Healthcare Technical Interview Deep Dive: Pharma Metrics, Biotech Valuations, and Sector-Specific Questions

The interviewer asks: "How would you value a biotech company with no revenue and a lead drug candidate in Phase 2 trials?"

Standard valuation methods don't work. There's no EBITDA to multiply. No earnings to discount. Just a pipeline of possibilities, each with probabilities of success and failure.

Healthcare investing operates on different principles. Drug development follows predictable phases with measurable success rates. Patent cliffs and exclusivity periods create known inflection points. Regulatory decisions can make or destroy billions in value overnight.

Here's everything you need to know for healthcare technical interviews—the metrics, valuation methods, and sector-specific questions that separate prepared candidates from everyone else.

---

Why Healthcare Is Different

The Drug Development Reality

Healthcare valuation centers on drug development economics:

Long timelines: 10-15 years from discovery to FDA approval.

High failure rates: Only ~10% of drugs entering clinical trials reach approval.

Binary events: Trial results, FDA decisions, and patent expirations create step-function value changes.

Regulatory moats: FDA approval and patent protection create defensible competitive positions.

Pricing dynamics: Unlike most industries, customers (patients) often don't pay directly. Payers (insurers, governments) negotiate prices.

The Subsector Landscape

Healthcare spans diverse business models:

Large-Cap Pharma:

• Diversified portfolios of approved drugs
• Patent cliff management
• M&A to replenish pipelines
• Examples: Pfizer, Merck, Johnson & Johnson

Biotech:

• Focused on specific therapeutic areas
• Often single-asset or limited pipeline
• Higher risk, higher potential returns
• Examples: Regeneron, Vertex, Moderna

Medical Devices:

• Physical products rather than drugs
• Different regulatory pathway (510(k) vs. PMA)
• Recurring revenue from consumables
• Examples: Medtronic, Abbott, Boston Scientific

Healthcare Services:

• Hospitals, clinics, managed care
• Service-based revenue models
• Less R&D intensity
• Examples: UnitedHealth, HCA, CVS Health

Life Sciences Tools:

• Equipment and services for drug development
• Picks-and-shovels exposure to biotech
• More stable business models
• Examples: Thermo Fisher, Danaher, Illumina

---

Drug Development Fundamentals

The Clinical Trial Process

Understanding trial phases is essential:

Phase	Purpose	Duration	Success Rate
Preclinical	Lab and animal testing	3-6 years	N/A
Phase 1	Safety in healthy volunteers	1-2 years	~60%
Phase 2	Efficacy and dosing	2-3 years	~30%
Phase 3	Large-scale efficacy confirmation	3-4 years	~60%
FDA Review	Regulatory approval	1-2 years	~85%

Cumulative probability: Only about 10% of drugs entering Phase 1 ultimately receive approval.

Key Regulatory Concepts

NDA (New Drug Application): The formal submission to FDA for drug approval. Contains all clinical trial data.

BLA (Biologics License Application): Similar to NDA but for biologic drugs (proteins, antibodies).

PDUFA Date: FDA's deadline to complete review. A critical catalyst for biotech stocks.

Priority Review: Expedited FDA review (6 months vs. 10 months standard). Granted for drugs addressing serious conditions.

Breakthrough Therapy Designation: Accelerated development pathway for drugs showing substantial improvement.

Orphan Drug Designation: Special status for drugs treating rare diseases. Includes 7 years of market exclusivity.

Patent and Exclusivity

Patent life: Typically 20 years from filing. By approval, often only 8-12 years remain.

Patent cliff: When patents expire and generics enter. Can reduce branded drug revenue by 80%+ within months.

Exclusivity types:

• New Chemical Entity: 5 years
• Orphan Drug: 7 years
• Pediatric Extension: 6 months additional
• Biologic exclusivity: 12 years

---

Healthcare Valuation Methods

Risk-Adjusted NPV (rNPV)

The primary methodology for pipeline-stage biotech. Applies probability weighting to future cash flows.

The framework:

1. Project revenues assuming drug approval
2. Estimate development costs to approval
3. Calculate probability of success at each stage
4. Discount cash flows by both time value and probability

Sample rNPV calculation:

A drug in Phase 2 with:

• Peak sales potential: $2B annually
• Years to approval: 5
• Probability of Phase 2 success: 30%
• Probability of Phase 3 success: 60%
• Probability of FDA approval: 85%
• Cumulative probability: 30% × 60% × 85% = 15.3%

Apply 15.3% probability weighting to the revenue projections, then discount to present value.

