Addressing the Problem of Product Revenue Underperformance

New-product revenue is the lifeblood of biopharmaceutical companies, providing for growth, financial stability, and investor valuations. However, about half of the new drug products launched over the past 15 years have underperformed compared with prelaunch forecasts by 20% or more (1). Assuming that companies perform marketing research to validate their target product profiles (TPPs), the disconnect between forecasts and new products’ postlaunch market performance can be attributed to two factors: Companies overestimate the value of their new product’s differentiation and customer value while underestimating the challenges and time associated with switching patients from products that they already are taking to new drug alternatives.

Forecasting new-product revenues accurately is crucial to managing a biopharmaceutical business. Underperformance disappoints investors and affects portfolio prioritization, clinical investment, and licensing and acquisition valuations. One client told me, “I know I’m overfunding losers and underfunding my winners.”

Background

The healthcare environment in which new drugs are launched includes multiple stakeholders with disparate goals and influence (Figure 1). This makes forecasting new-product demand increasingly challenging. To develop accurate forecasts and reduce product revenue underperformance, product developers must understand this environment and how its evolution will influence the adoption of new products.

Figure 1: Key life-sciences stakeholders involved in adoption of new drug products.

Companies typically respond to the challenge of that disparity by building teams focused on understanding the needs and perspectives of key stakeholders. Doing so is necessary but insufficient. What gets lost when taking that approach is understanding the interactions and influence of each stakeholder on the others and how those interactions affect managers’ assessments of how well and how quickly a new product will be adopted.

Complexity Theory and the Healthcare Ecosystem: Six months ago, a venture-capitalist (VC) friend encouraged me to meet with Will Tracy (vice president of applied complexity at the Santa Fe Institute, an independent, nonprofit research center for complex systems science). He explained to me his view of complexity theory (CT). Complexity arises in all systems in which many agents interact and adapt to one another. As the healthcare ecosystem adds new stakeholders, CT helps to provide clarity as to how prescribing decisions are made and why so many new products underperform against their revenue forecasts and investor expectations.

The typical new-product–launch paradigm involves contacting physicians to present clinical data and other evidence as to why a new drug would be better for their patients than familiar options would be. A similar process — often through advertising — is initiated to make patients aware of the new drug and motivate them to ask their physicians about it. A drug company hopes that when the two stakeholders meet, and if the patient is a suitable candidate for the therapy, then a prescription for the new drug will result. That assumes, however, that the new product will be accessible and affordable to those for whom it is prescribed.

As the power and influence of payers has risen, the model for new-product launches has been disrupted significantly. The drug industry’s general rule was that a new product’s revenue performance during the first six months after launch would determine whether that product was destined for blockbuster status. But that is no longer the case. In the United States, it can take six months to a year just for pharmacy benefit managers (PBMs) or payers to decide whether to add a new product to their formularies — and, if so, at what tier. In the context of pharmaceutical products or healthcare plans, the tier of a medication often refers to its placement within a formulary, which is the list of medications covered by an insurance plan. Medications placed in a lower tier typically face fewer restrictions than those in higher tiers. That means

• less paperwork for physicians (prescribing medications in lower tiers usually requires less administrative effort, such as fewer prior authorizations or less need for justification for the prescription)

• lower copayments for patients (patients generally have lower out-of-pocket costs for medications in lower tiers, making those drugs more affordable and accessible).

That structure clearly incentivizes the use of lower-tier medications — which are often generic or preferred brand-name drugs — helping to manage overall healthcare costs.

Complexities caused by the gatekeeping role of payers and PBMs have elevated the threshold of new-product differentiation needed for encouraging physicians to fill out additional paperwork or negotiate with insurers rather than spend their time with patients. Patient out-of-pocket costs can be as much as 50% in high-deductible insurance plans. That intensifies the need to deliver a compelling message that encourages them to visit their physicians and ask about a new product.

The Primary Reason for Revenue Underperformance: As mentioned above, companies frequently overestimate their new products’ differentiation from the standard of care. Just using a novel mechanism of action (MoA) doesn’t differentiate a drug from established competitors. It must truly make a difference to the patients for whom it is indicated.

