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    Biotech Industry: Financial Statement Analysis Prem Kurumoju

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    CFRA analysts have given a positive outlook to the biotech industry based on factors such as drug pricing, FDA approvals, patents, orphan drug sales, pipeline drugs, R&D investment, and the US economy. The key drivers that influence the entire industry are the NIH budget, FDA drug approvals, patent expirations, and R&D spending. Important factors for analyzing individual companies include qualitative measures like management expertise, business strategy, and clinical pipeline, as well as quantitative metrics such as sales growth, R&D spending, profit margins, and cash on hand. Successful biotech companies typically have multiple late-stage drug candidates, involve the FDA early, and spend 15-25% of revenues on R&

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    Biotech Industry: Financial Statement Analysis Prem Kurumoju

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    CFRA analysts have given a positive outlook to the biotech industry based on factors such as drug pricing, FDA approvals, patents, orphan drug sales, pipeline drugs, R&D investment, and the US economy. The key drivers that influence the entire industry are the NIH budget, FDA drug approvals, patent expirations, and R&D spending. Important factors for analyzing individual companies include qualitative measures like management expertise, business strategy, and clinical pipeline, as well as quantitative metrics such as sales growth, R&D spending, profit margins, and cash on hand. Successful biotech companies typically have multiple late-stage drug candidates, involve the FDA early, and spend 15-25% of revenues on R&

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    CFRA analysts have given a positive outlook to the biotech industry based on factors such as drug pricing, FDA approvals, patents, orphan drug sales, pipeline drugs, R&D investment, and the US economy. The key drivers that influence the entire industry are the NIH budget, FDA drug approvals, patent expirations, and R&D spending. Important factors for analyzing individual companies include qualitative measures like management expertise, business strategy, and clinical pipeline, as well as quantitative metrics such as sales growth, R&D spending, profit margins, and cash on hand. Successful biotech companies typically have multiple late-stage drug candidates, involve the FDA early, and spend 15-25% of revenues on R&

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    11 views1 page

    Biotech Industry: Financial Statement Analysis Prem Kurumoju

    Uploaded by

    prem
    CFRA analysts have given a positive outlook to the biotech industry based on factors such as drug pricing, FDA approvals, patents, orphan drug sales, pipeline drugs, R&D investment, and the US economy. The key drivers that influence the entire industry are the NIH budget, FDA drug approvals, patent expirations, and R&D spending. Important factors for analyzing individual companies include qualitative measures like management expertise, business strategy, and clinical pipeline, as well as quantitative metrics such as sales growth, R&D spending, profit margins, and cash on hand. Successful biotech companies typically have multiple late-stage drug candidates, involve the FDA early, and spend 15-25% of revenues on R&

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    Financial Statement Analysis Prem Kurumoju

    Biotech Industry

    CFRA analysts have given a positive outlook to this industry after assessing some of the key
    themes – drug pricing, FDA approvals, patents, sales of orphan drugs, encouraging pipeline, R&D
    investment, US economy, equity funding, consumers’ willingness to spend, regulations and
    politics.

    The key industry drivers that influence the entire industry are National Institutes of Health (NIH)
    budget, drug approvals by FDA, Patent expirations and R&D spending. The key factors to analyze
    a company include qualitative (Management expertise, business strategy, M&A strategy,
    university alliance, regulatory compliance, core competencies, market position, product portfolio,
    clinical pipeline, patent protection and most importantly R&D spending) and quantitative factors
    are sales growth, R&D as a percentage of sales, R&D expenditures per employee, or R&D as a
    percentage of market capitalization, profit margins, EPS, Cash on hand, Debt to capitalizations,
    P?E, NPV analysis. SG&A and option expenses.
    Some of my key takeaways are:

     Many firms do not have a commercial track record, we should be relying mostly on
    qualitative methods of valuation mentioned above.
     Management expertise is very important as they help in negotiations, guide the team to
    reach important milestones, and are committed to seeing the product to commercialization.
     Ensuring companies do not have competition in the drug they are developing, and it is
    important to gauge prospective earnings from products/compounds under development that
    must be approved and their probability to be successful.
     Successful companies typically have multiple drug candidates in the final stage of clinical
    development and involve FDA from initial stages. Patent expiration is critical as it leads to
    sale erosion – once patents expire, market shifts to biosimilars and generic drugs.
     Strong alliances with NIH, universities and other small companies helps increase their
    breadth in research and get their hands on the most advanced drugs/compounds.
     Successful companies spend is between 15% - 25% of operating revenues on R&D whereas
    the development stage companies spend well over 100%.
     Ensure that companies have cash on hand to support two years of operating expenses. It
    also helps a firm to have greater negotiation power when they form an alliance or merge
    with bigger companies.
     It is important to understand how growth is achieved – is it by unit volume gain, increased
    drug prices, acquisitions, onetime gains from asset sales?
     The key financial metrics to look at are revenues, costs and expenses, R&D as a % of sales,
    earnings, margins, EPS, liquidity, debt to capitalization, ROE, P/E, NPV analysis using
    DCF, Royalties, and rebates/ discount to PBMs.
    Xiong Jun Goon, Feb 2019, Biotechnology, CFRA Equity Research

    Summer 2, 2019

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