Valuation of Biotechnology Companies and their Assets

• Author: Jeremy Webster & Bill Stamatis
• Pages: 577-601

577

Chapter 21

Valuation of Biotechnology Companies

and their Assets

jeremy webster & bill stamatis*

A. INTRODUCTION

BIO, the trade organization for the biotechnology sector, def‌ines biotechnol-

ogy as “the use of cellular and biomolecular processes to solve problems or

make useful products.”1 Most that come across biotechnology get e xcited

by it: it is complex, fast-moving, science- driven, expensive, a nd ethically

charged — and it holds the promise to c hange the world. Already, the bio-

technology community celebrates contributions in the form of better health-

care, enhanced agricult ure, and a cleaner and safer environment.

Biotechnology as applied to life sciences will be a t heme of this chapter

because this area attracts great attention f rom the business world. There are

more than three hundred biotech drug products and vaccines currently in

clinical trials, targeting more than two hundred diseases, including various

cancers, heart disease, diabetes, multiple sclerosis, Alzheimer’s disease, AIDS,

and art hritis. Clearly the biotechnology industry is at the forefront of break-

through technologies, but along with the associated excitement comes the

volatility and uncertainty common to many technology-based companies.

* The authors would li ke to recognize the research, ed iting, and suggestions p rovided by their

colleague, Binu S.J. Math ai.

1 “Biotec hnology: A Collection of Technolog ies,” online: www.bio.org/speeches/pubs/er/tech-“Biotechnology: A C ollection of Technologies,” online: ww w.bio.org/speeches/pubs/er/tech-

nology_collec tion.asp.

578 jeremy webster & bill stamatis

In Canada, there are 459 biotechnology companies: 81 are publicly

owned, and 378 are pr ivately owned.2 These companies face signif‌icant

business challenges, as success in the industry depends upon ma ny fac-

tors. Valuations play an important role in several key strategic decisions,

such as investments and tax minimization approaches, that biotechnology

leaders face.

The goals of this chapter are th ree-fold. First, the chapter provides an

in-depth understanding of the key areas where the application of valuation

methodologies can assist biotech companies in their decision making. T he

chapter also details critical biotechnology va luation issues and methods.

Finally, the chapter discusses the critical factors that drive value in biotech-

nology, with the intention of helping biotechnology f‌irm leaders to set pri-

orities and make optimal decisions.

What follows is an overview of the clinica l development process, a de-

scription of the contexts in which valuations are important to biotechnology

companies, and a detailed discussion of the valuation process. To close out,

the chapter puts the valuation principles into practice with an i llustration.

B. THE RESEARCH, CLINICAL DEVELOPMENT, AND COMMERCIAL

APPROVAL PROCESS

In order to conduct a biotechnology company valuation, it is important to be

familiar w ith the c linical development process bec ause commercialization

is dependent on effective development and regulatory approval. The key

phases are illustrated below and expanded on in Appendix A :

Rigor and high-stake risks def‌ine the clinical development process.

Very few compounds make it far in the development life cycle: typically, f‌ive

thousand compounds are evaluated, f‌ive enter clinical trials, and only one

is approved. In 2005, for instance, Canada’s 459 biotech f‌ir ms sponsored

twelve compounds in Phase III and twenty in Phase II.3

2 Ernst & Young LLP, Beyond Bord ers: Global Biotech nology Repor t 2006, online: ww w.ey.com/

global/content.nsf/Canada/Med ia_-_2006 _-_Global_Biote ch_Report.

3 Ibid.

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