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What's a molecule worth? Discounted cash flows and drug development

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  • Liliana Doganova

    (CSI i3 - Centre de Sociologie de l'Innovation i3 - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris Sciences et Lettres - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique)

Abstract

Research and development of new drugs increasingly relies on partnerships between pharmaceutical companies and biotech start-ups. The latter are, in most cases, new ventures founded to commercialize results originating from public research. While the ability of biotech start-ups to translate scientific knowledge into knowledge that "the market will value" has been emphasized in the literature, little is known about this valuation process in practice. The paper examines how the market value of scientific knowledge is demonstrated and measured in partnerships between pharmaceutical companies and biotech start-ups, by focusing on a calculative device that is central in this process: the discounted cash flow formula (DCF). DCF calculates the value of a project by estimating the future cash flows that this project is likely to generate, reducing them by a certain factor due to their distance in time and their probability to occur, and adding them up to obtain the project's "present value". Faced with drug development projects, and their considerable length and uncertainty, the formula produces puzzling results: seemingly strategic projects turn out to have insignificant, or even negative, value. In order to account for the widespread use of a seemingly false, or even dangerous, formula, the paper adopts a performative approach and examines the effects that DCF induces in practice. Building on interviews with managers and consultants involved in project valuation, as well as on the analysis of scholarly and practitioner publications, we highlight two "felicity conditions" for the formula's performativity, which pertain to its network and its affordances.

Suggested Citation

  • Liliana Doganova, 2013. "What's a molecule worth? Discounted cash flows and drug development," Post-Print hal-00875289, HAL.
    • Handle: RePEc:hal:journl:hal-00875289
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