How Much Drug Sales Does a Biotech Need to Break Even?

The profitability issue hangs over the head of every biotech like the Sword of Damocles.

Looking at the domestic market in China, all companies are working hard towards this goal: cutting costs, improving efficiency, and even some companies have launched company-wide BD, cut pipelines, or transformed into CDMOs.

The harsh reality is that most biotechs are still searching for and striving to approach their break-even point.

So, how many drugs must a biotech company sell to break even? Let's shift our focus overseas and examine the paths taken by those successful pioneers.

Regarding the question of Biotech's profits and losses, it seems there is no standard answer.

Some companies only turned profitable when their revenue approached $2.5 billion; for most, it took over five years after the launch of a blockbuster product to reach sales of over $1 billion and become profitable; yet others successfully "turned the corner" with revenue of just $260 million.

In essence, the profitability issue in biotech not only tests a company's R&D pipeline layout, R&D strategy and efficiency, but also requires a bit of luck; more importantly, it also examines the effectiveness of the company’s business model behind the development of its core pipelines and indications.

/ 01 / 5 years, 1 billion US dollars

Looking globally, biotech is a group with extremely high "metabolism."

According to statistics from GF Securities, since 1990, more than 600 biotech companies have gone public on the NASDAQ. However, as of June 30, 2020, only 12 biotech companies had relatively stable revenue and positive cash flow.

If we extend the timeline from the rise of the biotech concept in the 1980s to the present, over the span of 40 years, only a handful have managed to buy their way into the pharma ranks.

Why is it difficult for biotech to survive in the long term? This is determined by the business model. Compared with large pharmaceutical companies that have average growth but strong certainty, biotech follows a divergent innovation model, and its growth process is full of uncertainties.

In other words, due to the high risks of R&D and the uncertainty of sales, most biotechs cannot successfully run through their business models, let alone make a profit.

So, how did those top global biotech companies manage to succeed? And at what cost?

Whether it is Regeneron, Gilead Sciences, Vertex Pharmaceuticals, or Biogen, most of them did not turn a profit until more than five years after the launch of their blockbuster products, when sales reached over 1 billion US dollars.

Take Regeneron as an example. After launching its first drug, Rilonacept, in 2008, sales have been consistently poor due to limitations in indications, and losses have continued to expand.

Until 2011, Regeneron launched the ophthalmic wonder drug Eylea, and its sales quickly took off. In the first year of its launch, sales reached $840 million, and in the second year, it became a blockbuster drug, driving the company's overall revenue to $1.378 billion and successfully reversing losses.

Gilead’s commercial story began with the antiviral drug Cidofovir, which, after its launch in 1996, maintained sales of around 100 to 200 million U.S. dollars until the arrival of the blockbuster HIV drug Tenofovir in 2001. Sales quickly surpassed the 1 billion U.S. dollar mark within three years. Led by this blockbuster, Gilead successfully turned a profit in 2007, and its profitability has soared ever since.

In contrast, it took longer for Vertex Pharmaceuticals and Biogen to become profitable. The latter's recombinant interferon for treating multiple sclerosis hit the market in 1996, but it took nearly a decade later, with sales reaching $1.8 billion, to turn a profit.

Vertex Pharmaceuticals Has Experienced Numerous Setbacks: From Immunosuppressants in 1999 to HIV, and Then to Antiviral Therapies for Hepatitis C in 2011. After 20 Years of Trial and Error, Vertex's Telaprevir Achieved First-Year Sales Exceeding $500 Million, Far Surpassing Market Expectations. This Drug Also Enabled Vertex to Realize Its First Profit.

It was expected that the company's fate would be reversed, but two years later, Gilead Sciences launched Sovaldi, a miraculous hepatitis C drug that could completely cure the disease, dealing a devastating blow to the company’s antiviral product line. It was only through the launch of Kalydeco in 2012 and Orkambi in 2015 in the promising field of cystic fibrosis that the situation stabilized.

