Author(s): Jeffrey J. Stewart ; Peter N. Allison ; Ronald S. Johnson 
Venture capitalists are often wary of investing in biotechnology because bioentrepreneurs seldom provide realistic estimates of the value of their technologies. To evaluate accurately a new biotechnology, an entrepreneur must account for the future revenue from the final product, the cost and time needed to get the product to market, and the various risks faced along the way. Entrepreneurs can approach the venture community with a more rational basis for investment by expressing a biotechnology in terms of risk-adjusted net present value (rNPV ; see "Glossary"), as discussed here. Investments, milestone payments, clinical trial costs, and royalties on sales can then be compared directly using the common currency of rNPV .
The numbers game
A researcher has made a scientific breakthrough that could be worth millions of dollars. To attract the investment needed to commercialize the biotechnology, the researcher must now convince venture capitalists and pharmaceutical companies of its potential. However, investors want to know what the biotechnology is worth today and will require evidence to substantiate this estimate.
Unfortunately, estimates of the value of a biotechnology are all too often clearly unrealistic. "Valuations" are typically made in the following (unrealistic) manner: "The market for our product is $2 billion per year, so if we capture only 10% of that market for 10 years, then the company is worth $2 billion today, less development costs." Perhaps as a result, the venture capital community often judges a company on the basis of its management's expertise rather than the underlying asset of real value--the biotechnology.
How, then, can we put a price tag on biotechnology? The best solution is to evaluate a biotechnology by estimating the rNPV . Using rNPV , researchers and potential investors can price the biotechnologies that they are considering selling, investing in, or acquiring. However, it should be noted that the management, science, and intellectual property surrounding a biotechnology must all be of the highest quality to interest the venture community; if any of these are seriously lacking, the biotechnology is effectively worthless.
Start at the end
The first place to start when valuing biotechnology is at the end--the projected revenue stream. The end product for most biotechnologies is a medicine, and the payoff is frequently the royalty due the biotechnology company paid from the estimated annual revenue of the product sold by a manufacturing and marketing partner (or sales of the product, if the company retains all rights). In general, annual revenues of a product are estimated using the current sales of drugs used to treat similar indications. As discussed previously , the take-home percentage (typically divided between milestone payments and royalties on gross sales) due pre-market biotechnology developers is about 40% of gross product revenue (see "Parameters for biotechnology").
To illustrate the rNPV method, we have created a hypothetical scenario: A company has developed Acmed, a potential treatment for asthma. The preclinical science and intellectual property are sound, and Acmed has passed initial testing in animals...
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