Terminal Value Issues in Valuation of Pharmaceutical Assets

How to Address Terminal Value Challenges in Pharmaceutical Asset Valuation

Several stakeholders who have an interest in pharmaceutical assets employ a multitude of methods to conduct valuations. Among various valuation methods, risk-adjusted NPV (rNPV) conducted using discounted cash flow analysis (DCF) is the most prevalent practice in the industry – read the dos and don’ts of pharma and biotech valuation.

One of the key drivers of pharmaceutical valuation is the revenue window, i.e. the time duration for which the company earns revenue for the asset. Traditionally, the revenue window has been considered until the loss of exclusivity due to patent expiry. Most valuation exercises attribute no value post loss of exclusivity of a pharmaceutical asset. This practice is indeed correct for small molecule-based pharmaceutical assets where we see an extremely sharp drop in revenue upon patent expiry. However, the vast majority of newer pharmaceutical assets are biologics. They are not as susceptible to revenue erosion as small-molecule based pharmaceutical assets have been. The low susceptibility to revenue erosion is the reason why we see several novel pharmaceutical companies continue to keep patent-expired biologics in their portfolio.

Furthermore, in practice, pharmaceutical companies also employ forward-looking competitive intelligence to assess new entrants, life-cycle management strategies and deal strategies to lock in revenue. This phenomenon of ‘incomplete loss of revenue’ post-patent expiry of biologics, makes a case that one also needs to attribute some value via so-called ‘terminal value’ after the expiry of patents. This argument, which is reflective of real-world business practice, not only applies to biologics but also to other complex drugs that do not encounter a precipitous drop in revenue upon loss of exclusivity.

BiopharmaVantage is a healthcare consultancy that provides valuation and related services specifically for pharmaceutical, biotechnology, and life sciences companies. If you would like to explore how we can assist you, then please contact us.