Healthcare · Pharmaceuticals
Drug Development Probability of Success
How probability of success enters a drug valuation: the cumulative chain, which costs it weights and which it does not, and biologics vs small molecules.
Selborne Research · Pharmaceuticals coverage: 7 guides, 6 company profiles, a primer and Excel model
Educational analysis for professional use. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
On this page
PoS Weights Cash Flows by the Chance They Happen
A drug in development is worth something only because it might be approved. Probability of success (PoS) turns that “might” into a number: the historical share of candidates at the same phase that went on to approval. In a valuation it weights each future cash flow by the chance that it happens. Time value stays in the discount rate; clinical risk sits in the weights.
The default table here is the 2011 to 2020 study by BIO (the US biotech industry body), Informa and QLS, which measured how often programmes passed each phase. Clinical trial success rates by phase covers what each phase tests and why the rates differ.
The Chain Starts at the Asset’s Current Phase
The chance of approval is the product of the gates still ahead. An asset entering Phase II has three to pass: Phase II (28.9%), Phase III (57.8%) and review (90.6%). Its PoS is 28.9% × 57.8% × 90.6% = 15.1%. The gates behind it no longer count.
| Current phase | Gates still ahead | PoS to approval |
|---|---|---|
| Phase I | I, II, III, review | 7.9% |
| Phase II | II, III, review | 15.1% |
| Phase III | III, review | 52.4% |
| Filed with the FDA | review | 90.6% |
Each gate passed raises the weight on the same approved drug, so a trial result moves a pipeline valuation sharply. Rates also vary widely by disease area (see success rates by therapeutic area).
Which Cash Flows Get Which Weight
Weight each cash flow by the probability that it is paid or received, so different lines of the same asset carry different weights:
| Cash flow | Happens if | Weight for a Phase II asset |
|---|---|---|
| Product sales and their costs | The drug is approved | 15.1% |
| Launch and marketing spend | The drug is approved | 15.1% |
| Phase III trial | Phase II succeeds | 28.9% |
| Rest of the Phase II trial | Already committed | 100% |
Committed spend gets no discount for failure because it is paid in every outcome. The common mistake is to net everything and apply one PoS to the result. That weights the committed trial at 15.1% instead of 100%, so it understates costs and overstates the asset.
A profitable drugmaker adds one refinement: its R&D reduces the tax it pays on the rest of the business, so trial spend is counted after tax.
Worked Example: A Phase II Asset
A fictional small-molecule candidate has just started Phase II. All figures are present values after tax:
| Item | Present value | Weight | Weighted |
|---|---|---|---|
| Product contribution if approved | $3,000M | 15.1% | $453M |
| Launch spend if approved | −$400M | 15.1% | −$60M |
| Phase III trial | −$500M | 28.9% | −$145M |
| Rest of Phase II trial | −$100M | 100% | −$100M |
| Risk-adjusted value | $148M |
The weighted value is 15.1% × ($3,000M − $400M) − 28.9% × $500M − $100M = $148M.
Apply one PoS to the net figure instead and the answer doubles: ($3,000M − $400M − $500M − $100M) × 15.1% = $302M. The gap is the trial money that has to be spent before anyone knows whether the drug works.
Biologics and Small Molecules Carry Different Odds
The BIO study splits new drugs by type. Biologics, made in living cells, reached approval more often than new molecular entities (NMEs), which are mainly small molecules:
| Starting point | All drugs | Biologics | NMEs |
|---|---|---|---|
| From Phase I | 7.9% | 9.1% | 5.7% |
| From Phase II | 15.1% | 17.4% | 11.2% |
| From Phase III | 52.4% | 53.6% | 43.6% |
Rerun the worked example with the biologic rates (17.4% to approval, 32.4% to reach Phase III) and the asset is worth $190M; with the NME rates (11.2% and 25.6%) it is worth $63M. Same product, same costs, and a threefold difference from the type of molecule alone. Use a type or disease-area rate when the asset clearly belongs to one, and the all-drugs figure when it does not.
