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. 



  

Diversified Venture Investments Still Beat Public Markets

Welcome to the new world where business plans suffer higher scrutiny, are probed for possible infusion of government capital, are examined for whether they would displace any US jobs and excruciatingly bracketed under one of the three areas the government wants to promote - energy, health care and education. The first thing to note is why someone would be interested in investing in a venture-financed business at all. One could argue that, given the current credit conditions, it is harder for small businesses to survive, as is. But, that is the beauty of venture-financed businesses. They dont depend on credit for growth and expansion - they depend on equity investments (which sometimes is so fortified that they might look like debt instruments) from investors and high net worth individual, who are adept at measuring and rewarding relatively higher risks. According to Thomson Reuters and the National Venture Capital Association (NVCA), the one year all venture Private Equity Performance Index (PEPI) declined significantly to -20.9%. Venture returns declined, in fact, across all horizons (3,5 and 10 years) and only the 20 year horizon remained in the black. While, this may look like a sad tale for the venture capital market, it is worth noting that the venture returns across all horizons outperformed public market indices, the NASDAQ and the S&P 500, through December 31,2008. The 20-year all-venture returns are around 17%, whereas the 20-year early seed VC returns are around 21% - the well-entrenched high risk, high reward position. It is pertinent to note that the 20-year return for the balanced and the later-stage VCs were the same at 14.5% each. It is clear from this analysis that investors who can gauge early stage companies successfully tend to reap better returns. It is in this context that diversification becomes important.

In a recent online presentation of opportunities available for VC investment, I was delighted to find an array of opportunities available out there for investment. The opportunities ranged from an agro-bio company in the US to a financial services data provider in vietnam to a cell phone provider who wants to enhance value-added services in Africa. As with stock picking, it is important for early stage investors to diversify their portfolios. Today's business environment is global - the opportunities to spawn small companies at standardized risk is available in several countries across the world. More so than ever, several countries and new markets have understood the importance of leveraging private equity capital to seed and grow companies.

New portals such as vator.tv and thefunded.com allow investors to get to know about opportunities in early stage markets. More such exchanges are in the making. While the value of being an insider on Sand Hill Road in Menlo Park, California cannot be underestimated, it is also worthwhile to understand that diversified investment opportunities are being made available to more of us. An early-stage/diversely invested asset class is perhaps a good addition to your investment to your portfolio, given the prevailing risk-reward situation in the economy.

Biotechnology Financing

I was recently at the MIT-Harvard Health Program information session where I met a few folks who are active participants in the Biomedical/Biotechnology/health care start-up industry. When I queried them about the state of the health care start-ups and the financing trends, the majority response was that getting financing for new ventures is going to be a very difficult task during the next year and a half. Folks were of the view that established start-up firms have a much better chance of getting follow-on financing than new entrants. When I asked them about what areas of health care research are emerging, most pointed to medical devices/technologies that addressed nerve-related diseases and efficient localized delivery of drugs. Prosthetic body parts is another biomedical area where a lot of development is being financed by venture capital. Overall, it was an interesting session where I got to learn about the latest advances in immunology and biomedical devices.