Biotech valuations: sourcing the probability of success for a drug in each stage in the FDA approval process and royalty rates

Ben McClure, in SFGate, relying on Investopedia, offered a snapshot of how to value a biotech company.  Would that it were that easy.

He did offer an important resource for valuators assessing risk in drug development, suggesting the Pharmaceutical Research and Manufacturers of America provides likelihood-of-success statistics for drugs in the various testing stages at FDA. For example, McClure pointed out the association “reported in 2003 that drugs entering Phase I clinical trials have a 15% probability of becoming a marketable product. For those in Phase II, the odds of success rise to 30%, and for Phase III, they climb to 60%. Once clinical trials are complete and the drug enters the final FDA approval phase, it has a 90% chance of success.”

Analysts know drug categories carry their own set of statistics, and relying on overall averages would probably produce a less-than-adequate result.  Nonetheless, the averages present sanity checks for the detailed scenario planning exercises required in biotech valuations.

In addition, McClure points out valuators need to access prevailing royalty rates in biotech to develop estimated discounted cash flows. BVR’s Royalty Rates in Biotech is an excellent source of full-text license agreements complete with non-redacted, variable royalty rates, and ktMINE is a real time database of such agreements.