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Valuing Pharmaceutical Drug Innovations

Author

Listed:
  • Ciliberto, Federico
  • Farmer, Leland
  • Khmelnitskaya, Ekaterina
  • Aryal, Gaurab

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.

Suggested Citation

  • Ciliberto, Federico & Farmer, Leland & Khmelnitskaya, Ekaterina & Aryal, Gaurab, 2025. "Valuing Pharmaceutical Drug Innovations," CEPR Discussion Papers 20302, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20302
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    File URL: https://cepr.org/publications/DP20302
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    More about this item

    JEL classification:

    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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