Figure 14.2 Value creation in
biotechnology
for R&D firms to focus on maximizing multiples; developing products
and selling them when the cost of further development exceeds the
amount of value created by additional R&D, and when further
development can be more efficiently and effectively performed by
another entity.
In developing a biotechnology product it is vitally important to be
cognizant
of the actions necessary to reduce risk and increase the value of
products in development, and the cost of those actions. Cost, in this
case, is not measured in terms of dollars, but rather time and loss
of equity.
While equity-free funding is available for biotechnology
development,
this tends to be restricted to early-stage activities.
Development-stage activities generally require exchange of company
equity in exchange for funding (see Development stages and funding in
Chapter 11). Figure 14.2 shows a general scheme of biotechnology
value creation in concert with risk reduction cost for a nascent
biotechnology firm, in an environment where the return on investments
is optimal for in early clinical trials. The factors determining
cost, value, and risk are dependent upon the product being developed,
a company’s business model and resource base, and market
sentiments determining cost of capital and value.
In this example, the cost of proceeding beyond early clinical trials
exceeds the value creation of these investments, making
early-clinical trials the optimal
point to sell a product (e.g. selling Phase I or Phase II leads). In
this example, selling prior to clinical trials deprives the company
the ability to recoup its early R&D investments, and selling past
clinical trials requires
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