It was not until 2017 that Vertex Pharmaceuticals, Inc. became fully profitable, with revenue of nearly $2.5 billion that year.

/ 02 / Earlier Profitability

From the path to profitability of these top biotech companies, it is not difficult to see that after launching a blockbuster drug, an average revenue of over 1 billion US dollars is required to cross the break-even point.

Of course, if you look through the annual reports of other well-known biotechs overseas, you'll find that there are other situations here.

For example, Alexion Pharmaceuticals, which focuses on the rare disease field and was acquired by AstraZeneca for $39 billion, had already turned profitable with revenue reaching just $260 million.

This is closely related to Alexion Pharmaceuticals' R&D strategy. The company's core product is eculizumab, the world's first marketed C5 complement inhibitor. Perhaps due to the significant challenges in developing this target, competition in this field appears to be less intense.

In March 2007, the FDA approved eculizumab for the treatment of paroxysmal nocturnal hemoglobinuria (PNH). It was later also approved for atypical hemolytic uremic syndrome (aHUS), acetylcholine antibody-positive myasthenia gravis, and other indications, receiving multiple orphan drug designations.

Eculizumab's global sales have been soaring, reaching blockbuster status in 2012 with sales of $1.124 billion, and hitting $3.144 billion in 2017.

From the perspective of mechanism of action, C5 complement inhibitors theoretically have great potential in the field of rheumatological and immunological diseases such as rheumatoid arthritis, psoriasis, and inflammatory complications of heart disease. The company has also conducted extensive research in these areas in its early stages.

However, things did not go as planned. After a series of clinical trials, eculizumab failed to achieve the expected efficacy in treating rheumatoid arthritis and membranous nephropathy. On the contrary, it showed promising results in the PNH field. Alexion also shifted its focus to the rare disease area.

Unexpectedly, this gold mine is very durable. As the founder of Alexion said: Compared with the price pressure faced by non-rare disease drugs with patient populations reaching tens or hundreds of thousands, the drugs developed by Alexion have remained almost unaffected for many years.

Despite the annual cost of eculizumab being as high as $440,000, insurance companies and national medical insurance agencies are willing to pay for it due to its definitive efficacy and irreplaceability. Guarding such a "goldmine," Alexion's R&D investment is evidently of a lower level.

Before being acquired, Alexion had the highest R&D expense ratio in 2017, which was only 25%. That year, its revenue exceeded $3.5 billion, with only six products, three of which were already on the market, and one each in Phase I, Phase II, and Phase III clinical trials.

Used to the large pharmaceutical companies having dozens or even hundreds of products in their pipelines, Alexion's product line appears much thinner. Moreover, with the increase in revenue, Alexion's R&D expense ratio has dropped to around 16%, far lower than the typically 30% R&D expense ratio of companies like Regeneron during the same period.

Of course, the low R&D expense ratio is also related to Alexion's preference for mergers and acquisitions. Among the three products launched in 2017, two were acquired through mergers and acquisitions.

This is somewhat similar to Gilead Sciences. Gilead Sciences achieved its first profit in 2007, with a net profit margin exceeding 30%, and maintained such profitability for many years thereafter, seemingly without facing the challenge of a profit ramp-up.

In 2001, Gilead's first anti-AIDS drug, tenofovir disoproxil fumarate, was approved by the FDA. Just a year later, Gilead spent $464 million to acquire Triangle Pharmaceuticals, obtaining emtricitabine.

In retrospect, it was the acquisition of emtricitabine that enabled Gilead Sciences to quickly become a leader in the HIV field. The groundbreaking hepatitis C drug Sovaldi was also obtained through the acquisition of Pharmasset. In 2012, Gilead spent $11 billion to acquire Pharmasset, and within the first three months after its launch in 2014, Sovaldi generated an astonishing $2.3 billion in sales, setting a record for new drug launches in the U.S. at that time.

