Risk-adjusted Net Present Value Research Articles

Financial evaluation of value-creating biosimilar development candidates: a business case study of low-, medium- and high-sales biosimilars

ABSTRACT Background Selection of a biosimilar development candidate requires detailed and careful analysis to ensure value creation. Research design and methods We applied the net present value (NPV) model for financial evaluation of biosimilar development candidates for the global market. Biosimilar development candidates from three categories were identified based on the global sales of their respective original biological products (OBPs): >$1 and ≤$4 billion, >$4 and ≤$7 billion and >$7 and ≤$10 billion. The standard NPV and risk-adjusted NPV (rNPV) were calculated under the base-case and various scenarios related to development costs, sales, selling, general and administrative expense, cost of goods sold, and discount rates. Results A biosimilar to an OBP with sales of $1.6 billion has some financial risk. Biosimilars to OBPs with sales of $5.5 billion and $9.4 billion have very less financial risk under the base-case scenario of analysis. Sales of an OBP had impact on the financial valuation and attractiveness of a biosimilar. Sensitivity of rNPV to different parameters varied for three biosimilars. Discount rates, sales and development costs were important parameters affecting financial valuation of biosimilars. Conclusion Biosimilar development candidate selection requires a thorough financial evaluation considering product-, company- and market-specific aspects.

Pharmaceutical R&D project portfolio selection and scheduling under uncertainty: A robust possibilistic optimization approach

Due to the costly and risky nature of research and development (R&D) projects and limited shared resources in pharmaceutical companies, it is essential to simultaneously address the selection and scheduling decisions, and this strongly prevents schedule slippage and poor resource management. Herein, we present a mathematical programming model to periodically select and concurrently schedule an optimal portfolio of R&D projects subject to varying levels of market and technical uncertainty over the desired planning horizon. More specifically, the technical risk of R&D projects is captured using a risk-adjusted net present value (rNPV) approach and their market risk is handled by developing a robust possibilistic programming (RPP) approach which can maximize the mean value of R&D project portfolio and control optimality and feasibility robustness. Given a set of potential R&D projects, limited resources, and a predefined time horizon, the proposed model determines the projects to be executed in each period, decides on the optimal outsourcing policy, and simultaneously concludes the optimal financial resources’ planning. We believe that our model can serve as a strategic decision-making tool to assist pharmaceutical company managers in analyzing various investment scenarios and selecting a balanced portfolio. The significance of the applicability of the developed model is demonstrated via a numerical example and some sensitivity analyses on the data taken from the literature.

Corporate Risk Evaluation in the Context of Austrian Business Cycle Theory

This paper expands Fuller’s (2013) analysis of the net present value and interest rate changes in the context of the Austrian Business Cycle Theory. During the boom phase of the business cycle, the economy shifts to a more risky position as the result of entrepreneurs’ profit targeting. To quantify this risk the duration, defined as the number of periods that elapse before the average present value dollar is received from a stream of cash flows, can be used. The new risk-adjusted net present value is created after applying the duration to capital asset pricing model determining the discount rate that should be used to calculate the present value of the project.

A novel valuation model for medical intervention development based on progressive dynamic changes that integrates Health Technology Assessment outcomes with early-stage innovation and indication-specific clinical success rates

