Biotech Asset Valuation Methods: A Practitioner’s Guide

Vol. 22, No. 1, 2024
Amitabh Chandra and Sumon Mazumdar

Biotech innovations lead to the development of life-saving drugs and vaccines. However, bringing a new drug to market is an expensive,risky, and time-consuming process. According to one survey, the probability that a drug that has completed pre-clinical trials, would successfully pass all three stages of clinical trials (the primary source of regulatory risk) and receive the FDA’s approval to be commercialized was less than 12%, is expected to take nearly 10 years on average, and costs $1.4 billion (in 2013 dollars, including the cost of compounds abandoned during testing). Biotech startups, which undertake such drug development efforts, typically have no existing revenue streams, and rely heavily on venture capitalists (VCs) for funding. This requires the VC and the startup’s founders to agree on the value of the drug in development (or equivalently, the startup’s value as the drug in development may be the startup’s only asset).