How much can a drug be worth?

There are many calculation models to estimate the value of a medicinal product, and very often investors wish to know the size of the market and potential profits very early. For that reason a so called “quick and dirty” calculation methods are often appreciated to create a least a preliminary picture of how big or small the drug value can be. I have a very good and simple method in mind that i would like to share. This method I often use myself and it usually works very well: a drug value is 5 times annual sales. This model DOES NOT take into considerations patent status, competitors and other aspects of a complex pharmaceutical business – just one plain simple number – annual sales of the drug.

Let’s see how good it works in practice

We can pick up an example from the latest deals announced:

“Pharmaceutical company AstraZeneca (AZN.L) has agreed to sell its small molecule antibiotics business to Pfizer Inc (PFE.N) in a deal that could be valued at more than \$1.5 billion.”

And here is the key parameter:

“The two established medicines in the deal — Merrem, used to treat serious infections in hospitalized patients, and Zinforo, an intravenous antibiotic used against skin and soft tissue infections and pneumonia – generated sales of \$250 million in 2015, AstraZeneca said.”

Five times sales are (\$250m x 5) equals \$1.25b, which mean that the model gives less than 20% mistake! It’s very good…

Another example

“Pfizer Inc. claimed the pharmaceutical industry’s latest big prize Monday, beating out a group of rivals after months of jockeying to buy Medivation Inc. and its blockbuster cancer drug for \$14 billion.”

The key number here:

“By acquiring Medivation, Pfizer gets Xtandi, a cancer drug that’s already approved for sale in the U.S. and elsewhere, and that analysts project will generate \$1.33 billion in annual sales for Medivation by 2020.”

Simple calculation gives: \$1.33 x 5 = \$6.65b. Well, it is not \$14b but the same order. And I guess that Xtandi is not the only “hot” product in the pipe-line.

Igor