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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Jim Oravetz who wrote (317)	7/29/1999 2:11:00 PM
From: Biomaven	Read Replies (2) \| Respond to of 52153

The following continues a discussion started on the Munch thread. I've moved it here because it has turned into more of a valuation/accounting discussion. To catch up, read Message 10707142 and the follow-ups. First, to address Harold's query: I recall seeing that only 1 in 10 drugs makes it from Phase I to market (and a small percentage of preclinical compounds make it to the clinic). If these statistics are generally right, how does that affect this valuation method? This isn't actually the statistic I've seen. One quoted at the FDA site: For example, of 100 drugs for which investigational new drug applications are submitted to FDA, about 70 will successfully complete phase 1 trials and go on to phase 2; about 33 of the original 100 will complete phase 2 and go to phase 3; and 25 to 30 of the original 100 will clear phase 3 (and, on average, about 20 of the original 100 will ultimately be approved for marketing). fda.gov The statistics for biotechs are probably worse, as a one-candidate company is naturally more reluctant to kill off its main justification for existence than is a big pharma playing Darwin. Still, it looks like better than 1 in 20. Anyone know what wildcat oil well success rates are? You may be right that early stage projects are too risky to capitalize. Maybe a compromise is the "more probable than not" standard that accountants are so fond of. Thus you would expense until you determined it was more probable than not that it would be successful (which by the above statistics would be around end of Phase II), and then capitalize. I suppose you could also do a combined present value / probability distribution approach. Thus if you estimate 20% chance of success, you capitalize 20% and expense 80%. Remember all you are trying doing here is to time the earnings charges. This enables you to better compare companies that may have projects at different stages of development. For big pharma it doesn't matter nearly as much because they have so many projects going at once that things more or less even themselves out. Peter