To follow up on a post we ran in February 2006 on Biotech Valuations, I wanted to alert you to a recent series of postings on biotech valuations on sizz’s biotech blog. 

Sizz’s biotech blog says that in making valuations of biotech companies, a good valuation method is risk-adjusted net present value, which is described as follows:

Risk-adjusted net present value (rNPV) attempts to value a company by taking into account not only the future cash flows, but also the probabilities that those cash flows will even take place. This is especially useful for small biotechs that have not yet obtained FDA approval for a product. In using rNPV, we are able to find a company’s value while taking into account significant events that could affect the stock price (like moving from Phase II to Phase III trials).

NPV is the same as a discounted cash flow analysis. It finds the present value of a firm’s future cash flows. rNPV is similar. It is the present value of future cash flows, but those cash flows are adjusted by the probability of effect.

In a follow-up posting, sizz’s biotech blog states:

Risk-adjusted net present value is most useful for biotechs because it can place a value on an individual drug. This helps us out for small biotechs because most of these firms’ value is derived from drugs in their pipelines. With rNPV, we can find the value of each drug in a company’s pipeline, add them up, and get a value for the whole company. This could also be applied to larger biotechs, but rNPV really only values the pipeline, so we would also have to find a value for the drugs that are already marketed using a traditional discounted cash flow method.

Sizz’s biotech blog also provides in subsequent postings a specific example of how this valuation can be put into practice using GenVec, Inc.  In GenVec: Profile, sizz’s biotech blog profiles the company, discussing its risk factors and drugs.In GenVec: Potential Markets and Financials, Sizz’s biotech blog examines the potential markets for GenVec, which are the foundation for the valuation.

This series of postings provides a very informative overview to the art of biotech valuations, along with specific examples to show how the formulas can be applied in practice.   All in all, these entries are definitely worth checking out.