Valuing Biotech Companies

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FORENSIC ACCOUNTING SPECIAL INTEREST GROUP VALUING A BIOTECHNOLOGY COMPANY DAVID RANDERSON ACUITY TECHNOLOGY MANAGEMENT PTY LTD Melbourne, May 2001 1. Valuation Methodologies Techniques used for valuing intangible assets, of which intellectual property (IP) is one form, may be put into three main categories1: 1. Cost Based; 2. Market Based; and 3. Revenue Based. Biotechnology companies, because their main assets are generally IP, have values that are invariably determined by their intangible assets. The valuation of a mature company tends to follow a methodology that draws heavily on its historical income, either by performing a discounted cash flow of future earnings the confidence in which derives from past activity, or…show more content…
As a scientist or engineer who has not trodden the exact route is prone to make the same mistakes, the replication cost cannot be assumed to be lower for the follower. Fortunately, the first to invent may take out patents to protect the discovery and preclude others undermining his market simply because they have the benefit of hindsight. Thus the patents, because they provide market monopoly for a period of time, confer a higher value on the IP than was actually spent. The competitor must circumvent this patent and hence, replacement cost may well exceed the expenditure on the original invention. A recent article in Nature Biotechnology4 reports that in interviews with 44 CEOs of biotechnology companies and company representatives, 21% used cost-plus approaches (“adding an arbitrarily chosen margin to their expected cost”). In consideration of the methods used for R&D syndication, a research report prepared by the Bureau of Industry Economics (BIE) noted5: “The [Bureau of Industry Economics] survey asked firms how they valued their core technology. Notionally, all firms either valued technology by aggregating the historical costs of producing the core technology and/or estimating the present value of an after-tax royalty stream. The second has a more credible economic basis for the

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