By Ben Hirschler
LONDON (Reuters) - Ten-year sales forecasts from AstraZeneca (AZN.L) - a central plank of its defense against a $106 billion bid approach from Pfizer (PFE) - underscore how valuing drugs is an art as well as a science.
While imponderables exist in any corporate valuation, pharmaceuticals are especially tricky, given the hazards of drug development and the long timelines of an industry where it typically takes 10 to 15 years to bring a new product to market.
AstraZeneca's prediction of sales above $45 billion by 2023 was widely seen as over-optimistic by industry analysts who have a more conservative view on many of the myriad factors that feed into modeling future drug sales.
One thing is certain: most experimental drugs fail.
The average new drug has just a 6 percent chance of making it to market when it enters initial Phase I testing in humans, according to Thomson Reuters CMR International, which specializes in measuring pharmaceutical R&D performance.
This rises to 69 percent by the time a new medicine reaches final Phase III clinical trials, and 90 percent once it is submitted for regulatory approval.
"There will be things in our pipeline that won't work - that's par for the course," Briggs Morrison, AstraZeneca's global head of medicines development, said on Wednesday.
Nonetheless, Morrison, who worked for Pfizer until 2012, believes his colleagues at AstraZeneca have honed the art of predicting future sales by blending the factors behind a new drug's commercial success.
The first pass involves evaluating the technical aspects of whether a medicine actually works, followed by judging whether wary regulators are likely to give it a green light, and then finally assessing its likely market share and pricing.
Given the many variables and the risk of over-promising and under-delivering, most drug companies prefer not to make long-term sales forecasts in normal times.
But these are not normal times for AstraZeneca, and it hopes that by sharing key parts of its internal Long Range Plan, prepared for the board each year, it can prove it is worth a lot more than the 50 pounds per share offered by Pfizer.
For investors, pharmaceutical investment remains to a large degree a game of molecular roulette.
Skimming through a 44-slide presentation on the new forecasts this week, AstraZeneca Chief Executive Pascal Soriot acknowledged the uncertainties but argued his group had one of the most compelling and visible pipelines in the industry.
He compared his forecasts to those made by Genentech before it was acquired by Roche (ROG.VX) in 2009. In that case, the numbers were achieved, but the sales did not all come from the expected products.
Overall, AstraZeneca believes its drug pipeline has a 36 percent chance of success, with potential peak annual sales of $63 billion translating to $23 billion on a risk-adjusted basis.
But the success rate varies hugely from product to product.
Alzheimer's drug AZD3293, which is about to enter Phase III testing and could in theory have annual sales of $5 billion, has a mere 9 percent probability of success, while the Phase III inhaled lung drug PT003 has a better than two-thirds chance.
Competitors, too, can skew prospects. AstraZeneca's benralizumab for severe asthma, for example, faces a rival biotech drug from GlaxoSmithKline (GSK.L), and clinical trials for both will ultimately determine if it is a hit or a miss.
Pricing is another major uncertainty, especially in specialty medicines where prices have gone through the roof in recent years, sparking a backlash in areas like hepatitis C.
Morrison said AstraZeneca's forecasts assumed more pricing pressure over time, but he acknowledged there was a risk.
"It's a problem - let's be candid," he said. "You need creative ways of pricing that society will feel offer fair value."
That is relevant in the hot field of cancer medicine, where AstraZeneca is chasing Bristol-Myers Squibb (MRK), Merck & Co (MRK) and Roche in the emerging field of immuno-oncology, which involves using drugs to boost the body's immune system.
AstraZeneca said it broadly agreed with forecasts that immuno-oncology could be a $28-35 billion a year market - but those numbers assume no dislocation in the current market that prices some cancer drugs at more than $100,000 per patient.
Overall, AstraZeneca expects the pipeline to make up a third of sales by 2023, with the balance coming from existing drugs, where market expectations are more solid but still far from certain.
The company's 2023 forecast for sales of $3.5 billion of heart drug Brilinta, for example, is far higher than the $1.3 billion consensus forecast for 2018 sales - a big gap that leaves many analysts scratching their heads.
(Editing by Will Waterman)