Drug developers often assume that the scientific backgrounds of physicians should work to the industry’s advantage. If a new product has superior clinical efficacy and straightforward dosing, with minimal safety and side-effect issues, and if it is accessible and affordable, then it should be well received and adopted quickly. The problem is that product attributes are not the only factors that influence whether a new product will be adopted.

In an article for Harvard Medical School’s corporate learning program, Ted James (medical director at Beth Israel Deaconess Medical Center) highlights some broader concerns (2): “If a new technology can demonstrate its value, fit into the work culture, and provide the necessary resources to be effective, that goes a long way in increasing adoption and implementation. It’s essential that technology be integrated in a way where it’s not a burden, but rather it actually facilitates getting tasks done efficiently.”

(see Insights on Underperformance box)

Understanding Differentiation Through DoI

The diffusion of innovation (DoI) theory developed by E.M. Rogers in 1962 remains the gold standard describing what people expect from a new product for them to change their behavior and adopt it (3). That is incorporated into what industry experts call the “Rate of Adoption and Market Penetration” (RAMP) model. Adoption requires a change in conduct, so a person must perceive the new idea, behavior, or product to be innovative and worthwhile.

DoI identifies five factors that influence the adoption of a new product: relative advantage, compatibility, complexity, trialability, and observability (Figure 2). In addition to a new product demonstrating superior performance characteristics to those of what someone is using already (relative advantage), the new product also needs to be easy to incorporate into that person’s life, and the risk associated with adopting the new product needs to be minimized. Below, I put the five factors of DoI into context for each key biopharmaceutical stakeholder.

^{Figure 2: Diffusion of innovation (DoI) theory (3).}

Physicians

Physicians continue to prescribe what they have always written for many reasons, even when they know a new product is potentially better. But their tendency to do so contributes to missed revenue forecasts and underperformance of new drugs.

Relative Advantage: Over 75% of US physicians are employed either by a hospital or a private-equity group (4). Those doctors are incentivized financially to see as many patients as possible each day to maximize practice revenue. That pressure to see patients leaves little time for poring through clinical data or meeting with pharmaceutical representatives to learn about new drugs. Connecting with physicians has become a challenge for most company sales representatives.

Usually when a new product is introduced, it is not made available immediately as part of a payer’s formulary. Physicians may have to fill out additional paperwork or call insurance companies directly to get permission to prescribe new products for their patients — all of which is more time taken away from seeing others. Additionally, switching a patient’s medication can require entering supporting data into the patient’s electronic medical record rather than simply renewing a prescription.

Compatibility: New products that necessitate changes in physicians’ day-to-day practice will be adopted slowly, especially if those changes impinge on the inner workings of a practice involving nurses and other support staff. If a new product affects physicians’ income negatively, they will be less inclined to adopt it as well. “Follow the money” is a baseline of understanding that every biopharmaceutical company should have in assessing how a new product will affect physicians’ practices.

Complexity: If a new therapy is complicated and/or switching patients to using it takes a lot of time, that will slow adoption as well. Consider a new drug that requires physicians to wean patients off a previous therapy and then titrate up to the appropriate dosage of the new one. That transition can take weeks. Complexity also can lessen patient adherence to new treatment regimens. Patients are more inclined to comply with therapies that are easy to use.

Trialability: Being able to try a new product easily is important. The risk associated with giving a patient a week’s worth of a medication to try is preferable to inserting a stent or other implantable device that is designed for long-term or permanent use. Note that physicians who follow the protocols laid out by hospitals/plans are less subject to malpractice suits; about half of all doctors will be sued for malpractice beforeage 55 (5).

Observability: Physicians know that patients want meaningful benefits that manifest quickly. The longer a therapy takes to demonstrate results, the more likely it is that patients will be noncompliant with its regimen. That can lead to negative outcomes that physicians need to manage.

Patients

Clearly, patients have many reasons to continue using the drugs that they have been prescribed before, even if they know that a new product is potentially better.

Relative Advantage: Similar to physicians, patients also have busy schedules. Finding time for health appointments during doctors’ hours can be difficult. A new product’s potential benefits have to be worth the time and money involved for the visit in addition to the cost of the new drug itself.

Compatibility: A new therapy that demands changes in patients’ day-to-day lives can present difficulty. Whether side effects are at issue or the mode of administration is complex, such barriers must be overcome. And of course, a new product needs to be both accessible and affordable.

