The Cross-Border Biotech Blog

Biotechnology, Health and Business in Canada, the United States and Worldwide

Valuation and other biotech mysteries – Part 3: What are you valuing?

[Ed. This is the third part in Wayne’s series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

Most likely you will be valuing a company, a product or a technology. The valuation of the stream of expenses and revenues for the development and commercialization of a product or a service is the simplest situation. If you are valuing a company, you are valuing its portfolio of products and technologies. In most cases, the current and potential future value of a single product, which is usually the lead product, probably accounts for the majority of the value of a biotech company.

Valuing a technology can be more difficult. Many companies claim to have a platform technology, which can be used to develop multiple products, potentially with multiple partners in multiple therapeutic areas. When a technology has a portfolio of products and partners, there is diversification and reduction of risk. If you want to take a simple and conservative approach to the valuation of a technology, do a valuation of the most important product in that portfolio, which is often the most advanced product. There are situations where technologies get ‘hot’ and valuation of only the lead product is not a useful valuation tool – we will look at ‘hot’ technologies later on in this series.

Therefore, you are probably valuing a product and I am going to assume it is a novel drug. In order to generate substantial revenues, that drug will have to be approved by the U.S. regulatory agency (Food and Drug Administration or FDA) since the U.S. is still the largest single pharma market. The U.S. and EU markets still account for about 75% of worldwide pharma sales.

The approval will be for one or more specific therapeutic uses of the drug, each specific therapeutic use being defined by the disease and the patient population. When you start the valuation of a product, two of the first questions will be ‘What specific therapeutic uses will be approved by the FDA’ and ‘What is the pathway to that regulatory approval’.

For those blog readers who have not looked at these questions before, one of the best teaching tools is a case study. The first case study will be Theratechnologies (TSX:TH) and the recent FDA approval of its lead drug EGRIFTA™ (tesamorelin for injection). At this point, I want to highlight two important sources of information (remember – get information and ask questions).

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