Over the years, the two industries i.e. pharmaceutical and biotechnology, that offered treatment interventions to patients have converged. An obvious example is the abundance of biotech-based drugs from both traditional pharmaceutical companies as well as biotechnology companies. Assessment of the fundamental business attributes of the two industries generally reveals that the risk profile of the two industries not too different. So, what does this mean for asset valuation of an emerging biotechnology or pharmaceutical company?
Traditionally, the cost of capital, aka discount rate applied to the DCF method, has been higher for the biotech sector than that of pharma sector. So, if you are a small biotech seeking a deal with established pharma who has multitude of assets like yours, would you agree for a higher discount rate in the valuation exercise, bearing in mind that higher the discount rate, lower the value. Alternatively, if you are an established pharma, you would argue that the fundamental business characteristics determine the discount rate, so a higher discount rate is justified. After attrition rate, (conversely, probability of success through the developmental stages), the discount rate is the greatest determinant of asset value. Using appropriate discount rate as well as other parameters in the valuation process are critical for estimation of fair value. Furthermore, it is always a good practice to triangulate using other methods of valuations such as comparables/benchmarking.
About BiopharmaVantage
BiopharmaVantage is a healthcare consultancy that provides valuation services specifically for the pharmaceutical, biotechnology and life sciences companies. If you would like to discuss how we can assist you, then please contact us.
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Katherine Mae
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BiopharmaVantage, Oxford, UK
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