Net Present Value in Pharma
Impact of Clinical Trial Success Rates on Risk-Adjusted Net Present Value (rNPV)
The Net Present Value (NPV) is a key figure used to assess the value of pharmaceutical candidates and guide decision-making throughout drug development projects. It indicates the future success of an investment considering the discounts relevant to the present (a discounted cash flow approach).
Factors that impact the NPV include:
- Cash Outflows: R&D expenses, including clinical trial costs
- Cash Inflows: projected market potential of drug candidate
- Discount Rate: rate of return used to discount future cash flows to the present
A project with a positive NPV is considered profitable whereas a project with a negative NPV, is considered loss-making.
It is important to consider the changes in risk over time when developing new pharmaceutical products. As a drug candidate advances throughout the drug development process, these risks decrease. The risk-adjusted net present value (rNPV) enables pharmaceutical companies to factor in these risks throughout development. While the rNPV involves forecasting revenues, costs, and timing, it also depends on the success rates of each development stage.
Pharmaceutical companies can monitor this value and test different approaches to improve the success rates of clinical trials and increase the value of candidates in development.
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- Thakur M. PV vs. NPV (Present Value vs. Net Present Value), Wall Street Mojo
- Stasior J, Machinist B, and Esposito M. Valuing Pharmaceutical Assets: When to Use NPV vs rNPV, Alacrita, August 2018