All stakeholders involved in the development, licencing, and market access of health care technologies use stage-specific valuation matched that integrates risks and outcomes to inform their decision making.A stage-specific valuation method, based on defining future cash flows for a product that are success-rate probability adjusted prior to being discounted with a risk rate, is termed risk-adjusted net present value, and a negative value indicates that a loss will be made and therefore the product should probably not be developed. However, values exited from these calculations can be highly variable depending on the data used to generate the calculation, and in light of the estimated $2.6bn in capitalised costs that is necessary to move an innovation to market, without any guarantee of product reimbursement, the financial risk is very high. Indeed recent return on investment numbers for life science investment are staggeringly low, significantly lower than the weight-adjusted cost of capital, implying healthcare R&D is economically unattractive. The outcome is that the objectives of modern intervention R&D are more linked to moving risk off the books or downstream to larger companies, which at face value seem better positioned to develop the products further, when in fact a complete reconfiguration of approaches, models and realistic actions and strategies are likely to generate more value.As NPV calculations are only as good as the data used to generate it, and both accurate and comprehensive values ideally should be used, based on real market dynamic, the latest clinical success rates and considering the latest reimbursement approaches, more formal HTAs for therapeutic intervention, we reassessed valuation approaches, integrated the reality of later stage clinical validation, product reimbursement based on Health Technology Assessment perspectives, and downstream costs to generate a whole value chain calculation. The outcomes led us to consider an alternative risk rate model based on dynamic changes that occur throughout the R&D process. While modelled for medical intervention development, the outcomes of this work can also be applied for evaluation of diagnostics and medical devices.Using four intervention types in two diverse indications as a model, we simulated various valuations, and our analyses suggest that using indication-specific success rates provides a more accurate value determination, and that a different risk rate approach should be followed, which was further validated using real market data. The implication is that all stakeholders need to take a holistic approach to valuation and working together for mutual benefit to de-risk development programmes and pipelines. This will enable all of them to use the same values before and throughout the R&D process, and facilitate better decision making, clearer trust as the innovation changes hands up the value chain, and eventually better and more cost-effective therapies.

Developing an Improved Risk-Adjusted Net Present Value Technology Valuation Model for the Biopharmaceutical Industry

The financial valuation of a drug that is still under development is required for various purposes. The risk-adjusted net present value (r-NPV) method, which recently emerged in the biotech industry, uses the development attrition rate as a discount factor to reflect risk during each development phase. The r-NPV method was developed to overcome the disadvantages of the prevailing discounted cash flow and real options methods and considers drug type, as well as the stage of development in its approach. Using this method, the current study examines technology values in the biopharmaceutical industry and matches the clinical development periods and success rates of these new drugs by analyzing datasets from ClinicalTrials.gov and MedTrack DB. It thus provides support for an empirical valuation model for experts in the field. Notably, there is limited research on the attrition rate and development period of new substance drugs and the research results are not consistently presented. In addition to new substance drugs, further research is necessary to deepen understanding of the attrition rate and development period of biologically-based drugs because of their inherent physical and developmental differences. Similarly, research on performance specifics within drug class models would enable refinement of the model.

A Glum Primer: How to Account for Risk with Uncertain Npvs

This note describes a method for adjusting uncertain future cash flows into a present certain equivalent. The use of net present value (NPV) to adjust a stream of future known cash flows into a single-value equivalent adjusted for the time value of money is common practice. The use of simulation to produce a risk profile of NPV values is also now common. While the expected net present value (ENPV) is often used to convert a risk profile of uncertain NPVs into a single-value equivalent, this approach ignores risk and the decision maker's attitude toward risk. Simply put, a 50% probability of receiving an NPV of $1 million is not as attractive as a 100% chance of receiving an NPV of $500,000. The general logarithmic utility model (GLUM) constructs a single certain equivalent from a risk profile (i.e., a “risk-adjusted NPV”) which goes beyond ENPV to incorporate risk aversion into the decision-making criterion. The simplicity and many attractive properties of the GLUM prompt us to suggest it as more attractive than other ways to adjust an NPV risk profile for risk. Excerpt UVA-QA-0849 Rev. Nov. 26, 2018 A GLUM Primer: How to Account for Risk with Uncertain NPVs We use net present value (NPV) to convert a stream of future known cash flows into a single-value equivalent. The NPV tool uses a discount rate to correctly account for the time value of money. We often next use expected net present value (ENPV) to convert a risk profile of uncertain NPVs into a single-value equivalent. Although ENPV accounts for all possible NPVs and their relative likelihoods, it ignores risk and the decision-maker's attitude toward risk. Simply put, a 50% probability of receiving $ 1,000,000 is not as attractive as a 100% chance of receiving $ 500,000. This makes ENPV an incomplete decision-making criterion. The purpose of this note is to describe the general logarithmic utility model (GLUM), which constructs a single-value equivalent from a risk profile. The resulting single-value equivalent is called a “present certain equivalent,” or “risk-adjusted NPV,” which goes beyond ENPV to incorporate risk aversion into the decision-making criterion. The simplicity and many attractive properties of the GLUM prompt us to suggest it as more attractive than other ways to adjust an NPV risk profile for risk. How to Use the GLUM . . .

