Are you double counting certain intangibles while valuing a project?
I was discussing with one of my clients’ partner regarding the valuation of a biotech product. The product is supposed to be co-developed by both parties at the facilities of the partner in an emerging market.He argued that I should count the value of the networks of doctors/hospitals that they have developed in order to value the product. There are several flaws in this argument.
First of all, it is not easy to quantify the value of the networks that has been built by them. Second, the value of product is the sum of discounted future cash flows that the product could generate in the future in different markets. Those cash flows would be achieved through company’s resources and capabilities: Tangible/ Intangible. For example – The Company might have a strong and effective sales force and robust distribution network that allow the products to be launched successfully in different markets. These resources and capabilities help the company to generate profits or excess returns. In strategy, we call this competitive advantage. The value of a product (assuming it already has superior technical advantages over its competitors) will be obtained by these competitive advantages. These factors are already considered while valuing the product.
No wonder why biotech companies out license its developed products to pharmaceutical companies that already have strong sales and distribution team. Imagine a biotech company licensing its product to another small company who do not have the capabilities to launch the product in the market!!. The value of even an innovative product would be close to zero.
Hence, adding separately the value of these intangibles is incorrect.
Look forward to your comments – Saurabh.firstname.lastname@example.org