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Quist has done a large number of 409A valuations this year, many of them for early stage, pre-revenue biotech firms. Our analysis, as within all 409A engagements, is heavily based on the projected value of the company at certain exit points. When we sit with management to discuss probable exits, often management estimates the probability of an IPO at 20-50%. Even more surprising is that the majority of management teams characterize an IPO as a "homerun."

However, as independent analysts, we must play the devil's advocate. Is an IPO really likely, and moreover, is it really the optimal situation for a pre-revenue biotech company? An article in Saturday's Investors Business Daily stated that the average biopharma IPO in 2006 raised only $50 million. (IBD, November 11, 2006). In addition, a recent study by The Tufts Center for the Study of Drug Development estimated that the average cost of developing a new biotechnology product was approximately $1.2 billion, and took over eight years. There is a serious discrepancy here.

First, $1.2 billion is a sizeable amount of capital to raise, of which the company will have given up a substantial portion of equity and also undertaken a considerable amount of debt. Will a company with significant debt and up to an eight year time frame to produce revenues capture value in an IPO market? Secondly, biotechs are notorious for missing milestones and rarely hitting projections. This is no match for the public markets, which demand quarterly earnings reports and higher returns over shorter holding periods. These are major contributors as to why there has been only about 20 biotech IPO's in 2006.

Sure, every CFO and CEO would like the boasting rights associated with hitting the "homerun"; however, our role is to step back and evaluate the feasibility and likelihood of this scenario. Today, a biotech is much more likely to be acquired by a larger pharmaceutical company looking to spend less on R&D and pay a hefty premium for a developed or near developed product to take to market; a fact which can be confirmed with a quick glance in any business journal or newspaper.

So, while "homeruns" can certainly be more exciting, our goal as an independent valuation firm is to determine the company's hitting strength and assess where they belong in the lineup. The ultimate value is not achieved by the longest "homerun," but rather the points you put on the board for your team.

Category(s): IRC 409A
Posted by Lauren Hall at 09:16 PM | Permalink | Comments (0) | TrackBacks (0)