New method for valuing loss-making biotechs

Bionest MPV (Market Pipeline Value) uses a benchmarking approach that compares the pipelines of publicly listed companies, providing investors with one approach to valuing loss-making companies with potentially valuable intellectual property.

“Valuation is a very critical issue for companies while raising funds, during a merger or any other type of transaction,” says Frederic Desdouits, Managing Partner and co-founder of Bionest Partners.

“While valuation requires technical skills, the vast majority of parties involved in the sector lack sufficient insight in valuation methodologies. Traditional P/E or EV/EBITDA valuation multiples cannot be applied to traditional drug development companies. Even DCF-type valuation, broadly used, is often subject to controversy.”

To populate MPV, Bionest mapped out 170 listed companies both in the US and Europe in various fields such as infectious diseases, cancer, anti-inflammatory diseases and auto-immune, vaccines, cardiovascular and neurology.

Applying the scoring method, Bionest Partners identified a series of undervalued companies in June 2006 which it dubbed the “Bionest June Basket” and tracked their performance.

This leads to some significant findings including the fact that contrary to popular belief, small companies with market capitalisations below $400 million, are similarly priced in the US and Europe, however more mature companies (with market capitalisations below $1.5 billion) are more highly valued in the US.

There is also a large discrepancy between pipeline values among the different therapeutic areas, oncology being the lowest value. Pipeline value, restated from cash, of US and European companies is similar.