Summer Analyst Interview - Generalist
When using intrinsic valuation techniques, such as a DCF, for new drugs, you need to use a risk-adjust NPV as opposed to a traditional NPV. Because the drug pipeline and approval process is uncertain, there is only a certain chance of success at each different trial phase and approval stage. The cash flows are multiplied by the cumulative success rate at each stage to get risk adjusted cash flows. You then find the risk adjusted rate using those cash flows.
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