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Biotech / Medical : Biotech Valuation

CRSP 55.08

-2.9%

Dec 26 9:30 AM EST

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To: biowa who wrote (1383)	8/4/2000 1:56:59 PM
From: Biomaven	Read Replies (1) of 52153

biowa, Your nice model also separates out time and risk and that's the key point I was making. Another big valuation problem is how to account for R&D spending. (This isn't unique to biotechs of course, but because they have the highest R&D spending of any industry the problem is most acute here and will become more and more significant as additional biotechs become profitable). I've always thought that the spending should be capitalized, and then either written off if the project fails or amortized if it succeeds. (Something like wildcat oil-well accounting). To see the magnitude of this issue, consider AMGN again. They earned 28c last quarter after expensing about 20c of R&D. Thus their PE ratio (66) is nearly double what it would be if they capitalized R&D (about 38). It would be interesting to see what the "corrected" PE ratios look like for other tech stocks. MSFT has a PE of 41, earned 44c in the last quarter and expensed R&D of around 20c, giving an adjusted PE of about 28 (if my math is right). Peter

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