Interesting link9 Mar 2019 21:14
Thank you.
Here’s a snippet
. INVESTING IN AN ENVIRONMENT OF REGULATORY UNCERTAINTY
2.1. VALUATING LIFE SCIENCE COMPANIES
Valuating a public life science company is difficult. Valuation methods typically include, amongst others, market capitalization over earnings (P/E ratio), market capitalization over sales, discounted future cash flow (DCF), and dividend growth models (Ross and Westerfield 2002). However, many pharmaceutical and biotech companies are ‘one trick ponies’ investing all available resources in a single product. This means a typical company has no approved products, hence no sales and most probably no profit. This renders many of these standard valuation methods unusable and many times an investor is left with a set of uncertain ‘guesstimates’ regarding the chance of approval, the size of the potential market, the pricing strategy of the company etc.
Inevitably, this uncertainty about future earnings leads to many differing opinions and different price targets amongst investors, and as a consequence, large price volatility (Rozelman 2011). However, one thing is certain: a lot of the approval uncertainty is taken away once the phase II hurdle is taken. A successful phase II study is a major value creating event as the experimental product has shown to be both safe (demonstrated in phase I) and to work (demonstrated in phase II).
Phase III trials are typically the most expensive part of clinical trials (Roy 2012). A negative phase III trial is often perceived as a very negative event for a life science company as it typically means a huge investment needs to be written down completely to zero. But even after a successful phase III study, uncertainty remains. The final decision to approve or refuse a product is made by the regulatory agency. On average, a small life science company, having a single product, who decides to file at the regulatory agency after a successful phase III clinical trial still has a 10-20% chance of having the filed product being rejected. So, an investor is often confronted with a discrete set of outcomes. There is either a big chance of an approval and subsequent earnings, albeit an uncertain amount, or a small chance of refusal and certainly no earnings.
Decisions by regulatory agencies can heavily affect stock prices of the product developing companies, especially when the company is relatively small. After all, the regulatory agencies decide whether the made investments are allowed to generate revenues or not. Recently, the FDA ruled negatively twice on 25 February 2013. Affymax’ anemia drug Omontys was withdrawn under pressure by the FDA because patients complained about allergic reactions. The stock price plummeted 85% to $2.40. Dynavax
Valuating life science companies|9
Technologies’ Hepatitis B vaccine was refused by the FDA because Dynavax failed to effectively demonstrate the safe of the vaccine. The stock price was sent down 33% to $1.99 (Siddiqui 2013).
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