How Private Biotech Companies Can Find Public Peers for Equity Valuations
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How Private Biotech Companies Can Find Public Peers for Equity Valuations

by Scott Schwartz
June 15, 2021

Private biopharmaceutical and medical technology companies are at the forefront of research and development, tackling novel medical solutions. This innovation is opening doors for many companies, but given how unique their business models can be, it’s often difficult to find industry peers to benchmark against for valuations and reviews of their equity compensation systems. 

As a result, biotech companies may need to take a non-traditional approach to their equity valuation

Equity Program Compliance

Your company may issue stock options or other equity instruments to attract and retain talent. If you’re pursuing another fundraising round or a public offering, your organization will likely be asked to complete a 409A valuation to properly value your equity compensation and the related expenses. In the event of an audit, you should have your equity programs aligned with U.S. GAAP — specifically ASC 718. 

Compliance Methodology

Any GAAP provides accounting guidelines to follow, but it doesn’t speak to the methodology of getting there. A common way companies calculate a proper valuation of their business is finding comparable public peer companies to determine things like pricing volatility. 

This input would be used for things like Black-Scholes valuations for stock options. But for very new, privately held biomedical companies, finding sufficient public entities to compare against can be quite difficult. 

Identifying Comparable Companies

When looking for industry peers, the simplest way to compare is by finding a company that develops similar products to your organization. This could be medicines for similar ailments, parts of the body, etc. You can further narrow the search by identifying a biomedical company at the same stage of clinical trials as yours. 

Clinical trial stage is a significant component of the overall value of a company and a strong indicator of future progress. This adds another layer of research to help you find public comparable companies that would be at a similar stage of trials but also align in other corporate traits.

As an emerging company, it’s not uncommon to find that peers who match your clinical stage offer only one to two years of pricing history. Ideally a valuation would include several peers with at least five years of pricing history. This is also quite beneficial for valuation of stock options, which often have a six-year expected term and require a similar lookback to determine relevant volatility rates for the Black-Scholes assumption.

On the other hand, companies that possess a sufficient pricing history tend to be large corporate entities. Asides from biomedical research, these companies also provide products in many other areas of medical and non-medical technology that wouldn’t necessarily fall under biomedical research.

You May Need to Get Creative

If your company is in this situation, you can start using interpretive guidance. You should still use an accepted methodology as an overarching guideline. Then, you can speak to the specifics by filling in the blanks.

Without an appropriate public company comparison, instead look for one with a similar business model. Generally, biotech companies use one of three pure-play models: technology partnering, asset creation and out-licensing, or product development and commercialization. You can also identify private companies that align more closely with your organization. In conjunction, these should provide you with enough peers to calculate a volatility rate that’s defensible in a 409A valuation.

For your valuation, it’s important to make sure the volatility rate is high enough and within your industry range. This should give you a conservative estimate of your company’s overall volatility. Over time, the availability of comparable peers for your company should increase in both number and pricing history — hopefully making your 409A valuations simpler down the road.

Key Takeaways

Since your company isn’t necessarily traditional, don’t assume that you should go the traditional route in your accounting approach. Accounting guidance is often not specific enough for all situations. Interpreting the guidance and finding solutions that work to present accurately prepared financials is the key.

If you have any questions or would like further guidance on building a compliant equity compensation program, reach out to our experts.

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