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les Nouvelles - December 2009


The Valuation Of Drug Development Projects—Part 2

Sangeeta Puran

Mayer Brown International, Senior Associate, London, UK

Earlier in March, the author completed a study examining the methods used to value drug development projects. The study was conducted by interviewing individuals over a period of four months in the UK from a representative sample of twelve leading industry participants, including small biotech business development (“biotech”), large pharma and large biotech business development (“pharma”), financial analysts (“analysts”) and venture capitalists (“VCs”).

The first part of this article provided an introduction to valuation methodologies based on forecasting the cashflows and quantifying the risks associated with drug development and commercialisation. Figure 1 reproduces the previously included example of the typical project lifecycle from a cashflow perspective, starting with early research, followed by clinical development, product launch, market penetration and finally revenue decline after patent expiry. We also reported on the methods used by the participants to value drug development projects and considered the VC approach to valuing early stage E projects was also explored.

The second part of this article will consider the different biotech and pharma approaches in acquisition, licensing and partnering negotiations. We also consider the valuation approach of analysts setting share prices. Finally, we examine the key challenges in forecasting the revenues, costs and risks associated with a drug development project.

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