Question

An international biotech firm conducted a survey to determine the value of new business created over the last month in millions of dollars. From 23 responses, the mean and standard deviation were found to be $3.129 and $0.534 million respectively. Assuming the data were collected through a random sample and that the value of new business created per month is approximately normally distributed, calculate a 95% confidence interval estimate of the average value of new business created per month in millions of dollars. State only the upper bound correct to three decimal places.

Answer 1

As many biotech firms do not yet have revenues, let alone profitability or cash flow measures. In fact, cash flows prior to approval of a drug will be significantly negative. That means “standard” valuation multiples like EV/EBITDA or P/E are less relevant. There are some alternative multiples like EV/invested R&D, which is essentially a cost-based valuation. The comparative valuation methodology is another popular methodology which utilizes public market comparables or comparable M&A transactions. It is often not applicable because most biotech companies are idiosyncratic, thus rendering comparative analysis of limited use. We will review an alternative valuation method below.

Even for more established biotech companies, their historical revenues are typically idiosyncratic enough that estimates still have to be built up from scratch rather than relying on past intra-company experience/data or even from other, comparable companies as guide rails for projections. In other words, the typical approach to projections of extrapolating past trends is pretty much out. For example, see below for the current pipeline of Swiss pharmaceutical research company Idorsia and note the range and variety of both mechanism of action (the process by which the drug produces a pharmacological effect) and target indications (the use of that drug for treating a certain disease).