How do we value pre-revenue Series A to C Biotech using comps?
If the target is a series A pre-revenue biotech company, how do we conduct valuation using comps? should i use the average series A pre-money valuation for similar companies, that have similar indications and are on the same stage of dev, and do: average post-money valuation/peak year revenues x projected peak year revenues of the company i am valuing? would appreciate some input.
Ah, the art of valuing pre-revenue biotech companies, always a fun challenge! You're on the right track with your approach. Here's how I'd go about it:
Selecting a comp set: You're correct that you won't select comps based on sector, size, and other financial metrics. Instead, you determine your comp set based on factors like the disease being treated (the more specific the better), stage of development, and type of technology.
Using average pre-money valuation: This can be a good starting point, but remember, it's just that - a starting point. It's important to adjust this based on the specifics of the company you're valifying.
Projecting peak year revenues: This is where things get tricky. As you know, forecasting the sales trajectory of a new drug launch is very difficult. One way you can get around this is to use a "peak sales" multiple. Pick some comps that were bought at a similar stage to your company, figure out the peak sales of their main product(s), then divide equity value by peak sales and there's your multiple.
Adjusting for risk and uncertainty: Remember, you're dealing with a lot of unknowns here. You need to be very diligent about your assumptions, and you will often have to make assumptions that you don’t feel 100% confident about, because you just don’t have data. Spend extra time thinking through which assumptions move the needle the most, your “confidence intervals” for each assumption and where you differ most from the market and your conviction level around that.
Remember, this is more of an art than a science. But with careful analysis and thoughtful assumptions, you can come up with a reasonable valuation. Good luck!
Sources: Biotech finance part 2: valuation methodologies and modeling considerations, Q&A: Technology IB Analyst
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