Evaluating the Investment Benefit of Multinational Enterprises’ International Projects Based on Risk Adjustment: Evidence from China

This study examines the international risks faced by multinational enterprises to understand their impact on the evaluation of investment projects. Moreover, it establishes a ‘three-dimensional’ theoretical framework of risk identification to analyse the composition of international risk indicators of multinational enterprises based on the theory of an enterprise’s international development path and stages as well as risk management. Using entropy weights and net present value (NPV), this study employs survey data to empirically analyse the international risk entropy evaluation model and then test the NPV evaluation model based on risk adjustment. A significant difference is found between the evaluation process of multinationals’ international investment benefits with and without considering the risk factors. This study concludes that the results of the risk-adjusted NPV model are more scientific and effective than that of the traditional NPV model as the basis of decision-making. It contributes to the theoretical literature by proposing the international risk entropy model and constructing the risk-adjusted NPV model to test the impact of international risk factors on the evaluation of international investment projects. This provides a reference to multinationals in their choice of investment projects as well as to researchers in this field.

Process change evaluation framework for allogeneic cell therapies: impact on drug development and commercialization.

Some allogeneic cell therapies requiring a high dose of cells for large indication groups demand a change in cell expansion technology, from planar units to microcarriers in single-use bioreactors for the market phase. The aim was to model the optimal timing for making this change. A development lifecycle cash flow framework was created to examine the implications of process changes to microcarrier cultures at different stages of a cell therapy's lifecycle. The analysis performed under assumptions used in the framework predicted that making this switch earlier in development is optimal from a total expected out-of-pocket cost perspective. From a risk-adjusted net present value view, switching at Phase I is economically competitive but a post-approval switch can offer the highest risk-adjusted net present value as the cost of switching is offset by initial market penetration with planar technologies. The framework can facilitate early decision-making during process development.

Net present value approaches for drug discovery

Three dedicated approaches to the calculation of the risk-adjusted net present value (rNPV) in drug discovery projects under different assumptions are suggested. The probability of finding a candidate drug suitable for clinical development and the time to the initiation of the clinical development is assumed to be flexible in contrast to the previously used models. The rNPV of the post-discovery cash flows is calculated as the probability weighted average of the rNPV at each potential time of initiation of clinical development. Practical considerations how to set probability rates, in particular during the initiation and termination of a project is discussed.

Selecting the most appropriate commercialisation strategy is key to extracting maximum value from your R&D

Business organisations are presented with many options in the commercialisation of the outcome of a research and development project, including licensing, in-house product launch, direct sale of a technology packaging or spinning off a new venture with other investors. In this article, a simple framework is introduced that can be used to select a suitable commercialisation strategy according to two parameters of the innovation, namely its strategic fit and the estimated value or risk-adjusted net present value of the opportunity. The use of this framework is illustrated with two examples, the first involving the development of a new product that is a significant innovation on an existing process or product line, and the second being the commercialisation of a biopharmaceutical. In both cases, the option of licensing is explored, and a further technique for identifying the most suitable point for the license event is presented.

Investment appraisal using quantitative risk analysis

Investment appraisal concerned with investments in fire safety systems is discussed. Particular attention is directed at evaluating, in terms of the Bayesian decision theory, the risk reduction that investment in a fire safety system involves. It is shown how the monetary value of the change from a building design without any specific fire protection system to one including such a system can be estimated by use of quantitative risk analysis, the results of which are expressed in terms of a Risk-adjusted net present value. This represents the intrinsic monetary value of investing in the fire safety system. The method suggested is exemplified by a case study performed in an Avesta Sheffield factory.