Valuing Pharmaceutical Drug Innovations

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.