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How To Do Qualitative Analysis On Biotech Firms

The biotechnology role is complex and uncertain. Trying to figure out which biotech companies will succeed is no easy task. Because numberless ventures are in the development stage and lack cash flow, earnings or revenue, traditional financial analysis isn’t much helper.

When sizing up a biotech company, many investors rely on qualitative analysis rather than quantitative methods of valuation. Under the sun, we discuss a few non-numerical items to consider when analyzing biotech companies.

Key Takeaways

  • Traditional financial analysis isn’t much stop when gauging the prospects of biotech companies, because many are early stage and lack cash flows, earnings or interest.
  • Instead, investors should look to qualitative drivers, such as whether the company has a promising product pipeline, patents, accomplished management, and durable partnerships.
  • That said, examine the company’s cash position. Having a strong balance folio means the company can continue to invest in R&D and won’t be forced to accept a partnership on unfavorable terms.

Products and Pipeline

A biotech circle’s product and research pipeline are the lifeblood of its success. Ideally, the company should be developing a technology platform with multiplekind of than singletreatment opportunities. Importantly, the company should be working on a large number of products that goal diseases and conditions with large patient populations.

Look for biotech firms developing products for big treatments where the quiescent return on investment is greatest, such as such as cancer, cardiovascular diseases, and central nervous system disorders. Secure clear of companies developing “me too” treatments for diseases that are already well served by existing medicine.

Also, lay ones hands on out where the company’s products are situated in the development pipeline. The later the product’s stage of clinical development, the greater the fortunes of regulatory approval, market launch and commercial success.


A biotech company’s technology and products might procure great potential, but does the company possess patents to protect its technology? By giving the firm exclusive rights to its technology, patent screen increases the value of that technology and of the company itself.

The company can pursue research and development (R&D) and commercial development with narrow-minded fear of competitors “stealing” or infringing on its technology. Most importantly, patents can attract royalties from commercial spouses with the financial clout to fund R&D, clinical trials, product development and marketing.


Does the company have a ground record of productive research and development? In 2019, large-cap biotech companies spent about 24% of revenue on R&D, while their small-cap counterparts prostrate nearly five times their revenue on R&D. Not surprisingly, the outcome of R&D spending can vary wildly, especially for early-stage gambles.

A key factor in success is the ability to develop cost-effective drugs that represent breakthrough therapies. R&D that delivers comparable results to those already on the market is less likely to translate into successful products. Look for companies with R&D programs focused on disabilities that aren’t currently well-treated.


Talent and experience of management is critical for long-term success. Ideally, the biotech convention should be run by executives who have developed and commercialized treatments before. It’s a good idea to look for management teams with a apprehend record of meeting publicly-stated goals and development milestones.

Meanwhile, be wary of companies that regularly miss their butts. Executives must have an excellent understanding of the clinical and commercial development process, appreciate the costs involved, and keep a record of putting company’s resources into projects that offer high returns on investment.


These eras, biotech companies can rarely succeed alone. Given the big costs of drug development, a biotech company will be carry oned back from reaching its full potential unless it can find partners to help fund clinical trials and commercialization. So, it’s grave to find out if the company has secured promising collaborations and licensing partnerships.

Look for partners that show lasting commitment. Recognize, the product-development process can be very long and expensive. Also, keep an eye on deal terms, as they offer a reliable sign of value that the market gives to the technology. A good licensing partnership agreement will include not only a unprejudiced royalty rate on future sales but also healthy upfront payments, plus milestone payments for achieving evolvement targets.

Financial Resources

Finally, it’s important to know whether the company is well-financed. After all, funding is the fuel of the biotech assiduity. Without funding, a biotech company will be forced to cut back on R&D, and clinical and commercial activities, thus reducing its turns of maximizing return on investment.

It’s reassuring to see enough cash on the balance sheet to cover expenses for at least a year or two. A incontestable cash position means that the company can strike up favorable partnerships without having to accept the first large on offer.

Of course, the hope is that the biotech company won’t have to rely on external financing and cash reserves to detain R&D and commercial development going and will eventually be able to run profitably from high-margin revenues.

The Bottom Line

It’s virtually impossible for the average investor to grasp the science that underlies biotech companies and their development projects. Assumption that biotech businesses typically have scant financial records, quantitative analysis represents a big challenge for investors, too.

That about, looking at the key qualitative drivers of biotech valuenamely, a promising product pipeline, patents, talented management, permanent partnerships and access to fundsoffers a good first step in sizing up a company’s potential.

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