ABSTRACT
Most drug development takes place within a business enterprise where the objective is to maximize the value of the company’s stock. Conceptually, the value of a company’s stock is simply the present value of its expected future cash flows. That is
r
Value of a company's stock E(C )
(1 )t t
t 1 ∑= +
(2.1)
where Ct is the net cash flow generated by the company from all projects in year t, and r represents the discount rate used to determine the present value of a dollar earned one year in the future
The calculation of the expected future cash flow for a particular project in year t, E(CProject k in year t), is accomplished in practice by splitting it into two components. Specifically
E(CProject k in year t) = P(Tech. Success) ∙ E(CProject k in year t/Tech. Success) (2.2)
That is, the expected cash flow for project k in year t is the probability that the drug will be successfully developed multiplied by the expected cash flow in year t given that development was successful. The term P(Technical Success) is often referred to as PTS, which is short for probability of technical success.