Complexity: Drugs with simple modes of administration will be considered for adoption more quickly than those requiring clinical infusion, for example, or complicated regimens.

Trialability: The ability to try a new product before making a full commitment is very helpful, particularly if the new drug has an expensive copayment.

Observability: When patients can experience the benefits of a new product, they are likely to adopt that new product quickly. The recent adoption frenzy over GLP-1 drugs for weight loss is the best example of observable benefit — compared with, say, a new medication for cholesterol reduction.

Payers

PBMs and other payers seldom encourage adoption of new drugs. That can make it difficult for physicians and patients to access the newest products.

Relative Advantage: New products typically cost more than the drugs they replace. The additional cost needs to be justified clinically and economically, with clear benefits for adding new products to a formulary. Rebates also need to be considered — both those offered by companies with established and new products.

Compatibility: Payers want new products that can be added easily to their formularies and/or to which patients can switch easily. Payers also dislike products that have limited distribution access and those that generate negative feedback from members, physicians, pharmacists, and employers.

Complexity: Products that require special training or are challenging to administer create problems with adherence and bring negative cost implications.

Trialability: When physicians can prescribe new drugs for a test period to ascertain whether they will work for a given patient, payers consider such products to be more desirable than those requiring an expensive, long-term commitment from the start.

Observability: Offering rapid and significant outcomes helps to justify the increased cost of new therapies to a formulary.

Table 1: Summary of diffusion factors (compared with a product already in use) as perceived by different stakeholders.

Forecasting with the DoI Approach

The Situation: One company developed a new drug (Product X) for a rare disease with which patients suffer episodes that can be debilitating and even require hospitalization. Physicians had the option of prescribing a generic drug that could prevent or reduce the number of such episodes, but that drug came with some side effects and safety issues that precluded many patients from taking it. Product X was demonstrated to raise serum levels of a protein that could lessen those episodes, although direct evidence of that effect had yet to be obtained.

The anticipated price of the new drug was US$35,000 per patient per year, and its forecasted revenues for the second year after launch were $270 million. Wall Street analysts were excited about this new product even without the established link between raising the protein levels and reducing the number of episodes. Many experts believed that pressure from advocacy groups for a new and better therapy for those patients would facilitate quick uptake both in the United States and Europe and that revenues would exceed $1 billion by the third year.

The DoI Survey: On behalf of one Wall Street firm, a DoI analysis was performed including a survey of relevant specialty physicians, payers, and patients with the condition. For survey physicians and patients, out-of-pocket cost was estimated at $2000/year for patients with commercial insurance. (Very few people with the condition are in high-deductible commercial plans.) A web-administered survey instrument was used, incorporating:

• patient demographics (age, education, occupation, and gender)

• disease symptomatology (frequency of episodes, severity of episodes, and time since last episode)

• current treatments (use of the generic drug, other treatments, specialty physicians managing the condition, and timing and duration of hospitalizations)

• impact of treatment on activities in daily living (work, travel, and social activities).

Highlights from the DoI Analysis: Stakeholder perspectives indicated that Product X was likely to be used but that uptake probably would be slower than had been anticipated without more definitive data, such as a comparison against the current standard of care regarding hospitalizations and emergency-room (ER) visits.

At $35,000 per patient each year, Product X most likely would require physicians to step-edit and/or obtain prior authorization from payers before it could be prescribed. Patients would be eligible if they suffered at least two episodes within 12 months. Given the relatively small percentage of patients who experience such incidences that often, that requirement could limit drug sales. Reducing the price through rebates would be helpful but wouldn’t change the overall circumstances.

Thus, the DoI analysis indicated that Product X was likely to underperform against the initially optimistic forecasts. To physicians and patients, it represented only a small improvement over the standard of care. Payers were very negative in their responses, particularly about cost and a perceived lack of evidence for efficacy. The combination of high costs per patient and a lack of clear benefit (without data connecting the increase in the protein to reduction in episodes) had diminished the product’s outlook. Second-year revenues indeed came in 30% lower than had been projected.

