I took a look back at projected 5-year sales for novel drugs from the class of 2013 to the class of 2018 and compared them with actual performance.

As you can see below, there are only a few instances where the variance was <20%, and several where the forecast was >4x off actual performance!

Exhibit 1: 5-Year Projections vs. Actual Performance (Class of 2013-2018)

So what are the implications of this? I see a few:

1. M&A that relies heavily on outer-year sales forecasts should be viewed cautiously. In fact, we've seen this story play out: overly optimistic forecasts for several targeted oncology drugs drove an implied out-year M&A multiple reset from ~6x to ~11x (source: BoA)

Exhibit 2: Consensus Forecast Misses for TO Assets

Potential acquirers recently burned by poor post-deal performance like that may be more cautious when deploying capital, although those with looming LOEs often have little choice but to be aggressive (i.e. Merck)

It's not just 5-year forecasts either, even forecasts of that current year are off by ~20-90% - a dislocation that is likely more severe for smaller assets with less attention

2. On the flip side, there are bargains to be had if you deeply understand a market. I'm reminded of Horizon Therapeutic's acquisition of Tepezza - they paid $145M for an asset forecasted to do $250M in peak sales. Just a few years later, that was revised upwards to >$4B in peak sales (although that now looks overly optimistic - see point 2) and was the centerpiece of Amgen's acquisition of Horizon for $27.8B

3. Arbitrary forecasts can be an exercise in false precision - ultimately there are too many unknowns for them to be useful. So what do you do?

I think instead of anchoring to specific numbers, it's better to have probability distributions around a wide set of outcomes and position yourself appropriately to manage downside risk while participating in the upside. The best deals are appropriately sized bets that can handle a lot of forecast error (i.e. high risk / high upside or doubling down on proven winners).

In other words, prepare, don't predict. (h/t: Taleb)

4. There's lots of untapped alpha in the biotech markets for investors - something I'm working on drawing out with a NewCo (if you're a biotech public equity investor, definitely reach out!)

Below are 2028 sales estimates for select drugs in the class of 2023 - given what we know, we can be certain most of these will miss the mark. The trick is having a better sense of which direction each will be.

Exhibit 3: 5-Year Projections for Class of 2023

One final thing to note: these estimates represent sell-side consensus, rather than buy-side consensus (the stock price at the same time point). The latter is harder to parse out of multi-asset companies (i.e. pharma), but it would be interesting to compare these for biotechs in a future analysis.