Key inputs to debate:

Input	What Drives It
Peak sales	Market size, competition, pricing
Probability of success	Mechanism, trial design, therapeutic area
Time to approval	Trial length, regulatory pathway
Patent/exclusivity	Filing dates, extensions
Discount rate	Risk profile, comparable transactions

Sum-of-the-Parts (SOTP)

For companies with multiple pipeline assets:

1. Value each drug candidate separately using rNPV
2. Add values together
3. Add cash and subtract debt
4. Adjust for corporate costs

SOTP = Σ(rNPV of each asset) + Cash − Debt − PV of Corporate Costs

DCF for Profitable Healthcare Companies

For large pharma with established revenue:

Standard DCF with healthcare considerations:

• Model patent cliffs explicitly
• Project generic erosion
• Include pipeline optionality
• Consider M&A for pipeline replenishment

Terminal value challenge: Drug portfolios don't have perpetual growth. Model specific asset lifecycles rather than terminal growth rates.

Comparable Analysis

For profitable companies:

• EV/Revenue
• EV/EBITDA
• P/E
• EV/R&D (for R&D-intensive names)

For pre-revenue biotech: Comps are challenging. Consider:

• EV per Phase 3 asset
• EV per dollar of NPV
• Market cap / peak sales potential

Selection criteria:

• Similar therapeutic area
• Similar stage of development
• Similar mechanism of action
• Recent transactions

---

Key Healthcare Metrics

Revenue and Commercial Metrics

Revenue by drug: Healthcare companies often report revenue by individual product. Understand the portfolio.

TRx (Total Prescriptions): Number of prescriptions written. Tracks market share and growth.

NBRx (New-to-Brand Prescriptions): New patients starting therapy. Leading indicator of growth.

Market share: Percentage of prescriptions in a therapeutic category.

Gross-to-net: Rebates, discounts, and allowances reduce gross revenue. Net revenue is what matters.

Development Metrics

R&D as % of revenue: Pharma typically 15-20%. Biotech can exceed 100% (spending more than revenue).

Pipeline value: Sum of rNPVs for all development candidates.

Clinical success rates: Company-specific track record matters for probability assumptions.

Biotech-Specific Metrics

Cash runway: Cash on hand divided by cash burn rate. How long until the company needs more capital?

Pipeline concentration: Percentage of value from lead asset. Higher concentration = higher risk.

Clinical catalysts: Upcoming data readouts and regulatory decisions that will move the stock.

---

Subsector Deep Dives

Large-Cap Pharma

What matters:

• Portfolio breadth and diversification
• Patent cliff exposure and timing
• Pipeline replenishment capability
• M&A strategy and execution

Valuation approach:

• DCF with explicit patent cliff modeling
• SOTP for in-line products plus pipeline
• EV/EBITDA for peer comparison

Key questions:

• How much revenue is at risk from patent expirations in the next 5 years?
• What's in the pipeline to offset losses?
• What's the M&A and BD strategy?

Biotech

What matters:

• Lead asset clinical progress and probability
• Cash position and funding needs
• Management team and scientific advisory board
• Competitive landscape in target indication

Valuation approach:

• rNPV primary methodology
• SOTP for multi-asset companies
• Cash floor (what's the company worth if the pipeline fails?)

Key questions:

• What's the probability of success for the lead program?
• How much cash is needed to reach approval?
• What's the peak sales potential if approved?

Medical Devices

What matters:

• Product portfolio and competitive position
• Recurring revenue from consumables
• Regulatory pathway and timeline
• Hospital purchasing dynamics

Valuation approach:

• More traditional DCF and comps
• EV/Revenue and EV/EBITDA standard
• Less binary risk than biotech

Key questions:

• What's the regulatory pathway (510(k) vs. PMA)?
• How defensible is the competitive position?
• What's the consumables/equipment mix?

Healthcare Services

What matters:

• Reimbursement dynamics and payer mix
• Volume trends and capacity utilization
• Labor costs and availability
• Regulatory and policy exposure

Valuation approach:

• Traditional DCF and multiples
• EV/EBITDA primary metric
• Bed count, enrollment, or member metrics for capacity

Key questions:

• What's the Medicare/Medicaid exposure?
• How does reimbursement trend affect profitability?
• What's the competitive dynamic in key markets?

---

Common Interview Questions

Valuation Questions

"How would you value a pre-revenue biotech company?"

Use risk-adjusted NPV. For each pipeline asset:

1. Estimate peak sales potential based on market size, competition, and pricing
2. Project the revenue curve from launch through patent expiration
3. Apply probability of success based on current stage and historical rates
4. Calculate NPV of risk-adjusted cash flows
5. Sum values across all pipeline assets
6. Add cash and subtract debt

The key debates are around probability of success and peak sales assumptions. Be prepared to defend your inputs.

"Walk me through how probability of success changes by phase."

Historical averages suggest:

• Phase 1 to Phase 2: ~60% success rate
• Phase 2 to Phase 3: ~30% success rate
• Phase 3 to Approval: ~60% success rate
• Cumulative from Phase 1: ~10%

These vary significantly by therapeutic area. Oncology has lower success rates. Rare diseases often have higher rates due to unmet need and regulatory support.

