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

To: Biomaven who wrote (7849)	2/10/2003 6:29:08 PM
From: Biomaven	Read Replies (5) \| Respond to of 52153

I was wondering if I should start a new thread for OT stuff. Every now and then I come across an interesting article like this one: The Battle for Your Brain reason.com But I hesitate to post it because I am concerned that we will stray too far OT. I personally don't mind some OT stuff in moderation, but I am always concerned that some of the valuable (and busy) contributors to this thread don't want to wade through too much OT stuff. Comments? Peter

To: Biomaven who wrote (7849)	2/10/2003 7:15:26 PM
From: Icebrg	Read Replies (1) \| Respond to of 52153

Peter Thanks My friends over at MF have more or less arrived to the same conclusion. It became too complicated. Charlie kills his own idea with the following post. Erik Now I will come clean and state that I do not believe that it is possible to develop a price/pipeline valuation metric that provides useful information. For simplicity sake, I tried to narrow the factors that comprise a "pipeline value" into development risk and time. Even if you humor me for a second and say that is acceptable, then we are faced with the problem of determining the relative importance of risk and time on pipeline value. What does an investor, or the market as a whole, consider to be the more important factor? The risk of failure, or the length of time to approval? Maybe today development risk is seen as twice as important than time. Maybe tomorrow time is on equal footing. Because the perception of the market towards drug development is dynamic, I don't think we could ever quantify the relative importance of all the factors that go into valuing industry pipelines. And it gets worse if you want to add in other important factors: management quality, potential sizes of markets, historical success rates by indication (because they are different), etc. With each additional factor, the complexity of the problem increases enormously. There is no way to balance the relative importance of all these factors. And since that step is absolutely required to derive "the pipeline value" of the Price/Pipeline ratio, then this is a no starter. I will throw in additional information. Back in early 2001 I scored pipelines for 60 companies under the following system: BLA/NDA drugs were worth 6 points, Phase 3 drugs equal to 4 points, Phase 2 drugs equal to 2 points, and Phase 1 drugs equal to 1 points. These were totally arbitrary point assignments and the purpose of the current thread is to demonstrate that we cannot actually derive real values to use. Back to what I did, I added up the total score for the pipelines and then plotted a graph. The pipeline score was on the x-axis and the market cap was on the y-axis. I made some adjustments to the market cap for cash so that the relationship would be just on pipeline value. What I found was that there were very few outliers to the curve that fit the data points (which was very close to a linear line.) If I wanted to say that 20% off the line was an aberrant value, then maybe 3-4 companies fell outside of this range. One, notably, was HGSI which at that time was a biotech darling. Since nearly all companies fell within a reasonable range, this was marginally useful for detecting outliers. And worse is that it provides no hint of the absolute value as all the comparisons are relative to a specific market environment. So my conclusions are that: 1.) Scoring a pipeline w/ arbitrary values does not provide useful information. 2.) It is impossible to derive real values to use to score a pipeline in a manner that will provide useful information; which was the purpose of this thread. 3.) It is impossible, with any accuracy, to determine the relative values of pipelines from different companies. In regards to conclusion 3, even if we go through the process of deriving real monetary values for pipeline drugs based upon expected sales, the assumptions used to anticipate expected sales often do not result in accurate predictions. Or even come close to how actual sales will turn out. So what's the point? Especially if the process does not identify outliers which are either overvalued or undervalued compared to the rest of the industry? So I don't see a point in making comparisons across companies. And it took a lot of thought to get to that point.