Valuation and Returns of Drug Development Companies: Lessons for Bioentrepreneurs and Investors

Objectives This study evaluates the association of Biopharma company valuation with the lead drug’s development stage, orphan status, number of indications, and disease area. We also estimated annual returns Bioentrepreneurs and investors can expect from founding and investing in drug development ventures. Methods SDC Thomson Reuter and S&P Capital IQ were screened for majority acquisitions of US and EU Biopharma companies developing new molecular entities for prescription use (SIC code: 2834). Acquisition data were complemented with drug characteristics extracted from clinicaltrials.gov, the US Food and Drug Administration (FDA), and deal announcements. Thereafter, company valuations were combined with previously published clinical development periods alongside orphan-, indication-, and disease-specific success rates to estimate annual returns for investments in drug developing companies. Results Based on a sample of 311 Biopharma acquisitions from 2005 to 2020, companies developing orphan, multi-indication, and oncology drugs were valued significantly higher than their peers during later development stages (p < 0.05). We also estimated significantly higher returns for shareholders of companies with orphan relative to non-orphan-designated lead drugs from Phase 1 to FDA approval (46% vs. 12%, p < 0.001). Drugs developed across multiple indications also provided higher returns than single-indication agents from Pre-Clinic to FDA approval (21% vs. 11%, p < 0.001). Returns for oncology drugs exceeded other disease areas (26% vs. 8%, p < 0.001). Conclusions Clinical and economic conditions surrounding orphan-designated drugs translate to a favorable financial risk-return profile for Bioentrepreneurs and investors. Bioentrepreneurs must be aware of the upside real option value their multi-indication drug could offer when negotiating acquisition or licensing agreements.

Stock Return Volatility, Firm Real Option Value, And Mergers And Acquisitions Premiums

Considerable effort has been devoted to indicate the critical determinants of acquisition premiums. However, the determinants of mergers and acquisitions (M&A) premiums are not yet fully understood. This research paper empirically examines the effect of stock return volatility on mergers and acquisitions premiums through real options value of bidder and target firms. With a sample of 2,559 completed M&A deals in the US during 1986-2016, we find that bidder firms tend to pay more premiums for the targets that have more future real option value and higher risk. To be more specific, when targets have more real options measured as high Research and Development (R&D) to market value, high sales growth rate, and low leverage ratio, the relationship between target return volatility and acquisition premiums is stronger. This study contributes not only to the literature regarding the determinants of mergers and acquisitions premiums but also to the literature of real options value. Keywords: Mergers and acquisition premiums, acquisition premiums, stock return volatility, real options, growth options

Stock Return Volatility, Firm Real Option Value, And Mergers And Acquisitions Premiums

Considerable effort has been devoted to indicate the critical determinants of acquisition premiums. However, the determinants of mergers and acquisitions (M&A) premiums are not yet fully understood. This research paper empirically examines the effect of stock return volatility on mergers and acquisitions premiums through real options value of bidder and target firms. With a sample of 2,559 completed M&A deals in the US during 1986-2016, we find that bidder firms tend to pay more premiums for the targets that have more future real option value and higher risk. To be more specific, when targets have more real options measured as high Research and Development (R&D) to market value, high sales growth rate, and low leverage ratio, the relationship between target return volatility and acquisition premiums is stronger. This study contributes not only to the literature regarding the determinants of mergers and acquisitions premiums but also to the literature of real options value. Keywords: Mergers and acquisition premiums, acquisition premiums, stock return volatility, real options, growth options

A Real Options Approach to Valuate Solar Energy Investment with Public Authority Incentives: The Italian Case

Solar energy investment represents currently a valid reason to support sustainable economic development. In fact, over the last few years, governments have applied different measures to incentivize private consumers and firms to use renewable energies. Photovoltaic (PV) projects are characterized by uncertainty due to meteorological conditions, the unpredictable behavior of government, and managerial flexibility. Since the Net Present Value (NPV) approach is not able to capture these uncertain factors, it was replaced with the Real Options Approach (ROA). The latter method manages to embed flexibility in PV investment using binomial trees. This paper valuates PV investment in all regional areas in Italy using an integrated approach between the discounted cash flows method and real option value, called Expanded Net Present Value (ENPV). We fit the probability of tax benefits into a binomial lattice model after analyzing the geographical position and weather conditions of all regional capitals of Italy. The results show that the cities with high irradiance/temperature have positive NPV and high investment values. On the other hand, while most cities have negative NPV, the inclusion of the flexibility in investment decisions gives additional value to the project, making the ENPV positive and implying an attractive investment opportunity with the possibility of delaying the project. We also propose a sensitivity analysis that shows how the real option value changes when incentive policies of the government become more attractive. This paper contributes to the existing literature in the way of considering financial, meteorological/geographical, and political factors to valuate PV investment.