Determine the risk/reward path by understanding the pharmaceutical life cycle

AND THE CLOCK STARTS TICKING...

- 20 years global patent protection on new molecule

- additional market exclusivities (e.g. rare disease, children, new chemical entity, GAIN act)

 

RESEARCH & DEVELOPMENT PHASE

- 8-14 years

- only costs, no sales, no earnings!

- risk-adjusted discounted cash flow valuation

 

A) Preclinical phase (lab & animal testing)

- 1-2 years

- safety & pharmacological properties

- initial formulation

- success rate: <5%

 

B) Clinical phase (human testing in a clinical setting)

 

Phase I

- 1-2 years

- safety

- healthy volunteers (10s)

- success rate: 5-10%

 

Phase II

- 1-3 years

- safety & determine optimal dose

- patients with disease (100s)

- success rate: 10-45%

 

Phase III

- 2-4 years

- safety & demonstrate clinical benefit/risk ratio (statistical significance p<0.05)

- patients with disease vs placebo (fake drug) or standard care (100s - 1,000s)

- success rate: 40-65%

 

Registration/filing

- 6 months (fast-track) - 10-12 months (normal review) 

- achieve marketing authorisation by FDA (US), EMA (EU) or PMDA (Japan)

- determine label (patient group, dose, warnings)

- success rate: 80-90%

 

RETURN PHASE

- 6-10 years

- determine pricing, reimbursement (per country/region)

- finally sales & earnings!

- phase IV (post-marketing surveillance) requirements to monitor long-term safety

- life cycle managment (e.g. new indications, formulations, Rx-to-OTC switch)

 

Historical valuation ranges:

- "Star" phase           P/E >20x

- "Cash cow" phase    P/E 10-15x

- "Mature" phase        P/E >6-10x