Projecting CAPEX for prerevenue company

Working for a biotech hedge fund and trying to project CAPEX. Since these companies are prerevenue I am struggling to find a good metric or formula to project future CAPEX. Thanks.

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Comments (4)

  • Prospect in IB - Gen
Jun 8, 2021 - 1:05am

Since capex for biotech firms are highly volatile, especially in pre-revenue/pre-commercialization phases, I am not certain a formula is the best way to think about it. Usually, management/ER have disclosure about capex for the next few years than can be helpful.

Jun 8, 2021 - 7:48am

I do not cover biotech or have any interest in biotech companies but I would assume that you will have to do this on a company by company basis rather than derive some kind of formula that can be applied across multiple firms. If it were me, I would look through the established players who have drugs in their pipeline or in development that are similar to your target and use that as a basis. Alternatively, I'm assuming your company has raised capital or has a history of capital raises. I would also assume your company has published the number of employees working for it. Thus, I would model a level of G&A spend for these employees (make some type of assumption between R&D staff, admin, mgt, sales and marketing team; come up with a model for these costs based on average salaries for similar companies, can use glassdoor for reference points), and then I would assume that essentially all other capital the company has raised is devoted to capex. When I say capex, I don't mean capex in a traditional manufacturing capacity or relative to the balance sheet, I mean in terms of total investment (R&D, advertising, traditional capital investment).

If your question is more so related to more traditional balance sheet investments specifically, I would again look at comps and search their PP&E/operating lease disclosures for potential reference points. You could also look through whatever city/town they have a presence in, figure out local commercial real estate costs, figure out what type of equipment they likely need to operate and the ASPs of whatever units are needed. That should give you an all-in type cost, then put together a depreciation schedule and assume that future capex matches off that depreciation (in essence no growth investment, purely maintenance spend). I would think that the company isn't going to make substantial PP&E growth investments until it begins generating revenue and/or showing promise in its drug pipeline. 

Tough to give a more specific answer based on the information provided (egregious use of the word assume in my response as a result), just throwing out some ideas that would be my initial thoughts if I had the same task. 

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