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

To: Sam Citron who wrote (11923)	6/5/2004 11:56:53 AM
From: scaram(o)uche	Read Replies (1) \| Respond to of 52153

Traditional biotech valuation is knowing what a pharma will pay for a given project at a given state of maturity....... knowing market size, competitive projects, chance of technical success, etc. and estimating/guessing how many suitors there would be for a given project and what they'd pay for it. Then you add up all the projects and cash, throw in a premium for infrastructure and personnel if it's a big-science company, and you know what a pharma will PAY for a biotech or what a large biotech can and will PAY for a small biotech. Presto, valuation. What other real-world metric could possibly count? Most biotechs don't have the "E" in EPS, so you figure out what a project is WORTH in a real-world marketing infrastructure, and therefore what someone is willing to pay for it. You start at Medline and go from there. The guts of data that you needed to start at your own question had been put out on the table. We had discussed the royalty rate (rkrw) and market size (Peter). Peter has given us the very best analysis to be had of the relative label merits. The remaining parts of the agreement are described in the Pliva press release. You have everything in hand that a large biotech suitor has. Instead of trying to get Peter to go through some magic hand waving, casting Cooper as either Gary Lyons or David Robinson in a three year leading role to come up with a projected PE?? You could spend your time making your own estimate of the company's REAL value. You might even have a perspective from which others could profit. There's going to be a TON of noise this weekend and next week about a Sugen-derived molecule. Those who read and integrate what is shared here at SI are very familiar with the concept, due to the relentless sharing of research by Miljenko Zuanic. Nobody minds someone who is all take and no give. But it's gotta come with a "TIA". You got incredibly FAST and concise analysis of the situation. Spoon fed comes to mind.

To: Sam Citron who wrote (11923)	6/5/2004 7:11:19 PM
From: Biomaven	Read Replies (3) \| Respond to of 52153

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