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“Early Drug Discovery and Development Guidelines:

The nature of a drug development project is characterised by high attrition rates, large capital expenditures, and long timelines. This makes the valuation of such projects and companies a challenging task. Not all valuation methods can cope with these particularities. The most commonly used valuation methods are risk-adjusted net present value (rNPV), decision treesreal options, or comparables.

The most important value drivers are the cost of capital or discount rate that is used, phase attributes such as duration, success rates, and costs, and the forecasted sales, including cost of goods and marketing and sales expenses. Less objective aspects like quality of the management or novelty of the technology should be reflected in the cash flowsestimation.[9][10]

Candidates for a new drug to treat a disease might, theoretically, include from 5,000 to 10,000 chemical compounds. On average about 250 of these show sufficient promise for further evaluation using laboratory tests, mice and other test animals. Typically, about ten of these qualify for tests on humans.[11] A study conducted by the Tufts Center for the Study of Drug Development covering the 1980s and 1990s found that only 21.5 percent of drugs that started Phase I trials were eventually approved for marketing.[12] In the time period of 2006 to 2015, the success rate was 9.6%.[13] The high failure rates associated with pharmaceutical development are referred to as the “attrition rate” problem. Careful decision making during drug development is essential to avoid costly failures.[14] In many cases, intelligent programme and clinical trial design can prevent false negative results. Well-designed, dose-finding studies and comparisons against both a placebo and a gold-standard treatment arm play a major role in achieving reliable data.[15]