Healthcare · Pharmaceuticals
Pharmaceuticals Sector Primer
A 39-page primer plus Excel valuation model on pharmaceutical companies: patent cliffs drug by drug, probability of success, pipeline rNPV and sum-of-parts.
2026 Edition · data as of June 2026
- pages
- 39
- sections
- 15
- model sheets
- 13
Choose a format
PDF only
The full primer
£25 / ~$32
- 39 pages, 15 sections
- Worked examples and applied cases
- 2026 Edition, data as of June 2026
Excel model
Valuation template
£45 / ~$58
- 13 sheets (.xlsx)
- Runs the primer's worked valuations live
PDF + Excel model Best value
Both files together
£59 / ~$76
- The 39-page primer
- The 13-sheet Excel model
- £70 bought separately · £11 less
Complete Healthcare Library
All three Healthcare industries: three primers, three Excel models (Pharmaceuticals, Biotech, and Medtech).
Inside the primer
The 15-section contents, a worked valuation page, and the Excel dashboard.
Contents
- 01 How Pharma Makes Money
- 02 Listed Pharma Types
- 03 Clinical Development and the Patent Ladder
- 04 Segments and Sub-Markets
- 05 Revenue Drivers: Generic Build
- 06 Cost Structure: R&D and Margins
- 07 Valuation Frameworks
- 08 Worked Example: Year-by-Year Sum-of-Parts
- 09 Worked Example: Full Company Roll-Forward
- 10 Applied Cases: Concentration and LOE
- 11 Applied Cases: GLP-1 and Transition
- 12 The Companies in This Primer
- 13 Key Metrics and Screening
- 14 Risks, Benchmarks and Case Study
- 15 Glossary and Cheat Sheet
Worked examples and applied cases · 39 pages · 15 sections · 3 drug schedules
The Excel model
Educational material for professional use. This primer and its model are not investment advice or a recommendation to buy or sell any security, and they are not personalised. Worked valuations use illustrative calibrations, not fair-value estimates for any company.
A drug earns high margins only while its patents and regulatory exclusivity keep copies off the market. When they expire, generics or biosimilars take volume and price within a few years. A pharma company is therefore worth the cash its marketed drugs earn up to each cliff, plus a pipeline weighted by the odds that each asset reaches patients. Trailing earnings hide both clocks, which is why a year-by-year model does the work here and a multiple does not.
Pharma valuation benchmarks by development stage
A pharma asset's value depends on where it sits on two ladders: the clinical one before approval and the patent one after. These are the benchmarks the primer uses at each rung.
| Stage | Method | Benchmark | What sets the position |
|---|---|---|---|
| Phase I asset | rNPV | 7.9% chance of reaching approval | Modality: 9.1% for biologics, 5.7% for new small molecules |
| Phase II asset | rNPV | 15.1% chance of approval | Therapy area and trial design |
| Phase III asset | rNPV | 52.4% chance of approval (57.8% to filing, then 90.6%) | Peak sales, launch year, years of exclusivity left |
| Marketed brand | Product DCF with a dated fade | 100% until loss of exclusivity | Patent expiry, litigation settlements, Medicare price-setting date |
| Small molecule after LOE | Generic fade schedule | About 23% of units kept after 12 months; price 39% below brand with one generic, over 95% with six or more | Number of generic entrants; brand size before entry |
| Biologic after LOE | Biosimilar fade schedule | Humira US revenue down 62% over two years | Rebate contracts and switching costs |
Every stage is discounted at the same 8.5%, an illustrative 4.50% Treasury yield plus about four points of equity risk. Clinical risk lives in the probability of success, so the rate does not rise for a riskier asset. A drug moves up its row with larger peak sales and a longer runway to its cliff, and down with an early settlement or a Medicare price date that lands before patent expiry. As a cross-check on the commercial portfolio, the sector forward P/E in Damodaran's 2026 snapshot is 24.2x.
Worked example: a pharma sum-of-parts valuation
Take a hypothetical company with $25B of base revenue, three named drugs and $5B of net cash. The primer values each piece on its own year-by-year schedule at 8.5% and adds them up. Drug C, the Phase III asset, peaks at $13B of sales; its launch cash flows are worth $23.3B if it is approved, or $12.2B at a 52.4% chance, and $2.2B of committed trial cost comes off in full.
| Part | Value |
|---|---|
| Base business (15-year DCF plus 2% terminal growth) | $96.9B |
| Drug A: small molecule, loses exclusivity in year 3 | $7.1B |
| Drug B: biologic growth driver, loses exclusivity in year 12 | $57.5B |
| Drug C: Phase III asset ($12.2B PoS-weighted, less $2.2B trial cost) | $10.0B |
| Net cash | +$5.0B |
| Company value | $176.5B |
| Value per share (2.0B shares) | $88.3 |
Now suppose Drug C were still in Phase II, with everything else unchanged. Its chance of approval drops to 15.1%, so the same $23.3B of launch cash flows is worth $3.5B, and after the $2.2B of trial cost Drug C adds only $1.3B. Company value falls to $167.8B, or $83.9 a share. That is a large move for one trial, yet one point on the discount rate moves more: at 9.5% the whole company is worth about $79.1 a share, because the rate re-prices the base business and its terminal value too.
