Traditional risk-adjusted valuation methods in the biotechnology industry exhibit significant limitations when assessing early-stage technologies. These limitations include high failure rates, lengthy development timelines, and substantial research and development (R&D) and commercialization costs, which traditional methods fail to fully incorporate. In this study, we propose a revised valuation methodology, ‘modified risk-adjusted NPV’ (mrNPV), which addresses R&D costs, probability of success, projected sales, timely risk application, and the cost of failure. The mrNPV method assesses the value of a diabetic drug under development as more than US3 billion and free cash flow as more than US300 million compared with the traditional method, demonstrating its applicability in biotechnology valuation and bridging the gap between theoretical frameworks and real-world needs.
Yeon et al. (Mon,) studied this question.