Anyone investing in public biotech companies will find it challenging to answer the key question: does this company have a good chance to create real value?
Medical breakthroughs can result in huge revenues, but being the first to develop and commercialize technologies based on cutting-edge research inherently comes with a high risk of failure. In addition, biotech companies face a lengthy and intricate development process all the way from discovery to clinical trials and commercialization. In order to attract money on the public market, they need to come up with an engaging proposition capable of capturing the trust of investors.
While in other sectors stock valuation is often based on a financial analysis of the company, evaluating the stock of a biotech company is a much more qualitative task. Most biotech companies go public when they still have no earnings, so the value of their product is still theoretical. To evaluate biotech stocks, therefore, potential investors have to rely on a combination of industry data and a deep understanding of the drug or medical device.
“The main difference is the risk profile,” said Peter Abelin, Life Science Senior Consultant at the Danish valuation consultancy firm Xplico. Abelin noted that there is a high development risk in pharma, whereas with other sectors the main risk falls in marketing.