The primer shows the year-by-year schedules behind each part and grids that re-run the whole valuation across probability of success, peak sales and the discount rate. The Excel model does the same with your own drugs.
Which pharma valuation method fits which company
| Company type | Primary method | Check with | Why |
|---|---|---|---|
| Growth-franchise engine (such as GLP-1) | Product DCF with manufacturing capacity | Forward P/E | Earnings are visible; the concentration is a ramp, not a cliff |
| Single-franchise cliff | Loss-of-exclusivity bridge plus pipeline rNPV | Largest drug's share of sales against its patent date | One brand's dated fade dominates the equity |
| Diversified innovator | Sum of parts by brand | Sector P/E and PEG | No single product moves the whole company |
| Healthcare conglomerate | Segment sum of parts | Drug-only comparisons | The medtech leg follows a different cycle |
| Pipeline asset or pre-revenue company | rNPV on each asset | EV/Revenue | No earnings for a P/E to read |
What the full primer adds
The primer builds the tools in order: how pharma makes money, the listed company types, clinical development and the patent ladder, then the revenue build and the cost side of R&D and margins. Two worked chapters value one illustrative company from first input to value per share: a base business, a small molecule reaching its cliff, a biologic growth driver and a Phase III asset weighted by its probability of success. Applied cases on concentration, loss of exclusivity, GLP-1 drugs and portfolio transition follow, and screening closes with product concentration, R&D intensity and payout.
Free guides on the site cover the individual pieces, so you can revise one idea without reopening the PDF: patent cliffs and LOE erosion, rNPV pipeline valuation, probability of success, revenue concentration, patent expiry dates by company, R&D intensity by company and the GAAP payout trap. Research profiles for Eli Lilly, Novo Nordisk, Merck, Pfizer, AbbVie and Johnson & Johnson run the same screens on filed results. The companion Excel model spans thirteen sheets, from the base business and three drug schedules through the consolidated bridge, the patent-cliff and concentration views to a live sensitivity grid, so moving one drug's cliff year re-runs the valuation.
Sheets: Quick Start, Instructions, Assumptions, Base Business, PoS Calculator, Drug A, Drug B, Drug C, Consolidated, Patent-Cliff Bridge, Concentration, Sensitivity, Dashboard.
Pharma valuation: free guides
Pharma valuation FAQ
- How do you value a pharmaceutical company?
- As a sum of parts. Each marketed drug is a discounted cash flow that runs until loss of exclusivity and then fades on its own schedule; each pipeline asset is a risk-adjusted NPV (rNPV), its cash flows multiplied by the probability that it reaches approval. The base business, the drug values and net cash add up to company value. A forward P/E is only a cross-check once that model is built, because trailing earnings cannot see a patent cliff.
- What is rNPV in pharma valuation?
- Risk-adjusted net present value: the present value of an asset's after-tax cash flows if it launches, multiplied by its cumulative probability of success from its current phase. On BIO 2011-2020 data that probability is 7.9% from Phase I, 15.1% from Phase II, 52.4% from Phase III and 90.6% once filed. Trial costs already committed are deducted in full, because they are paid whether or not the trial succeeds.
- What discount rate is used in a pharma rNPV?
- The primer uses 8.5%: an illustrative 4.50% ten-year Treasury yield plus about four points of equity risk, the same rate for marketed drugs and pipeline assets. Clinical risk goes into the probability of success; raising the rate as well would count trial failure twice.
- What P/E do pharma stocks trade on?
- Damodaran's 2026 snapshot for US drug companies puts the sector forward P/E at 24.2x against expected earnings growth of 17.81%, a PEG of 1.40. The primer treats that as a rough guideline that drifts with the market. It cross-checks a commercial portfolio after the drug-by-drug model is built and does not replace it.
- How fast do drug sales fall after a patent expires?
- For a small molecule, brands keep about 23% of units 12 months after generic entry, and brands with more than $250M of sales before entry keep about 18%. Price falls too: about 39% below the brand with one generic and more than 95% below with six or more. Biologics fade more slowly, because biosimilars are not substitutable at the pharmacy: Humira's US revenue fell 62% over its first two years of biosimilar competition.
See this methodology applied to a real company:
Eli Lilly (LLY) →