FORENSIC ACCOUNTING SPECIAL INTEREST GROUP VALUING A BIOTECHNOLOGY COMPANY
DAVID RANDERSON ACUITY TECHNOLOGY MANAGEMENT PTY LTD Melbourne, May 2001

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Valuation Methodologies

Techniques used for valuing intangible assets, of which intellectual property (IP) is one form, may be put into three main categories1: 1. Cost Based; 2. Market Based; and 3. Revenue Based. Biotechnology companies, because their main assets are generally IP, have values that are invariably determined by their intangible assets. The valuation of a mature company tends to follow a methodology that draws heavily on its historical income, either by performing a discounted cash flow of future earnings the confidence in which derives from past activity, or capitalisation of maintainable earnings. Another technique considers the orderly realisation of assets. As most biotechnology companies have no historical revenues and the tangible assets are not representative of a company’s real value, these methods are seldom applicable. Conceptually, the value of a company is the sum of its assets value. However, accounting practices allow companies to reflect only the tangible part of their assets. Obviously, high valuations of companies that are in negative cash flow and with minimal tangible assets is causing concern to the taxation office (as demonstrated by their stance on core technology valuations in R&D syndicates) and the Australian Securities and Investment Commission (ASIC).

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Reilly RF, Schweihs RP, Valuing Intangible Assets, 1998.

Determining the worth of a research project or R&D based company by discounting free cash flow is more often than not of questionable worth since such methods often result in negative value. Biotechnology companies, as well as other high technology companies, trade on stock exchanges with considerable value. In addition, these companies raise capital,