1. An appropriate discount rate for pharma could be, for example, a pharma-marketing-specific weighted average cost of capital (WACC) of 9%. The rationale for using 9% is as follows: Grabowski and Vernon have suggested a 12% WACC for the pharmaceutical industry in general. In essence, they arrived at this figure by taking the risk-free rate of return on a 30-year US Treasury bond, which is 6%, and adding 3% for development risk and 3% for sales (market) risk. However, since we are valuing market risk here, it would be inappropriate to include development risk. Therefore, we end up with 6% (the risk-free interest rate) plus 3% (the pharma market risk), which gives a total of 9%.]
2. Grabowski, H.G. & Vernon, J.M. A new look at the returns and risks to pharmaceutical R&D. Management Sci. 36, 804–821 (1990).
3. Harris, G. How Merck plans to cope with patent expirations. Wall Street Journal, February 9, A1 (2000).
4. Lerner, J. The control of technology alliances: an empirical analysis of the biotechnology industry. J. Ind. Econ. 46, 125–156 (1998).
5. Lerner, J & Tsai, A.I. “Financing R&D through alliances: contract structure and outcomes in biotechnology” in Proceedings of Allicense '99: Banking on innovation in the next millennium (Recombinant Capital and Wilson, Sonsimi, Goodrich & Rosati, San Francisco, 1999).