How to Value a Biotech Company

1. Most common question is valuation: For a biotech/pharma company in clinical trials (no revenue/approved products), easiest to do a DCF

2. Comps and Transactions will often not give great valuations because of a lack of companies that will fit the needed criteria - Company would need to be developing drugs in the same indication, large molecule/small molecule needs to be the same etc. 
   1. Therefore easier to do DCF - There are a few key things necessary to understand about a clinical stage biotech/pharma DCF 
   2. Revenue projections - Most important, Key idea is to take all future revenues and multiply them by the percent chance you have of getting approved. Generally this is a small percentage because you are not necessarily in phase 3. Ex. If you have a 50% of getting approved, take all future estimated revenues and multiply by 50%-probability adjusting your dcf. See more on how to actually project revenue below. 
      1. Depending on what phase of trials - will need to project out until New Drug Application approval (see timeline of clinical stages below). 
      2. Once you have the approved date - for a biotech with small platform, ramp up period of 4-6 years to hit peak sales - determine peak sales by when your market share (Market size = total addressable population for that disease, * penetration = what percent of that population you will treat) starts taper off.
      3. Determine the total revenue by # of people taking your drug * price of your drug. Estimate pricing of your drug using comparable dtrugs in similar or same indication. After you hit your peak sales, revenues will tape off until your patent expires - 20 years from patent filing which is generally before you start clinical trials. 
      4. After your patent expires, generics can be produced if you have a small molecule drug, biosimilars can be produced if you have a large molecule drug (biologic). After patent expires, genreally lose 70%+ of you revenue.
      5. Take all of these revenues and probability/risk adjust them using the percent chance that you move on from each phase of clinical trials up ti chance you get approved for your drug
   3. Discount rate
      1. You have already probability adjusted your dcf, so discount rate is more standard. Normal WACC calculation for unlevered DCF, except very low cost of debt (no investor wants to give debt to clinical stage companies because its too risky and they wouldnt be able to share in the large potential drug sales). 
      2. Low cost of debt, high beta makes WACC much higher than normal companies = 12-15%
   4. Terminal Value
      1. If using Gordan Growth Method for a clinical-stage company, you CANNOT have a perpetuity growth rate - it is impossible to predict that a clinical-stage company with no approved drugs will be able to produce revenues forever because you cannot predict that they will continue to produce approvable drugs - the drug you are currently predicting revenues for will lose revenues after the patent is expired.
      2. If using the multiples method, the multiple you use is EV/Peak Sales to compare with your comps.
         1. You have 0 revenue so that means no earnings multiples. Could potentially use a go-forward P/E multiple and discount the future earnings but better to not suggest this unless you want to get grilled.

These are from my prep notes I hope they help!