Importance of Asset Valuation in Pharmaceutical Research and Development

by Randy Goodman, PhD

Asset valuation activities play a crucial role in pharmaceutical research and development. Knowing the value of an asset or collection of assets is especially important for licensing partnerships, mergers and acquisitions, portfolio prioritization, and investor decision-making.

The value of an asset, and the goal of increasing it over time naturally affects other strategic decisions, such as:

• Continuing or halting clinical trials
• Evaluating new products and market opportunities
• Strategic planning including risk assessment
• Time to market (often 10–15 years from discovery to full commercialization)

Key Considerations in Early Stage Valuation

Key considerations that affect the value of your asset include the stage of development. Pre-clinical assets have a higher risk of failure and are typically valued based on the existing scientific data and market potential. As development progresses successfully and as more is known about the product candidate, value increases.

The market and competitive landscape, including existing treatments and unmet medical needs, are also crucial. Differentiated products targeting significant unmet needs tend to have higher valuations. Regulatory factors, such as approval pathways and potential restrictions, significantly impact value, while designations like fast-track or orphan drug status can enhance it.

Forecasting Market Potential for R&D Asset Valuation

To forecast an asset’s future success, a company must assess:

• The target market’s size using either a bottom-up or a top-down approach. The bottom-up approach focuses on the patient numbers and calculates market size by evaluating the following parameters: number of patients with the condition, number of patients receiving treatment, and the price of treatment per patient. The top-down approach estimates the product candidate’s future sales by extrapolating sales of existing products in the same therapeutic class.
• The new product’s market share, which is affected by factors such as competition from available treatments and products, as well as those in development; pricing; relative advantages compared with current treatments; dosage and formulation of the candidate; clinical evidence of efficacy and safety; and patient/physician product loyalty.
• The market growth rate which depends on future competitive threats such as potential alternative treatments and the entry of generic substitutes which depend on the product’s patent protection and exclusivity period.
• The product’s projected price, which depends on factors such as the new product’s efficacy relative to existing products; the willingness of patients and physicians to switch to the new, often more expensive product or to generic substitutes that may become available in the future; and pricing regulations and government policies.

Accepted Approaches to Early Stage Valuation

There are several accepted asset valuation approaches for these products including:

• Risk-Adjusted Net Present Value (rNPV): A standard method for valuing development-stage pharmaceutical assets. It incorporates the probability of success at each development phase, providing a more realistic valuation framework. This method is useful for analyzing in-process R&D assets across all stages and aids in decisions like capital raising, licensing, and milestone payment negotiations.
• Comparable Company Analysis (CCA): A market-based approach that compares the asset or the company to similar public companies or past deals. Price multiples from comparable companies are applied to the asset’s metrics, with adjustments for differences. While CCA provides a starting point, a deep understanding of the underlying assets and qualitative factors is essential.
• Sum-of-the-Parts (SOTP) Valuation: Useful for companies with multiple drug candidates. Each pipeline asset is valued separately, and these values are then summed for the total company value. This method provides insights into how pipeline risks and opportunities affect overall value.
• Venture Capital (VC) Valuation: Often employs a combination of methods to arrive at an asset valuation, considering both financial metrics and qualitative factors unique to the industry. This method focuses on the investor’s perspective, aiming for a return on investment at a projected exit event within a specific time frame.
• Decision Tree Analysis: Offers a visual and structured approach to analyzing investment decisions by mapping out possible outcomes, risks, and potential payoffs. This is especially useful for complex or multi-stage investment where decisions unfold over time.
• Real Options Method: Values the strategic flexibility and potential future opportunities associated with a drug candidate, such as the ability to adapt to changing market conditions or to pursue multiple indications.

Factors That Influence Product Valuation During Pharmaceutical Research and Development 

Factors influencing asset valuation include:

• Clinical Data: Efficacy, safety data, and outcome data are essential in determining an asset’s potential and market uptake
• Disease Area and Unmet Need: Assets targeting diseases with high unmet medical needs and large addressable markets are valued more highly
• Mechanism of Action: Novel MOAs and disease-modifying therapies have attractive market potential
• Regulatory Status and Potential for Accelerated Pathways: These may have a higher probability of value due to faster market entry

Example of Early Evidence Planning in Valuation

For example, an asset valuation for a cardiac drug would include a detailed investigation of:

• The Market Size and Pricing: Patient population, potential reimbursement, competitive landscape, assumed medical unmet need, and market pricing for similar products
• Development Costs: Preclinical, clinical trials, and regulatory submission
• Estimated Probability of Success (POS): Preclinical at a factor of 5–10%; Phase 1 at a factor of 50–60%; Phase 2 at a factor of 30–40%; Phase 3 at a factor of 60–70%; Approval at a factor of 90%
• Discounted Rates: Typically 10–15% for late-stage, higher for early-stage
• The Patent Life: Effective exclusivity post-launch (often 8–12 years after approval)

Why Early Stage Valuation Expertise Matters

A small company may not have the expertise in house to gather the above information and prepare a decision tree to determine the overall value of a given asset. Valuing biotech assets can be challenging and requires specialized expertise.

However, knowing the value of your asset is critical because companies need to weigh the time and the expense involved in development and the considerable regulatory risk that a candidate faces in getting FDA approval against the anticipated return on investment post-approval. This is where Facet can help. A deeper understanding of the fundamental drivers of your candidate’s value under multiple, complex scenarios enables Sponsors, VCs, and FDA to objectively analyze and resolve differences in their assessment of the candidate’s value at each stage of development.

Transform Your R&D Asset into a Market-Ready Solution

Facet specializes in R&D asset valuation, market assessment, and regulatory alignment. Whether your goal is investment, divestiture, or launch, we provide the expertise to position your product for long-term success. Complete the contact form to schedule a consultation with the experts at Facet Life Sciences.