Biotechnology, that's one of those few industries where you are seeing real change happening. Where you can see innovation, and innovation with respect to new products is generally what drives stock returns.
Biotechnology involves the manipulation of proteins that form the building blocks of living organisms to develop drugs and vaccines.
Biotechnology in and of itself is a fairly risky business. (FDA approval process)
Most of the companies are involved in developing drugs, and drug development (R & D) is a lengthy and expensive undertaking and does not always result in success.
Large drugmarkers such as Roche are trying to revive sales growth. Pharmaceutical companies bigger than $20 billion are forecast to post the largest annual revenue decline in at least a decade in 2013 after patent expirations opened the door to generic versions of top-selling drugs. This is a good reason for M & A, in order to rejuvenate top-line growth.
If you cannot make new products, you have to buy an "orphan-drug maker" for growth. But at what price?
The nature of drug development project is characterised by high attrition rates, large capital expenditures, and long timelines. This makes the valuation of such projects and companies a challenging task. Not all valuation methods can cope with these particularities. The most commonly used valuation methods are risk-adjusted net present value (rNPV), decision trees, real options, or comparables.
The most important value drivers are the cost of capital or discount rate that is used, the duration of the phases, the success rates of the phases, the estimated phases costs, and the forecasted sales including cost of goods and marketing and sales expenses. Less objective aspects like quality of the management or novelty of the technology should be reflected in the cash flows estimation.
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