For years the industry has struggled to put a valuation on early stage research.

Banc of America analyst Jim Reddoch provided a series of benchmarks he uses to value genomics and post-genomics companies, as well as a view of how he sees the new tools penetrating the R&D process over the next 15 years, at the 2001 Banc of America Securities Healthcare Conference in Las Vegas last week.

To assess the value of toolkit companies, he worked backward from a net present value of a typical drug on the day of approval, which he pegged at $440 million. His discounting yielded an NPV of $40 million on entry into the clinic, $20 million for a drug lead, $10-$12 million for a target that has been validated in a mammalian system, $3 million for a potential target and $2 million for a gene patent.

Looking out over the longer term, Reddoch estimated that the $40 billion spent on R&D annually is growing at 10% a year. He put the penetration of genomics tools at 15% today, growing to 50% by 2015. Looked at another way, the $300 million in worldwide drug sales is growing at 12% a year. Genomics-derived drugs, which he defines as protein therapeutics and antibodies, account for about 10% of that total. By 2010, Reddoch expects genomics-based products, which by then will include small molecules, to account for 20% of the total.

Eric Ende, the firm's biotech analyst, provided more general valuation metrics. He noted that biotech P/E ratios historically have stood at 40x, while they are now at about 49x. P/S (price to sales) has historically been at about 10x versus 12x now, while PEG (price to earnings growth) historically has been 1.4x compared to 1.95x currently. On an NPV basis, he said stocks are fairly valued and should start to stabilize, although he said he wouldn't be surprised to see a further decline of 10-15%.

Ironically, despite the plunge in valuations, Ende said outflows from biotech/health care funds have totaled only some $300 million. However, he noted - not surprisingly - that investors have become more valuation-sensitive than they were last year.

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