Biotechnology Valuations for the 21st Century
Apr 01, 2002
Jeffrey J. Stewart

The biotechnology industry has matured significantly in the last 20 years. In the 1980s, a biotechnology company represented an investment that defied accurate calculation. Biotech firms argued that molecular biology and gene manipulation would provide more efficient methods of drug discovery than the traditional "brute force" screening methods favored by pharmaceutical companies. Nonetheless, biotechnology's model of rational drug discovery and at-scale protein manufacture was unproven. Would biotechnology be able to deliver organism-derived pharmaceuticals (biologics) to the market?

Now, at the beginning of the 21st century, the uncertainties that previously weakened biotech's foundations have been shored up. Biotechnology does provide a rational method of discovering new drug targets. Biotechnology can convert those drug targets into biologics. Biologics can be manufactured cost effectively at scale. In addition, biologics tend to have fewer side effects than do traditional chemical pharmaceuticals. And they are more likely to succeed in clinical trials. With these major uncertainties under control, the value of a biotechnology can be calculated with reasonable certainty so that biotech investment may be made rationally.

The value of biotech R&D projects may be estimated by incorporating clinical-trial success rates into a traditional discounted cash flow analysis. Risk-adjusted net present value (rNPV) is a straightforward valuation method for biotechnology. The author has created a sample spreadsheet (Microsoft Excel format) pre-programmed to do the calculations. Click here to download.