Where PoS Stops
PoS covers failure before launch. After launch the risk changes shape: the drug earns until its exclusivity ends and then loses most of its sales to generic or biosimilar copies. That is a separate schedule, built product by product from the filed patent dates, as the patent cliff guide shows. A Phase III asset can carry a 52.4% chance of approval and still face a patent expiry eight years after launch. The rNPV guide puts the two together for one asset.
PoS also says nothing about what the pipeline costs to run. Six large drugmakers spent between 14.9% and 24.3% of FY2025 revenue on R&D; the R&D intensity guide compares them on one basis.
A base business, a drug at its patent cliff, a growing biologic and a Phase III asset, each valued year by year and summed to value per share.
- 15 sections, the patent ladder to a year-by-year sum-of-parts valuation and concentration screens
- 39 pages
- a small molecule at its cliff, a biologic growth driver and a pipeline asset weighted by its phase, plus a base business
- 3 drug schedules
- large-cap innovators on filed product concentration and loss-of-exclusivity dates
- 6-company screen
The Excel model is the primer's sum-of-parts valuation live across 13 sheets: a base-business DCF at an 8.5% WACC; three drug schedules, each set to marketed or pipeline and to a clinical phase that sets its odds; loss-of-exclusivity cliffs that settle on a generic floor; a calendar-year input that turns a filed patent date into a schedule year; the consolidated bridge to value per share; and patent-cliff, concentration and sensitivity views. Change a drug's LOE year, phase or peak sales, or the WACC, and the value moves.
See what's in the Pharmaceuticals Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Healthcare industries
Frequently Asked Questions
- What is probability of success (PoS) in drug valuation?
- PoS is the historical chance that a drug candidate at a given phase goes on to win approval. In a valuation it multiplies the cash flows that only happen if the drug is approved. On the BIO, Informa and QLS rates for 2011 to 2020 it is 7.9% from Phase I, 15.1% from Phase II, 52.4% from Phase III and 90.6% once an application is filed.
- Why is committed trial spend not multiplied by PoS?
- Because it is paid whatever the result. Spend on the trial already under way happens in every outcome, so it counts in full. Revenue, launch costs and later trials happen only if the drug gets that far, so each is weighted by the chance of reaching that point. Applying one PoS to revenue net of all costs understates those costs and overstates the asset.
- Do biologics and small molecules have different success rates?
- Yes. In the BIO 2011 to 2020 data, 9.1% of biologics entering Phase I reached approval against 5.7% of new molecular entities, which are mainly small molecules. From Phase II the figures are 17.4% and 11.2%, and from Phase III 53.6% and 43.6%.
- What is the probability of approval for a Phase III drug?
- On the BIO 2011 to 2020 rates, 52.4%: 57.8% of Phase III programmes reach a filing and 90.6% of filings are approved. It is the rate the pharma model applies to its Phase III asset.
Read next
rNPV: Valuing Drug Pipelines
Risk-adjusted NPV for drug pipelines: PoS-weighted cash flows, an 8.5% WACC built on a 4.50% 10-year Treasury rate, and a worked Phase III asset at $1,621M.
Patent Cliffs and LOE Erosion
How loss-of-exclusivity erodes branded drug revenue: generic unit-share curves, net-price erosion by competitor count, biosimilar contrast via Humira, and a worked fade on a $3,000M brand.
Pharma R&D Intensity by Company
R&D as a share of revenue at six large drugmakers: where acquired R&D and write-downs are booked, what the PhRMA industry average covers, and why spend is not output.
Clinical Trial Success Rates by Phase
FDA phase definitions and BIO/Informa success rates: 52.0% to 28.9% to 57.8% to 90.6%, cumulative 7.9% LOA from Phase I; the later Citeline 2014–2023 data give 6.7%.
See it applied
These company profiles apply the concepts from this guide to real public companies.