Since we started publishing nearly a year ago, events have led us to repeatedly analyze issues related to how companies build corporate value and how they can show investors a return on investment.

In the standard model, valuation starts out low and increases in a steepening curve as companies hit milestones, typically represented by different stages of preclinical and clinical development, that act as signals of diminishing risk.

The problem with this picture is that investors no longer find it credible - a series of hard lessons has convinced them that the curve is flatter for a longer period of time than companies would like. These two views of value creation are depicted in The Clear Route map on the next page.

The milestone delusion

The problem arose in part because both Wall Street and biotech companies initially assumed that companies should be rewarded by upticks in their valuations upon hitting clinical milestones. Too often, the milestones were seen as sure signs of decreased risk.

But the milestones were for the most part black boxes, ostensibly conferring meaning but in reality masking many real issues that later arose to set back programs.

As a result, many companies ended up overvalued relative to where they really were in development, and especially when comparing the quality and quantity of the information generated in relation to the remaining risk. Their curves ended up looking like The Shortcut (see page A3) as those companies in effect "borrowed" money in advance of the actual reductions in risk that would have justified their higher valuations.