Valuation of Pharmaceutical Products in the Development Phase

Kasper Dalsgaard Thomsen & Rasmus Breum Andersen

Student thesis: Master thesis


The pharmaceutical industry has been associated with high margins and vast profits for a long period of time. This is shown in the stock prices for the pharmaceutical companies as they have previously outperformed the S&P 500 index. However, the industry was recently caught in the middle of the presidential election, with both candidates promising to lower the price on medicine. The thesis investigates changing market conditions by focusing on pharmaceutical products in the development phase. The main objective of the thesis is thus to investigate which valuation models that are most suitable for valuation of pharmaceutical products in the development phase. This investigation is based on a case study of Bavarian Nordic’s product MVA-BN RSV, which is a product currently in development phase II. The thesis examines three valuation methods: DCF, ENPV and real options. The aim is to assess the performances of the models by evaluating them based on their user- and value attributes. The theoretic findings reveal superior performance of real options relative to the capital based valuation methods. The key advantage of the real option model is the capturing of strategic flexibility by including a volatility estimate in which the market movements for the underlying asset are reflected. In the valuation, the DCF model is used solely for the purpose of estimating the value of the commercial phase. The DCF model creates the foundation for the ENPV and the real option model to estimate the value of MVA-BN RSV including the development phase. The ENPV model captures the technical risk related to the probability of the project failing one of the phases. However, the ENPV model does not capture the strategic flexibility. The real option model on the other hand, captures the value of strategic flexibility. However, MVA-BN RSV is so deep in the money that the strategic flexibility has no value. Since the project has no value related to strategic flexibility, the ENPV model is preferred due to its complying with the theoretic assumptions. The real option model has some limitations complying with realistic assumptions. To further investigate the performance of the different models, a worst case scenario analysis was performed. The result reveals that the real option model captures the value of strategic flexibility, whereas the ENPV model underestimates the true value of MVA-BN RSV. Despite the differences in the worst case scenario, the thesis states that since investment decisions are more dependant on technical risk than market risk, the ENPV model meet the value criteria to a sufficient extent. Combined with the excellent user attributes, the thesis concludes that ENPV is the preferred model to use

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2017
Number of pages132