income statements, balance sheets, and valuations

Question 1

Balance sheet

Answer 1

Statement of assets
They are fixed in time or snapshots of a situation at a given moment

Question 2

Equity

Answer 2

Summed ownership
E = assets - liabilities
Liabilities: an economic obligation that costs money
e.g. loans, mortgage, expenses
Assets: things of positive economic value, - Property, equipment, cash, intellectual property
There is fixed and variable, dependent on how fast it can be converted

Question 3

Income statement

Answer 3

Always related to a period
Revenue: money earned in a certain period from goods or services
Variable costs: total costs of goods sold, e.g. materials/consumables, power, wages, rent
Gross profit = revenue - costs
operating profit = gross profit - fixed costs
fixed costs = marketing, (overhead costs)

Question 4

RoA

Answer 4

Return on Assets
How good is a company on operating its assets.
Operating profit/assets

Question 5

RoE

Answer 5

Return on Equity
Netincome/Equity
how much does shareholders get for their shares
netincome = operating profits - interests and tax

Question 6

What are the primary categories of valuation?

Answer 6

sunk cost
Valuation by market cap
Comparison based
Cash flow based

Question 7

Valuation by market cap

Answer 7

The combined Value of all the companies Stocks.
Is an easy and effective way of estimating the value.
It can be challenged; some companies are “overpriced” or “underpriced”.
For a small drug development company this value is achieved when they go IPO.
Only works for companies on the stock market

Question 8

Valuation by sunk cost

Answer 8

value is determined from the combined amount already invested in the company
“the fallacy”: what has already been paid should not be considering when investing
it is a simple method that is assumed to be wrong

Question 9

Comparison based valuations

Answer 9

You find an asset where you know the value, and then you compare it to your own asset
you can find several assets and use the median or the average

Question 10

Multiples approach

Answer 10

Find a comparable project or company
and compare common factors
P/E
sales based multiples (price per sale)
Asset driven multiples (shares - liabilities)

then compared to your own and then determine the valuation from there.

there are not proper multiples to use in biotech cases. Because they have no sales to forecast. And they IPO very late in the development phase

Question 11

Comparison values in life science

Answer 11

IPO values, the value when it went public
Deal Values: mergers, sales, license deals
Asset Values, the value of individual drug products

Problems with comparables:
- every drug needs to be unique to be competive
- difficult to get data
- arguments play a key role in determining the value
- it is difficult to compare similar assets, and to choose the asset

advantage:
- easy to understand and apply
- few assumptions needed
- Gives a good understanding of the market

Question 12

Discounted Cashflows

Answer 12

if the discount rate goes up the present value go down.
Net present value is the sum of all present values.

The discount rate takes into account to compare cash flows that occur at different time points and that they occur with uncertainty

in life science we use risk adjustment, as they would otherwise go quickly towards zero because of the high risk. as the discount rate should only take care of the market risk.