Title: Valuing Pharmaceutical Drug Innovations

Abstract: Using stock market responses to drug development announcements, we measure the $\textit{value of pharmaceutical drug innovations}$ by estimating the market values of drugs. We estimate the average value of successful drugs to be \$1.62 billion and the average value at the discovery stage to be \$64.3 million. We also allow for heterogeneous expectations across several major diseases, such as cancer and diabetes, and estimate their values separately. We then apply our estimates to (i) determine the average costs of drug development at the discovery stage and the three phases of clinical trials to be \$58.5, \$0.6, \$30, and \$41 million, respectively, and (ii) investigate $\textit{drug buyouts}$, among others, as policies to support drug development.