How does the Biotech Scale work?
The problem with biotech companies is that you can’t use standard fundamental analysis. There is no or only limited cash coming in. Therefore, an alternative method is required: portfolio or pipeline analysis.
A biotech company has a patented research portfolio called the pipeline. The pipeline contains the intellectual property which has to mature in 3 steps to finally reach market approval. The closer to approval, the higher the financial evaluation.
The Biotech Scale is a unique tool which allows you to quickly perform portfolio analysis. You can set weights to each of the Phases 1 to 3 and already approved drugs. The weights are then multiplied with the number of patented drugs available in each step. The sum of these weighted drugs is than calculated as the total portfolio score. And the final result is shown on a scatterplot (score vs. market capitalization). With this method you can systematically compare peer biotech companies.