Valuing Pharmaceutical Drug Innovations

Gaurab Aryal (), Federico Ciliberto, Leland Farmer and Ekaterina Khmelnitskaya

Papers from arXiv.org

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.

Date: 2022-12, Revised 2026-05
New Economics Papers: this item is included in nep-ind
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