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Tuesday, 1 March 2011


in the pharmaceuticals sector, a drugs pipeline consists of the drugs that a company has under development or is testing. This includes completely new drugs, variants of existing drugs and new applications of existing drugs. The pipeline starts with new drug discoveries and it is important to assess companies' ability to discover new drugs as well as drugs that are currently in the pipeline. The early stage of the pipeline needs to be refilled as drugs move up. Good R & D is crucial. New drugs require extensive development, pre-clinical testing, three stages of clinical trials and then have to approved in each country the company wishes to sell the drug in. This means that many uncertainties lie between discovering a new drug and selling it. The uncertainties lessen as a drug moves along the pipeline . It is not uncommon for companies to buy and sell drugs that are in various stages of development, or to enter into agreements to jointly develop or market drugs. In these circumstances one company may receive milestone payments from another for completing particular stages of development, trials and approval, as well as royalties on the drug once it is marketed. Major pharmaceutical companies always have pipelines with many drugs in them. This may appear to spread the risk, but it is often the case that most of the value of the pipeline lies in a small number of drugs, or even in a single "blockbuster" drug Assessing the pipeline is often the most important part of valuing a pharmaceutical company, and the most difficult. The value of a pipeline is the sum of the values of each drug in the pipeline. To assess the value of a drug in the pipeline one needs to consider: the size of potential market for the drug how much market share the drug will be able to gain the risk that it will not be approved. The size of the potential market may be clear. If the drug is to treat a specific disease, recognised disease for which the need for treatment is accepted it may be easy. However if the diagnosis or treatment is a matter of controversy, if existing treatments are effective or if treatment is so expensive that health services or insurers may not pay for it, then the market size is less clear. How much market share a drug gains will depend on its cost and effectiveness compared to competitors. This includes not just the drugs already on the market, but others that are in development. The risk of failure to gain approval is the hardest thing to assess. It requires evidence of both effectiveness and safety. Effectiveness is generally demonstrated fairly early on (but not always). Safety problems may show up at any point in the clinical trials, although the risk diminishes in the later stages. Companies largely dependent on established products are easier to assess, and there are fewer uncertainties in the valuation. The best growth opportunities in the sector are small companies with a platform for developing new drugs. The valuations of these are, of course, very uncertain.

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