So how does biotech valuation work?
Well Rick has given one reasonable approach here. Let me add my slant (nothing I haven't said on this thread before over the years, but of course it gets buried):
Ultimately, from a valuation perspective, the value of an asset today is driven by the present value of its cash flow. Now this is a methodology that might work well when valuing real estate or the like, but doesn't work at all well when valuing biotech. The reason for this is simple - in traditional DCF analysis you use time as a proxy for risk. You say: "This is a risky project, therefore I'm going to discount future earnings at 25% per year instead of 10% per year."
But in biotech, if you are trying to value an early stage product (with possible launch in say 5 years), peak sales might well be 10 years or more away. So the present value is enormously dependent on what discount rate you use. Further, the risk profile is quite different in the years before approval and the years after approval.
So the basic methodology I would suggest is to first separate out risk of success from the other factors. Second, focus on ultimate peak sales modulated by the different probabilities of sales once the product is approved - i.e., probability of a blockbuster vs. a medium product vs. a bust. Then capitalize these peak sales (or earnings) at some multiple, and present-value the resulting number at some moderate discount rate.
With Sanctura, we have an easier task as there is no longer any approval risk. But there is still the complication of the limited exclusivity. Because of that factor maybe IDEV was smart to go with a lower royalty and a bigger upfront.
Peter |
