Stock Watch: Risk And The Pharmaceutical Discount Rate

I listened to a discussion recently on the discount rates used to value pharmaceutical and biotechnology products. One of the speakers suggested that the same asset should have a higher value (via a lower discount rate) if it were being developed by Pfizer Inc.* for example, than by a smaller biotech company. This is logical because an asset in an area where Pfizer has therapeutic and commercial expertise should have better quality resources behind it and Pfizer’s previous experience in that therapeutic area should also increase the chances of success. In addition, a new product enlarging an existing therapeutic portfolio at Pfizer has the advantage of not building out a de novo commercial infrastructure at a smaller biotech company. However, I wondered if these assumptions were always true and if enough track-record risk is captured in company valuations.

When Pfizer acquired Biohaven Pharmaceutical Holding Company Ltd. for $11.6bn in May 2022, it was largely to gain its...