Valuing Pharmaceutical Drug Innovations

TL;DR

This paper introduces a methodology combining event studies and discounted cash flow models to estimate the market value of pharmaceutical drugs based on stock market reactions to development announcements.

Contribution

It provides a novel approach to quantify drug values and development costs, with estimates across therapeutic areas, aiding policy design for drug development support.

Findings

Average drug value for small firms is estimated at $2.16 billion.

Preclinical stage net value is approximately $50 million.

Expected development cost at discovery start is about $38 million.

Abstract

We propose a methodology to estimate the market value of pharmaceutical drugs. Our approach combines the event study method with a discounted cash flow model that infers drug values from stock market responses to drug development announcements. We estimate the average value of a drug developed by small firms (those below the 95th percentile of market capitalization) to be \$2.16 billion. At the preclinical stage, the risk-adjusted and present discounted average net value of drugs is \$50 million. Leveraging these estimates, we also determine the expected drug development cost at the start of the discovery stage to be \$38 million. We estimate values and costs for several therapeutic areas (e.g., neoplasm, infections) and explore applying these estimates to design policies that support drug development through drug buyouts and targeted preclinical interventions.