How To Value Biotech Firms?

Sep. 05, 2017 2:11 PM ETADVM, AGN, ALPN, CHMA, ECYT, GILD, EVFM, OTIC, GSK, TEVA8 Comments


  • Is it wise to invest in something you don't understand?
  • Can you value a biotech firm without being an expert?
  • Can an expert value a biotech firm?
  • What are strategies to invest without deep knowledge?

A reader asked me how to learn more about doing valuations of biotech firms. Specifically, pre-revenue biotech firms. Thanks for the impossibly difficult question.

It’s so tough many investors - perhaps wisely - caution against it.

You may have heard the mantra of Buffett to stick to your circle of competence or Peter Lynch telling us to invest in what we know.

At the same time, these same investors famously don’t use extensive spreadsheets to model their investments. Peter Lynch invested in so many different companies he can’t have had time to do complex valuations and Warren Buffett prefers value to obvious.

And other investment legends also teach concepts like:

Heads I win; tails, I don’t lose much.

-Mohnish Pabrai

We do liquidation analysis and liquidation analysis only.

-Peter Cundill

Focus on the downside, and let the upside take care of itself.

-Peter Sellers

I always struggled to value firms like Nintendo (OTCPK:NTDOY), Dreamworks Animation - a big winner for The Black Swan Portfolio - or a net-net like Gravity (GRVY).

You can get a reasonable idea of the downside or liquidation value, which is the strategy suggested by some of the great investors mentioned above.

However, how do you value the upside of a firm that can produce a Shrek like franchise in any given year or a couple of total busts? How do you value a firm that one produced a very popular game in both Korea and China but with a declining user base. The gold standard for a success is something like Activison's (ATVI) World of Warcraft but it is only a matter of time before that success will be exceeded by another company. The market didn’t think much of Nintendo before Pokemon Go and then it surged 137.4%.

ChartNTDOY data by YCharts

Not only

This article was written by

Bram de Haas profile picture
Special-Situation And Event-Driven Ideas To Improve Risk Adjusted Returns
15 years of investing and I feel like a rookie in his first year at the academy. My roots are in the value school but over time I've learned to respect different approaches. I'm interested in what quants do, options traders do, and even what WallStreetBets is doing (keep your friends close and...)

I gravitate towards special-situations. That means situations around companies or the market where the price can move in a certain direction based on a specific event or ongoing event. This eclectic and creative style of investing seems to suit my personality and interests most closely.

Since 2020 I host a podcast/videocast where I discuss (special-situation/event-driven) market events and investment ideas with top analysts, portfolio managers, hedge fund managers, experts, and other investment professionals. I highly recommend it (pick episodes around topics that interest you) for the amazing guests that come on with regularity.

I've been writing for Seeking Alpha since 2013 after playing p0ker professionally. In 2018 I founded Starshot Capital B.V. A Dutch AIF manager. Follow me on Twitter @Bramdehaas or email me Dehaas.Bram at Gmail

Disclosure: I am/we are long AGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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