One consensus is that no matter how high the sales are, pharmaceutical companies must maintain their nature of burning money on R&D. A typical example is Regeneron. Almost all the money earned from Eylea has been funneled back into R&D, an amount one order of magnitude higher than that of its biotech peers during the same period. Consequently, its profitability level remained relatively low in the first decade of commercialization.

Companies like Alexion Pharmaceuticals and Gilead Sciences, which have grown through acquisitions, can either achieve profitability earlier or reach high-quality profitability sooner.

/ 03 / "Negative" Teaching Material

Of course, in the top biotech camp, there are also "negative" examples.

The so-called "flip side" means that even though the company's product sales are not low, the huge investment in R&D makes the company's profitability still a long way off.

A typical example is Seagen, the ADC pioneer acquired by Pfizer for $42.8 billion.

As early as 1997, when ADC technology was still immature, Seagen was founded and set its sights on the ADC field. After more than 20 years of exploration, Seagen has now established a high-quality ADC product pipeline.

Currently, Seagen has four marketed products: Adcetris, Padcev, Tivdak, and Polivy. In 2022, these four products generated $1.7 billion in revenue for Seagen, accounting for 87% of its total revenue.

In the same year, Seagen's R&D expenses reached $1.34 billion, with an R&D expense ratio close to 70%. Adding sales expenses, the company's total annual loss exceeded $600 million.

In fact, Seagen's commercialization capability is not bad, but the company has been continuously investing heavily in platform development and subsequent pipeline construction, leading to an increasing loss. In 2018, its R&D expense ratio reached 86%. Although the ratio decreased with revenue growth, it still remained close to 70%, while the loss expanded from $260 million to $610 million.

This is not difficult to understand. Facing the enormous pressure brought by DS-8201, Seagen must invest more to regain the leading position. Just last September, fearing disruption, Seagen reached a cooperation agreement totaling up to $3.46 billion with Nurix, a leader in the PROTAC field, hoping to develop degradation antibody conjugates (DAC) with new mechanisms of action.

Investment and冒险continue.

Take Alnylam, the leader in the RNAi field, for example. Since launching the world's first approved RNAi drug in 2018, which validated the RNAi technology pathway, the company now holds five commercially available RNAi drugs with continuously rising sales. Its stock price has surged significantly, and its market value has exceeded $34 billion, successfully achieving a leapfrog advancement.

Last year, driven by sales and licensing revenue, Alnylam's revenue exceeded 10 billion RMB for the first time. In the first half of this year, the company maintained a high growth rate of over 80%, with revenue surpassing 8 billion RMB. However, the company is still incurring continuous losses.

In order to maintain its leading position, Alnylam has had to continuously invest in R&D to validate the value of its own platform, which has also led to consistently high R&D investment. From 2023 to 2021, the R&D expense ratios were 55%, 85%, and 94%, respectively.

At the same time, due to the simultaneous sales of multiple drugs, the company's selling and administrative expense ratio has remained at a high level for the past three years, being 44%, 74%, and 74%, respectively. These factors have collectively led to the company’s inability to achieve profitability.

Of course, the good news is that as Alnylam's revenue grows rapidly, various expenses are being quickly diluted. In other words, Alnylam is still on the path to profitability; it just takes longer.

/ 04 / Summary

R&D and commercialization are equally important for innovative pharmaceutical companies. However, excessively high cost levels can create a gap between sales profitability and overall profitability. How to increase sales and reduce the cost ratio while maintaining R&D competitiveness is a challenging task.

For China's biotech companies that are striving to move forward, learning from these successful cases will not only help them better understand industry rules but also provide valuable experience for their future development.

After all, in this challenging field, every successful example is a valuable asset on the road to success. And perhaps the profit trajectories of those who have succeeded can also help the market view the profitability issues of biotech more objectively and rationally.

       Title: How Much Medicine Must a Biotech Company Sell to Break Even?