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

Abstract

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.

Value and Price of Multi-indication Cancer Drugs in the USA, Germany, France, England, Canada, Australia, and Scotland

“…Furthermore, scientists leverage new technologies, including next-generation sequencing, high throughput screening, or machine learning, to quickly test hypotheses and identify optimal patient populations (and indications) for a drug [ 31 , 32 ]. Discovering platform technologies, such as targeted therapies or immuno-therapies, which can be used across multiple diseases, are especially desired and valued by investors [ 1 , 4 , 5 ].…”

“…Additionally, multi-indication drugs offer dynamic efficiency gains for patients and manufacturers as lengthy and costly research and pre-clinical testing efforts only occur once per drug. Expanding drugs to new indications increases revenues, profits, returns, and valuations for manufacturers [ 4 , 5 ]. However, pricing and reimbursement mechanisms have not evolved at the same pace as pharmaceutical development, intensifying concerns about the affordability of new drugs.…”

Initial and supplementary indication approval of new targeted cancer drugs by the FDA, EMA, Health Canada, and TGA

“…Whilst this observation could suggest that a large part of indication development is random, additional variables may be necessary to fully explain companies’ decision making in pharmaceutical development. For instance, variables characterizing an indication’s peak sales and competitive environment, the pharmaceutical company’s portfolio size, R&D partnerships of certain indications, licensing agreements, mergers and acquisitions, and underlying market conditions may influence economic decision of pharmaceutical companies throughout the drug development process [ 10 , 11 , 48 ].…”

“…Similarly, pharmaceutical companies are incentivized to pursue research and development (R&D) in diseases with a high unmet therapeutic need with expedited clinical development and regulatory approval timelines [ 9 ]. Michaeli et al previously demonstrated this strategy yields high company valuations and excess financial returns for Bioentrepreneurs and Investors [ 10 , 11 ]. Arguably more substantial than R&D incentives could be the monetary incentive created by uniform pricing of multi-indication drugs.…”

Value drivers of development stage biopharma companies

“…Evidently, Biopharma firm valuation is mainly subject to the lead product's development stage [10,[20][21][22][23]. However, knowledge on factors that explain the valuation dispersion within development stages is scarce.…”