Valuation methods and discount rates in Biotech
November 19, 2009
Which discount rate and which valuation method to use is a hot topic when making financial valuations of biotech projects and biotech companies.
Discount rates and valuation methods for biotech companies has been the subject of much theorizing. Methods as DCF, rNPV, and Real Options are methods known to most industry professionals.
When discussing the issue of valuation of biotech projects/companies with other professionals, it becomes clear that there are many different opinions regarding what is the ”correct” method and discount rate to use.
We have therefore prefarred a survey on valuation mathods for biotech companies. This survey is NOT about what you think is the right (theoretical) method and the right discount rate.
Rather the purpose is to gain a better understanding of which discount rates and methods are actually used by professionals around the world, and thus to give industry professionals a better overview of the different view-points in biotech valuation.
PARTICIPATE IN THE SURVEY HERE
The survey takes less than 10 minutes to complete. All respondents will receive the summary report on the survey findings free of charge.
Thank you for your participation
Best Regards,
Nicolaj Højer Nielsen
Important to distinguish between the short-term and longer-term effects of the credit crisis
November 30, 2008
Analysts are advising investors to stay away from biotech companies in urgent need of capital. Goldman Sachs is predicting that as many as half of European biotech companies may fail due to the current credit crisis.
We agree biotech companies having to raise capital in the next 12 months will either be forced do so at the expense of shareholder value as a result of a lower valuation. Or they will not be able to raise capital at all. Other biotech companies, with limited financial resources, will need to conserve cash by closing/delaying a large part of their pipeline. We have already seen a number of Scandinavian biotech companies do so, and others will follow suit in the months to come. Those are the short-term effect of the credit crisis.
In the longer term we foresee an acceleration of the emerging trend towards more extensive and strategic partnerships between biotech- and pharmaceutical companies. Most biotech companies will find it harder, even in the medium- to long run, to raise capital and will be forced to look for alternative ways of financing their operation. At the same time many pharmaceutical companies are faced with blockbuster products coming to the end of their patent protection. Those companies need to focus much of their attention and efforts on feeding their pipeline.
These developments work to highlight the fact that the relationship between biotechs and pharma companies is co-evolutionary in nature. Like hummingbirds and flowers they have become dependent on each other and each others’ resources for their long-term survival.
The biologist will speak about how such species have grown ’structurally coupled’ to each other - how they are determining each other over time. Same is true for the relationship between biotechs and pharmaceuticals, only we humans have the added capacity for developing strategic tools for formalizing and optimizing such process of co-evolution. In this case those tools are: partnerships, alliances and M&As and we predict these tools will be employed more in the future.
The current credit crisis will act to strengthening the structural coupling between biotechs and pharmaceutical companies and that is the real and longer-term effect of this current crisis.
Best regards,
Nicolaj Højer Nielsen, Managing Director
BIOSTRAT BIOTECH CONSULTING
Why the market does not like Flurizan
June 5, 2008
The share-price of Lundbeck has fallen with approximately 10 %, since the Danish pharmaceutical company announced an inlicensing deal with the US biotech company Myriad for a new drug named Flurizan aimed against mild Alzheimer. Why do investors not like the deal, and could the deal be (yet another) good sign for biotech companies?
What we know…
Flurizan has completed phase II and the results from the two ongoing phase III studies will not be known until June 2008. Lundbeck will pay Myriad USD 100 million for the European commercialization rights + milestone payments + royalties in the range of 20-39 % of sales.
Lundbeck has clearly taken a calculated bet. Lundbeck believes so much in Flurizan that the company is willing to pay a large sum of money before the phase III data is known. The company is thereby trying to avoid a bidding-war against Big Pharma after positive phase III data, but is at the same time taking significant financial risk.
Why is the Market so skeptic?
Biotech is maybe THE industry with the largest degree of information asymmetry. Biotech companies simply know much more about the strength and weaknesses of a potential product than outside investors/partners. This has been proven again and again by the lack of shareholder value creation in investment funds - even those that are managed by highly specialized investment companies.
The market believes that the information asymmetry is also in play in the Flurizan deal. If data from the ongoing phase III studies are so promising, why is Myriad outlicensing the product before the phase III data is available? Such a decision could of course be explained by a risk-minimizing strategy by Myriad – but again, if Myriad believes so much in the product, why not take the risk and wait 4 weeks for the data to be available?
The price…
The other thing that worries the market is the price of the drug. Taking the calculated bet could of course be defended if the acquisition price and royalties are very low. Many investors believe that not only have Lundbeck just spent USD 100 million on the roulette, but even if successful – the product will be very expensive for Lundbeck.
The parties have announced that Lundbeck will pay royalties in the range of 20-39 % of sales, which seems very high com compared to industry standards.
We don’t know the details of the agreement, and are therefore not in a position to judge whether the price is too high or not. We can just conclude that the market has voted with its feet, and the share-price has fallen with close to 10 % since the announcement. The market believes that Lundbeck’s bet is not generating shareholder-value.
Is the Myriad-deal good news for biotech companies in general?
We believe that the Myriad deal is yet another sign that the power between (inlicensing) Pharma companies and (outlicensing) biotech-companies are shifting to the favor of the latter.
In a time where many biotech companies, especially the companies with many early-stage projects, are struggling to get new funding, it is encouraging to see how good terms it is possible to negotiate only with phase II data. Most Pharma companies, like Lundbeck, is struggling to fill out their pipeline. The fight over good potential products is constantly getting tougher and tougher – for the benefit of biotech companies with the “right” products in their pipeline.