The Capital Market’s Perception – White versus Red

Whereas Red Biotechnology is already accepted by the capital markets and dominates by far the total number of biotechnology companies, there are only few dedicated white biotech companies. Venture capitalists have preferred red opportunities, while white biotechnology used to have a lower attendance with capital markets and is still more driven by big chemical corporations than an agile start-up scene. The focus of red biotech is on new drugs with a relatively easy to estimate market potential and share, while industrial biotechnology mainly develops new process routes to already known drugs or chemicals. These characteristics require more knowledge of the industry and often contribute to the lack of investors’ attendance of white versus red biotechnology. In comparison to red, white biotech processes or products usually serve a broader range of applications and should thus diversify the investor’s risks accordingly. However, many venture capitalists still are not aware of the chances or even seem to shy away from taking the white opportunity, presumably because of difficulties in reasonably estimating the scope of market potential and market share that could be achieved with a single process or product. However, the impact of white biotechnology can be found in most future oriented statements of big chemical companies and is expected to drive future chemicals earnings significantly. Furthermore, the number of spin-offs from universities and start-ups with a dedication on white biotech is expected to pick up momentum. Investors conferences are held with dedication on white biotech companies and investors are more and more looking for this emerging sector. All this makes it obvious that now could be the time to look for opportunities for paying-off investments.
The adequate valuation of investment opportunities in growth companies within industrial biotechnology is, though, often seen as a challenge by market participants. Principally, several techniques are available for valuing white biotech companies: The DCF method, the Multiples valuation, Venture Capital method, the Portfolio or Sum-Of-The-Parts approach or option based valuation techniques like the Real Option valuation. Admittedly, it can be tricky to put a price tag on biotechnology companies that often offer little more than the promise of success in the future. Just because someone in the lab cries «Eureka!», that doesn’t necessarily mean that a revolutionary process or enzyme has been found. In the biotech sector, it can take many years to determine whether all the effort will translate into returns for a company. Red biotechnology is a forward-looking, cash-hungry industry. Sometimes, it takes far beyond a billion of Euros and many years to develop a drug which then might not come to market. So biotech and pharma companies are constantly looking to all areas of the finance industry for funding. Their assets are often highly intangible (intellectual property) and, because they are so forward-looking, there is little current concrete information available for the investor other than retrospective insights into previous projects. It is a high-risk business, but one which can give massive returns. In comparison to red, white biotech investments often afford lower initial investments and offer lower risk due to a diversification among applications and industries. Two of the characteristics of white biotech, to which investors are giving increasing attention, are the typically much shorter time span from idea to market – 3 to 5 years, compared to 10-12 years for a biomedical product – and less regulatory requirements. The accumulated market potential, market shares and derived free cash flows are, however, more complex compared to red biotech projects and can require the engagement of several industry specialists. Industry teams that are engaged in the valuation can comprise biotechnology specialist, chemicals and consumer good or medical applications expertise. Despite the complexity of deriving a value from white biotechnology projects, the business models are often highly promising and many white investment opportunities, that are currently undiscovered, wait to be caught. For picking the right alternative, investors need to be able to evaluate such companies properly in order to make proper business decisions about their investment. The credit crunch increases the need for the proper valuation approach in general, but in particular for the high-risk biotechnology sector: Due to the credit crunch, the European Biopharmaceutical Enterprises trade association reckons that 20% of all European biotech companies could go out of business in the next six to 18 months (Warmington, 2009). Comparatively, this could mean another chance for white biotechnology to increase attention due to eventually more stable business models and broader application ranges.