I listened to a discussion recently on the discount rates used to value pharmaceutical and biotechnology products. One of the speakers suggested that the same asset should have a higher value (via a lower discount rate) if it were being developed by Pfizer Inc.* for example, than by a smaller biotech company. This is logical because an asset in an area where Pfizer has therapeutic and commercial expertise should have better quality resources behind it and Pfizer’s previous experience in that therapeutic area should also increase the chances of success. In addition, a new product enlarging an existing therapeutic portfolio at Pfizer has the advantage of not building out a de novo commercial infrastructure at a smaller biotech company. However, I wondered if these assumptions were always true and if enough track-record risk is captured in company valuations.
Stock Watch: Risk And The Pharmaceutical Discount Rate
Track Records May Not Be Reflected Even In Risk-Adjusted Valuations
In contrast to the SEC’s view that public companies’ regulatory filings give investors all the information needed to make an investment decision, the discount rate used to value a company may not reflect all its risks.
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