Sstandard financial metrics do not always apply except to the “top -tier” biotech companies that have large revenues and/or earnings. With those companies one can look at Price/Sales ratio, P/E ratio, Balance Sheet, technical trading patterns and earnings growth.
Analysis that is used by Wall Street “sell side” firms typically includes a pro-forma forecast of revenues from the current product portfolio that is in various stages of clinical trials. Assumptions would include approval dates, partnerships with larger pharmaceutical firms and product revenues. From the product portfolio a discounted cash flow analysis (DCF) is done forecasting product sales, and values the Company at a future hypothetical PE and PS.
Without the benefit of an analysts’ product portfolio or forecast, the following guidelines may be used to make a quick fundamental valuation of a Company:
1.) Cash position and years of cash burn. A development stage company without revenues should have at least two years of cash and more in bear markets. Review balance sheet carefully.
2.) Product portfolio and clinical trial staging. A more difficult analysis is to review and value the clinical stage pharmaceutical products especially those in Phase III and II and make a judgement on the product sales. Anticipated product approvals drive stock prices several months in advance. There may be a sell on the news.
3.) Institutional support and pedigree. If the major owners of the companies’ stock include strong investors , then there is hope that with good news the stock will be driven up. In bad times the company will be supported with a financing to protect VC investment. Of course this can also create volatility because the stock can be sold aggressively by institutions with bad news.
4.) Management Team. View the bios of management to determine if their track record includes past successes and relevant experience.