"How do you think about valuing a company with a drug losing patent protection?"

Model the patent cliff explicitly:

1. Estimate current revenue from the drug
2. Project generic entry timing and market share capture
3. Generics typically capture 80-90% of volume within 1-2 years
4. Price erosion of 80%+ for the branded drug
5. Model the replacement revenue from pipeline or M&A

The value destruction from patent cliffs is predictable. The question is what replaces it.

Sector Knowledge Questions

"What's the difference between Phase 2 and Phase 3 trials?"

Phase 2 trials establish proof-of-concept efficacy and optimal dosing. They're typically smaller (100-300 patients) and shorter. The primary goal is demonstrating the drug works in patients.

Phase 3 trials confirm efficacy at scale for regulatory approval. They're larger (1,000-5,000+ patients), longer, and more expensive. The primary goal is statistical confirmation of benefit versus placebo or standard of care.

Phase 2 has the highest failure rate (~70%) because many drugs that look promising in small trials fail to replicate results at scale.

"How does a patent cliff affect a pharmaceutical company?"

When patents expire, generic competitors enter with drugs priced 80-90% lower than branded. Volume shifts rapidly to generics—often within 6-12 months.

The branded drug typically retains 10-20% market share from patients who prefer branded or have insurance that doesn't mandate generics.

Revenue decline of 80%+ is common within 2 years of generic entry.

Companies manage patent cliffs through:

• Next-generation formulations
• New indications extending exclusivity
• Life cycle management strategies
• M&A to acquire new products
• Authorized generics (participating in generic market themselves)

"What factors drive drug pricing?"

Several factors interact:

Clinical benefit: Drugs with significant survival or quality-of-life improvements command premium pricing.

Competition: Monopoly (first-in-class) vs. crowded market (me-too drugs).

Payer dynamics: Insurance coverage and rebate negotiations.

Government policy: Medicare negotiation, international reference pricing.

Indication: Rare diseases can support higher prices per patient; large markets may require lower prices for access.

Cost of goods: Typically low for small molecules, higher for biologics.

Deal Questions

"Why would a large pharma company acquire a biotech?"

Pipeline replenishment is the primary driver. Large pharma faces ongoing patent cliffs that erode revenue. They need new drugs to replace lost revenue.

Acquiring biotech provides:

• Validated clinical assets (de-risked through trials)
• Therapeutic area expertise
• Faster access than internal R&D
• Specific mechanism or technology platforms

The alternative—internal R&D—is slow and uncertain. M&A can be more capital-efficient for accessing innovation.

"How would you think about the premium in a biotech acquisition?"

The premium reflects the gap between public market valuation and strategic value:

1. Start with rNPV of the pipeline
2. Add commercial synergies (sales force leverage, geographic expansion)
3. Add cost synergies (eliminate duplicative G&A)
4. Adjust for probability uplift (larger company may execute better)
5. Consider competitive dynamics (other potential bidders)

Biotech premiums typically range from 30-100%+ depending on competitive tension and strategic fit.

---

Healthcare M&A Dynamics

What Drives Deals

Patent cliff pressure: Companies facing revenue declines seek acquisitions to replenish pipelines.

Platform technology: Acquiring novel mechanisms (gene therapy, mRNA, cell therapy).

Geographic expansion: US companies acquiring European or Asian assets.

Vertical integration: Pharma acquiring specialty pharmacies, distributors.

Therapeutic area consolidation: Building scale in specific disease areas.

Recent Deal Themes

Oncology remains hot: Cancer therapies command premium valuations due to unmet need and pricing power.

Rare disease premiums: Orphan drug economics support high acquisition prices.

mRNA and gene therapy: Platform technologies attract strategic interest.

Obesity and cardiometabolic: GLP-1 success has driven interest in metabolic disease.

---

Key Takeaways

Healthcare interviews require sector-specific knowledge that generic prep doesn't cover.

Master these concepts:

• Clinical trial phases and success rates
• rNPV valuation methodology
• Patent cliff economics
• Regulatory pathways and designations

Understand these metrics:

• Pipeline probability of success
• Peak sales potential
• Cash runway for biotech
• Patent expiration timing

Be ready to discuss:

• How to value pre-revenue biotech
• Patent cliff impact on valuation
• Pharma M&A rationale
• Differences across healthcare subsectors

The key insight: Healthcare valuation is fundamentally about probability-weighted outcomes. Unlike most industries, success or failure of individual programs can be estimated using historical data and clinical information.

Interviewers want to see that you understand the drug development process and can apply that understanding to valuation. The technical methods are learnable. The sector intuition comes from studying how the industry actually works.

Build that foundation, and the interview questions become straightforward applications of core principles.