Editor’s note: Yilian Yuan is director, marketing analytics, IMS Management Consulting, Fairfield, Conn.

Few industries spend as much on research and development as the pharmaceutical industry. Said another way, few have as much at risk when bringing a new product to market. The top 10 pharmaceutical companies in the world each spend an average of $3.8 billion a year on R&D, and the cost of miscalculating what the return will be on that investment could be disastrous. Thus, the pharmaceutical industry has developed very sophisticated methods of forecasting the market potential for a new product. Forecasting is an integral part of pharmaceutical business planning and provides critical information so that informed decisions can be made on how to allocate R&D and marketing resources.

Depending on the situation, there are different ways to forecast new product market potential. One is analog and event-based, another is patient-based, and sometimes the two approaches are combined. This article serves as a primer on the analog-based approach to forecasting for new pharmaceutical products in development and outlines the major steps involved.

The first step in performing any forecast is to thoroughly understand the therapeutic market in question and its competitive dynamics. This entails analyzing:

For example, to forecast product market potential in the cholesterol treatment market, it is necessary to understand current treatment guidelines and the size of the potential patient population. In 2002, according to the National Health and Nutrition Examination Survey (NHANES; 1999-2002), over 100 million Americans had total cholesterol levels of 200 mg/dL or higher (borderline high-risk). The latest guideline published by the U.S.  government’s National Cholesterol Education Program (www.nhlbi.nih.gov/chd ) calls for even more aggressive drug treatment and a lower LDL target value.

Several drug cla...