actual peak sales 6 years after the drug has launched, reflecting continued uncertainty even as new information becomes available."
To sum it up, drug forecasters tend to be wrong by a wide margin, overly optimistic, and persistently wrong even years after the drug is launched.
