What methods are being used for biotechnology valuations?

In March 2009, Sangeeta Puran, Senior Associate, of Mayer Brown International, London, UK completed a study examining the methods used to value drug development programs. The study was conducted by interviewing individuals in the UK for a period of four months from a representative sample of twelve leading industry participants, including small biotech business development, large pharma and large biotech business development, financial analysts and venture capitalists.  Overall, according to the study, most participants tended to only use the more conventional tools of rNPV and comparables, with only a few participants (namely pharma participants) using other methodologies on a regular basis. At Accuserve, we use rNPV extensively for biotechnology valuations and have built a body of models with industry wide stats that help us better approximate drug development times and operating costs incurred in different phases of development. We also have been able to input ODTC offsets and accelerated development time frames to compare and contrast various drug development cycles. Needless to say, this experience comes over a period of time.
Turing to using comparables, during the study, one participant commented that everything was in a bit of a muddle. Another participant opined that prices are being eroded and that there are 3 key factors:
 - the public biotech/pharma market currently has a very low value
 - biotech companies are desperately running out of cash
 - everyone is saying values are slipping and values are slipping
Given this environment, we at Accuserve, strongly recommend that companies use a bidding process to license out their innovations. We believe that good quality assets will still get good prices but the ones at the bottom are probably not going to exchange hands that easily. Generally, even if we get at a fair market value, we have seen that in auction processes the bids invariably end up higher for good quality assets. This is especially true given that there are not very many Phase III projects around. The demand for technologies that can potentially migrate to Phase III is going to remain high.
According to the report: Upfront payments were the most heavily negotiated. Upfront payments typically are negotiated based on comparables. The two things for which data is extensively available out there are upfront fees and so called 'biovalue deal' value, according to the report, Accuserve also has felt the same in that we have more access to upfront payments and biovalue deal data. Needless, to say milestone payments can be inputted into the model by looking at financial statements.
Clearly, the participants were apprehensive about using comparables blindly and wanted to rely on more concrete information such as upfront payments and biovalue deal.
The other methods, in our experience, and according to the report are used in very limited fashion, except by large pharma buyers, who have an army of analysts to throw at the valuation.
In our opinion, rNPV if properly modeled out continues to be an appropriate method to arrive at a fair price for the assets. The caveat here is that in an auction type environment, prices generally tend to get higher than the fair value. 



  

Facebook investment valuation

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DigitalSky Technologies, a prominent Internet investor in Russia and Europe, has invested $200 million in FaceBook, in return for a 1.96% stake, effectively implying that the company's valuation is $10 billion. Can we call this a fair value of the company, especially given that Microsoft earlier invested $240 million for a 1.6% stake, pegging the company's value at $15 billion? FaceBook had about 307 million visitors in April, implying a $32.57 per visitor valuation. At Accuserve, our read is that when companies and individuals invest in companies to acquire lower stake or invest in small amounts, they are willing psychologically to accept enhanced valuations. When the stakes are small, so to speak, the risk associated with not achieving that enhanced valuation is rather small, in the minds of the investor. When you have a lot of money in a company, the risks of not achieving that valuation becomes quite big. The other issue is how the investor gauges exit routes. In IPO markets, the listing price requires high disclosure requirements - implying a valuation that could be significantly less than when exiting in M&A markets. Perhaps, the investors realize that Facebook may only opt for a private exit, where such high valuations can be maintained with relatively less scrutiny. At Accuserve, our philosophy has always been to look beyond the numbers. Several Internet related transactions require a reverse thinking of established valuation concepts. For instance, valuation specialists argue that when looking at minority investments, a discount be applied on the fair value of comparable transactions that happened at a so-called premium. We argue differently for Internet companies. We argue that, in the Internet industry, several transactions have occurred in a flipped manner i.e. majority stake acquisitions have happened at a discount to valuations seen during minority stake investments. The primary goal when an enhanced valuation is being assigned during early stages of a company's development is for the founders to retain control of the company and not give away so much that it disincentivizes the founders. We have to account for this thinking and this is best done by thinking about Internet valuations in a different way.