Investment Banking Summer Analyst Interview - Investment Banking
I answered by saying you should use a probablity-adjusted DCF and weight the free cash flows by the cumulative probability that the company's drug(s) will pass phase I, II, and III and go into commercial stage. He said that in most scenarios that's the correct methodology, but you can also build a bottoms-up model (determine market size and penetration for the company's drugs once it reaches commercial stage). He also mentioned that if the company is pre-clinical / early stage, in most scenarios you should not implement a terminal value because it assigns to much certainity that the business will reach a mature stage.
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