| While more biotech companies are trying to go public in Europe there are only a few specialised investors, and the vast majority of shareholders are not familiar with the specifics of the sector in terms of valuation methodologies.
Investors like to compare companies and usually look at a limited number of variables within a sector: growth and growth prospect, margins, multiples and newsflow. Unfortunately, due to their lossmaking structure, traditional P/E or EV/EBITDA valuation multiples cannot be applied to drug discovery companies. Even discounted cash flow-type valuation (DCF) is often the subject of controversy, as mastering the ‘fair valuation’ of a biotech company requires a large number of assumptions: probability of success, competitive positioning, timeto- profitability, cash requirements and discount rate, to name but a few.
FAIR VALUE: A MYTH
As an example of the disparate valuations an investor can get from different experts, consider a pharmaceutical compound in development and entering Phase II with a sales potential of roughly US$170-200 million. What follows are two scenarios that differ only slightly in a few key hypotheses for which non-specialists would find it impossible to assert the correct figures (see Table 1).
Conducting a direct net present value (NPV) of the project, it is interesting to note that even without considering the risk of failure inherent to the industry, by simply delaying the date of launch by one year and reducing the peak sales by 10 per cent, the value of the project is reduced by about 25 per cent. Note also that both scenarios give a NPV before adjusting the cash flow to their probability of realisation – between seven and eight times the level of required investments. |