Why New Drugs Underperform

Most physicians and patients want new and improved drugs, but the criteria for what defines a new and superior product have changed. The influence of payers as gatekeepers and the corporate ownership of most physician practices — and associated financial incentives for maximizing patient revenues — have altered the healthcare landscape. That requires a shift in the calculation used to determine whether a new product will be differentiated sufficiently to facilitate the behavior needed to drive demand. The calculus used in the past was a simple benefit–risk ratio. Spinnaker Life Science Strategy Consultants suggest using Equation 1 instead.

Equation 1: A new model for assessing the threshold of differentiation for new drug products.

The need to reduce new-product underperformance is critical to investors as well as to the efficient allocation of resources within biopharmaceutical companies. Although underperformance can result from ineffective go-to-market launch strategies, it is more commonly the result of miscalculation — when companies overestimate the value of a new product’s differentiation relative to the alternatives currently in use.

As payers intercede to insist that more expensive new products will be economically or clinically justified, the obstacles to driving new product demand are higher than ever before. Using market-research techniques built around the DoI model gives companies an understanding of what motivates each key stakeholder and how interactions among those stakeholders will influence their behavior. Such understanding is a necessity for companies seeking to forecast new-product uptake as accurately as possible to reduce the incidence of underperformance.

INSIGHTS ON UNDERPERFORMANCE

Underperformance of new products can have a number of consequences across the business of a biopharmaceutical company.

Manufacturing Planning: Uncertainty in forecasting demand makes it difficult to determine how much product needs to be made. Overestimating demand can lead to excess inventory; underestimation can lead to stockouts and missed opportunities.

Inventory Requirements: Demand uncertainty directly influences inventory requirements. Excess inventory can tie up capital and warehouse space, increasing holding costs. If demand exceeds expectations, then inventory shortages can cause lost

sales and damage to brand reputation.

Supply-Chain Relationships: New-product underperformance can strain relationships with suppliers and contract manufacturers. Suppliers can have trouble meeting demand fluctuations; manufacturers can face inefficiencies due to changes in production schedules. Maintaining transparent communication and flexibility in contracts can help mitigate such issues.

Manufacturing Strategies: Necessary adjustments to manufacturing strategies could include scaling back production capacity, renegotiating contracts with suppliers and manufacturers, or diversifying production to accommodate multiple products in the same facilities.

Impact on Costs of Goods Sold (CoGS): Fixed costs such as overhead expenses and initial investments in manufacturing facilities become a larger portion of CoGS when sales volumes are lower than anticipated. This can increase the per-unit cost of production, reducing overall profitability unless adjustments are made to pricing or cost structures.

References

1 Jacquet P, et al. Variability in Large Pharma Launch Performance. LEK Insights 16 Jan 2024; https://www.lek.com/insights/hea/us/ei/variability-large-pharma-launch-performance.

2 James TA. A Glimpse Into the Future of Digital Health Innovation. Harvard Medical School: Boston, MA, 25 Feb 2022; https://corporatelearning.hms.harvard.edu/industry-insights/glimpse-future-digital-health-innovation.

3 Rogers EM. Diffusion of Innovations. Third Edition. The Free Press: New York, NY, 1983; https://teddykw2.wordpress.com/wp-content/uploads/2012/07/everett-m-rogers-diffusion-of-innovations.pdf.

4 Avalere Health. Updated Report: Hospital and Corporate Acquisition of Physician Practices and Physician Employment 2019–2023. Physicians Advocacy Institute: Winnetka, IL, April 2024; https://www.physiciansadvocacyinstitute.org/Portals/0/assets/docs/PAI-Research/PAI-Avalere%20Physician%20Employment%20Trends%20Study%202019-2023%20Final.pdf.

5 O’Reilly KB. 1 in 3 Physicians Has Been Sued; By Age 55, 1 in 2 Hit with Suit. AMA Network 26 Jan 2018; https://www.ama-assn.org/practice-management/sustainability/1-3-physicians-has-been-sued-age-55-1-2-hit-suit.

Harris Kaplan is a managing partner of Spinnaker Life Sciences Strategy Consulting; 1-410-215-9595, [email protected]. Spinnaker is based at 179 South Street, 7th Floor, Boston, MA 02111, with additional offices at

200 Southdale Center, Edina, MN 55435; https://www.spinnakerls.com.