A deep understanding of the key biotechnology valuation drivers is critical for those who have an interest in biotech assets and businesses- read how to conduct pharma and biotech valuation accurately. Because of the stage-gated development of biotech assets, the probability of success (POS) is one of the key drivers of biotechnology valuation. POS (conversely, attrition rate) in turn, is driven by the fundamentals of assets and their attributes. In this article, we discuss the other key driver of biotechnology valuation – the discount rate.
Over the years, the two industries, i.e., biotechnology and pharmaceutical, which offer 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 reveals that the risk profile of the two industries is not too different. So, what does this mean from an asset valuation perspective for an emerging biotechnology or pharmaceutical company?
Traditionally, the cost of capital, aka the discount rate applied to the risk-adjusted NPV method, has been higher for the biotech sector than for the pharma sector. So, if you are a small biotech seeking a deal with established pharma that has a multitude of assets like yours, would you agree to a higher discount rate in the valuation process, bearing in mind that the higher the discount rate, the lower the value? Alternatively, if you are an established pharma, you would argue that the fundamental business characteristics (reflected in high beta), determine the discount rate, so a higher discount rate is justified.
Among the several biotechnology valuation drivers, and after POS, the most critical driver of biotechnology valuation is the discount rate. Accurately calculating discount rates is critical in biotech valuation exercises. As a biotechnology valuation expert, we also recommend triangulating computed value using other valuation methods such as rNPV and comparables/benchmarking.
BiopharmaVantage is a life sciences consultancy that specializes in providing valuation services specifically for the biotechnology and pharmaceutical sectors. If you would like to explore how we can assist you, then please contact us.