Spotlight on Biotechnology: valuation challenges of early-stage companies. A case study on CRISPR Therapeutics AG and Allakos, Inc.

Abstract

High volatility, no predictable cash flows and technological uncertainties make Biotech-Healthcare companies’ valuation a challenging task for analysts and investors. Translating clinical promises into economic value represents a rough obstacle of this attractive business, especially in measuring the potential implications that scientific breakthroughs can bring to society and the size of the financial markets’ reaction to such events. The aim of this work is to provide a deeper understanding of the dynamics behind Biotech companies’ analysis, moving from the traditional valuation models to a risk-adjusted framework, including the technological and regulatory issues related to FDA (Food and Drug Administration) and EMA (European Medicine Agency) approval process. The efforts made have required a full immersion in a biological and clinical context that is far and beyond the common practice proper of the financial valuation field.

Keywords: Equity Valuation, Biotechnology, Volatility, Return, Stock pricing, Financial modelling, Value Investing, DCF, Real Option, Black & Scholes, CRISPR Therapeutics, Allakos, CRISPR, Cas9, Monoclonal Antibodies.

JEL Classification: G10, G11, C81