ModelChoice decision tree · Pharma and biotech

Pharmaceutical Pipeline Decision

Develop drug A, drug B or both, out-license both, or keep the money?

Complexity: ★★★★★
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From the model’s decision tree

Best first decision: Develop Both (Parallel)

The expected value of each first option when every later decision is also made well (the tree rolled back).

First decision	Expected value
Develop Drug A	$407,802,000
Develop Drug B	$94,502,000
Develop Both (Parallel)	$776,711,250	✔ best
Out-License Both	$200,000,000
Do Nothing	$0

Measure	Value
Expected value of the best strategy	$776,711,250
Chance of a loss on the best strategy	70.5%
Best outcome on the best strategy	$3,535,000,000
Worst outcome on the best strategy	−$140,000,000

The best strategy: chance of each outcome or less

S-curve (cumulative probability) of Develop Both (Parallel) from the saved simulation.

The decision

A mid-size pharmaceutical company has two drug candidates in its pipeline. Both target different therapeutic areas but share the same clinical trial cost structure and regulatory pathway. Management must decide whether to:

Develop Drug A alone (oncology, blockbuster potential)
Develop Drug B alone (rare disease, moderate but steady revenue)
Develop both in parallel (diversification, higher upfront cost)
Out-license both candidates to a larger pharma company
Do nothing and preserve capital

How the inputs are linked

The MC_Tree_1 sheet has a parameter table above the decision tree. Phase I, II, and III costs and success rates are defined once in the control panel and referenced by multiple branches in the tree. Changing a single parameter instantly updates all linked tree values and recalculates expected values.

The inputs that drive several branches at once:

Phase I Cost — used by Drug A, Drug B, and Both paths
Phase II Cost — used after Phase I success in all paths
Success rates — same clinical success rates drive all branches
Regulatory filing cost — same FDA submission cost for both drugs

The decision tree

The tree has 3 decisions, 10 chance events and 19 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.

DecisionChance event+$ cash flow on the branch

Decision: Pipeline Strategy

Develop Drug A −$5,000,000expected $407,802,000
Chance: Phase I Result (A)
- 65% Phase I Success −$15,000,000expected $630,080,000
  Chance: Phase II Result (A)
  - 40% Phase II Success −$50,000,000expected $1,605,200,000
    Chance: Phase III Result (A)
    60% FDA Approved +$2,792,000,000payoff $2,722,000,000
    40% Phase III Failedpayoff −$70,000,000
  - 60% Phase II Failurepayoff −$20,000,000
- 35% Phase I Failurepayoff −$5,000,000
Develop Drug B −$5,000,000expected $94,502,000
Chance: Phase I Result (B)
- 65% Phase I Success −$15,000,000expected $148,080,000
  Chance: Phase II Result (B)
  - 40% Phase II Success −$50,000,000expected $400,200,000
    Decision: Drug B Launch Decision
    Full Phase III −$50,000,000expected $400,200,000 ✔ best
    Chance: Phase III Result (B)
    60% FDA Approved +$867,000,000payoff $747,000,000
    40% Phase III Failedpayoff −$120,000,000
    License After Phase II +$100,000,000payoff $30,000,000
  - 60% Phase II Failurepayoff −$20,000,000
- 35% Phase I Failurepayoff −$5,000,000
Develop Both (Parallel) −$10,000,000expected $776,711,250 ✔ best
Chance: Portfolio Phase I Outcome
- 42% Both Succeed Phase I −$30,000,000expected $1,144,500,000
  Decision: Both Passed Phase I
  - Continue Both to Phase II+III −$100,000,000expected $1,144,500,000 ✔ best
    Chance: Dual Phase II/III Outcome
    6% Both Approved +$3,675,000,000payoff $3,535,000,000
    38% One Approved +$2,800,000,000payoff $2,660,000,000
    56% Neither Approvedpayoff −$140,000,000
  - Pick Best, License Other −$50,000,000expected $682,000,000
    Chance: Best Candidate Phase II/III
    24% Approved +$2,900,000,000payoff $2,810,000,000
    76% Failed +$100,000,000payoff $10,000,000
- 46% Only One Succeeds −$15,000,000expected $647,000,000
  Chance: Single Survivor Phase II/III
  - 24% Survivor Approved +$2,800,000,000payoff $2,775,000,000
  - 76% Survivor Failedpayoff −$25,000,000
- 12% Both Fail Phase Ipayoff −$10,000,000
Out-License Both +$200,000,000payoff $200,000,000
Do Nothingpayoff $0

Change the numbers. Open the workbook with ModelChoice, change a probability or a cost in the tree, and the best decision updates at once.

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Key assumptions

Assumption	Value	Notes
Phase I Cost (per candidate)	$5,000,000	Clinical trial Phase I cost
Phase II Cost (per candidate)	$15,000,000	Clinical trial Phase II cost
Phase III Cost (per candidate)	$50,000,000	Large-scale pivotal trial
Phase I Success Rate	65.0%	Probability of advancing to Phase II
Phase II Success Rate	40.0%	Probability of advancing to Phase III
Phase III Success Rate	60.0%	Probability of FDA approval
Peak Annual Revenue (Blockbuster)	$800,000,000	Best-case annual revenue
Peak Annual Revenue (Moderate)	$250,000,000	Moderate market uptake
Peak Annual Revenue (Niche)	$80,000,000	Small patient population
Licensing Deal Value	$100,000,000	Upfront + milestones if out-licensed
NPV Multiplier	3.5	Revenue-to-NPV conversion factor
Regulatory Filing Cost	$8,000,000	NDA/BLA filing and review costs

The figures are illustrative: the companies and numbers are invented for teaching.

Try it in ModelChoice

Change Phase I Cost in the control panel. Watch all branches update
Increase Phase III Success Rate. See how it shifts the optimal strategy
Run Sensitivity Analysis. Tornado chart shows which parameters matter most
Run Strategy Table. Compare all strategies on the risk-return frontier

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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.